2011 was a tough year to make money in the markets.  It was not like 2008 when many investors dropped half their net worth, but with interest rates near zero and a variety of world events, 2011 was a volatile one.  Japan suffered an earthquake, tsunami and nuclear meltdown.  Greece reached the brink with other parts of the Eurozone slipping with it.  The United States Treasuries were downgraded – no longer rated AAA.  The Arab Spring brought six Arab countries into civil wars.  We entered a new war in Libya while leaving Iraq and we ended the year with Iran beating its war drums.  Even once dependable China spent the year purposely slowing their economy, wrestling with an over-built housing and office market.  After all, the S&P 500 ended the year, roughly flat, but 8% below its April 29^th high.  Even those numbers overstate the market performance since the 16% gain between October 4^th and October 28^th was one that few investors realized since most were heavily cash after a five month market decline, culminated by a September which saw the market drop by 10% in that month alone. Hardly a scenario that sounds good for investors?

The good news: Many of the storm clouds of 2011 may soon dissipate.  The week before Christmas, the ECB (European Central Bank) granted over $600 billion in three-year loans to European banks and loosened the collateral requirements that banks use to qualify for ECB loans (and to be considered solvent).  The plan is referred to as the Long-Term Repo Operation (LTRO) and indicates that the ECB has found a palatable (to Germans) plan for printing euros.  I believe the LTRO will actually help.  Very encouraging considering the ECB track record of talk, but no real action.  The LTRO allows banks to borrow at 1% and invest that money into their own nations’ treasury bonds.  It should help reduce the borrowing costs of their respective governments, while offering the banks a (no additional) risk way of making a 4% or more return on the borrowed funds.  I say there is “no additional” risk since the major banks of Italy, Portugal and Spain already have huge exposure to their government treasuries.  If their treasuries blow-up, the banks are toast, so helping to prevent such an occurrence while making an attractive return, seems to be a win-win.  The plan worked here, so the ECB has resigned itself to copy the U.S. plan of quantitative easing – allowing for the printing of euros on an “as needed” basis.

The LTRO indicates the ECB commitment to keeping the eurozone united, so it becomes less likely that even Greece will be eliminated.  It certainly bodes well for Italy, Spain and Portugal which until now, appeared in danger.  The investment opportunity will become clearer once we see a few treasury auctions in these same countries.  Lower rates will reflect the program’s success and that would bode well for all markets.

China

China spent the end of 2010 and most of 2011 stepping on the economic brakes, raising interest rates five times and bank reserve requirements eleven times.  But on December 5^th, the China Central Bank (PBOC or Peoples Bank of China) lowered the reserve requirements for the first time in over three years, indicating that they are satisfied with their inflation and property numbers and are now more concerned about stimulating their economy.  I expect another reduction this month, ahead of the Chinese New Year, and likely more to follow.  The PBOC favors reserve requirement reductions over interest rate reductions because they believe they are better able to direct the effects to business rather than residential real estate.  As China eases, it will stimulate their economy, likely keeping GDP growth above 8% for 2012.  This would be bullish for businesses selling to Chinese companies and consumers, regardless of their domicile.

U.S.A.

U.S. companies as a whole are in very good shape right now.  Though stock charts may not reflect it, most companies spent the last few years getting lean and profitable, while many are now trading their shares at very attractive valuations.  Once investors begin to wrap their beliefs around the ECB plan, these shares could takeoff.  Add a stimulus via China’s lowering of the bank reserve requirements and we may see a 20% or better rise in our portfolios, which are complete with the companies which should benefit most.

Possible Political Kicker

2012 might even bring a real jobs bill via an energy plan.  I never count on politicians (of any stripe) to do the right thing, but this is one that almost everyone would favor and it would help the lower incomes the most – not just here, but everywhere.  It might happen – election years have a way of getting politicians to get something done.

Adopting an energy plan based on the incredible abundance of natural gas, would create hundreds of thousands of jobs, would decrease the cost of oil for Americans and all other nations.  Reduced costs for gasoline and heating would free-up money for reducing debt, saving, and for the purchase of discretionary products – a global stimulus plan that would vastly increase tax revenues without increasing tax rates.  The United States is the Only major nation without an energy plan.  We are the Saudi Arabia of natural gas – a clean burning fuel that costs less than 1/4 that of gasoline.  The program would almost eliminate the US trade deficit, would put much more than the $80/month that the payroll tax reduction provides American workers and instead of robbing Social Security, it would add to the Social Security funds.  The resulting drop in the use of oil would make the environment cleaner and make the world safer.  Oil would likely drop below $70 per barrel, making the funding of terrorist groups difficult if not almost non-existent as Arab countries dealt with a drop in net income by half or more.  That would reduce the costs of defense for us and our allies, allowing countries to reduce their deficits and debt from savings and the additional tax revenue.  A natural gas energy plan would spur the economy and the markets in many ways.  We will not count on this, but when this finally happens, portfolios will have an incredible bull run.

Frank

Ph.  512.345.6789

Finally, it appears that Europe may act – right or wrong, they appear ready to do something about the sovereign debt crisis’ of Greece, Italy and other PIGS nations. We have used cash and short positions to hedge against the markets over the past five months and they have helped considerably, but positive actions by Europe and China should put the wind at our back. With that in mind, we have removed all hedges and are now cash and long. The first and most in-your-face, is Europe’s sovereign debt. Germany has ratified the European equivalent of TARP and now only a couple of nations remain. Why did Europe ever put together a system of 17 nations which must vote unanimously for any change? The second event looks closer as of an hour ago (4:30 am CST). China announced stronger growth numbers than generally expected and said they expect their currency to continue its steady appreciation (much of our cash is in Chinese renminbi or renminbi). We will start adding renminbi denominated, short-term bonds as a safe parking spot. They average about 2.5% (net) and the renminbi has rather steadily climbed 6.5% against the dollar in the last twelve months. With China’s intentions well established, we can expect the same going forward. It is exactly as I have expected and previously discussed, since it is in China’s best interest. Since they are entirely in control of their currency, it is the one given in an unpredictable world.

There is still a third big issue that will put the wind at our economy’s back and would make market gains an easy proposition. It would go a long way towards solving the unemployment and housing problems. It would reduce, almost eliminate, our export deficit and reduce the threat of terrorism. I encourage you to let the President and Congress hear from you on the topic. It is simply an energy policy. Short-term, start drilling for our own oil. It will greatly reduce the cost of gasoline, putting extra money into the economy instead of sending it to OPEC. Just 2 ½ years ago the national average cost for a gallon of gasoline was $1.73 but the moratorium on drilling has reduced global supply, resulting in an increase in the cost of oil and putting more money in terrorists hands. Long-term, we should convert our trucks and cars to natural gas. We have more than a 100 year supply and it is clean burning. The number of jobs the two solutions would create would be in the millions, which would obviously spur the economy and spill over to housing.

Before I go forward and discuss the Fed, the economy and China, in more detail, I want to show you the following graph. It should put into perspective exactly what we have been dealing with. The following shows the relative performance of the various world indexes and gold. Even gold retreated in September (there were two margin requirement increase which caused much of the (temporary) retreat). Down months are never a good thing, but try to remember others, like the end of 2008, where we rebounded very quickly. I expect we will be able to do the same this time. All losses hurt, but we have actually dropped very little relative to the world indexes which are down an average of 24% since the end of April. We have a lot of cash that can be put to work when the big sovereign debt issues are resolved and when the emerging markets resume their more obvious growth. But as I stated earlier, we plan to tread water in the meantime and wait for these issues to be clearly solved.

The Fed

Whenever speaking before a Congressional committee, former Fed chief, “Easy” Al Greenspan was fond of saying, “I guess I should warn you. If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” His protégé, Fed chief Ben “Bubbles” Bernanke borrowed the script from his mentor, and speaking in Jackson Hole, Wyoming on August 26th, – left most his audience wondering what he meant.

At the end of the day, it was generally understood that while the Fed hasn’t made a final decision so far, Bernanke was careful to keep the dream of QE-3 alive. “The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said. Adding a new twist, he said the September policy meeting will be extended to two days, instead of just one, to allow for a fuller discussion, suggesting a “pleasant” surprise (QE-3) could be in the offing next month. Since then, several Fed governors have indicated that they would back another round of QE should the economy show clear signs of sliding towards another recession. And just this week, Mr. Bernanke said the same.

Operation “Twist” began last week with the Fed pledging to buy longer-term U.S. Treasuries. I guess Bernanke and friends believe that business is not borrowing to expand because the 10-year rate was 2.25%. Certainly, by driving that rate down to below 2%, …that will change? Hopefully, that is the precursor to a Refinance Bill that will allow qualified home-owners to quickly and easily refinance their homes at very low rates. That would create a huge stimulus to the economy, one which continues every month for years, and without taxpayer expense. Of course, it takes a President and a Congress to pass the bill or the Fed action is basically useless if not harmful. Again, if such a bill is enacted, we will respond, but not before it is passed by both houses and signed by the president.

The Economy – Double Dip?

Investing Rule 1 of 1 : The economy and the markets seldom reflect each other. As I discussed in a recent letter, one should not confuse a bad economy for a bad investment environment. That is true of most weak economies and even recessions, but this government has brought us to a meaningful chance of depression, thus the forced decision to hunker down our investments and wait.

Today, if you are looking for a job, the world may appear hopeless. With over 9% unemployment and around 17% of the workforce underemployed, America is less than vibrant. But when you look at corporate America, it is a different picture. Corporate America is in perhaps, its best shape since the 1980’s. Balance sheets are robust, earnings are growing and cash is at record levels. The disconnect is at the cross-section with government. Those with the capacity to hire are simply immobilized. How can you budget or manage to the unknown of fiscal and regulatory policy? In an environment where companies question the potential demand for their goods and services, there is good cause to be hesitant about hiring new employees.

Add a president and a congress who bombard the consumers with a constant tome of the sky is falling, why would anyone rush out to spend a dime of what might be the last dollars they should ever have? The leadership of our nation, along with a compliant media, convinced most of the world of an impending disaster called the debt ceiling and went on to target D-day as August 2nd. As the days and weeks passed with the president on television almost every day speaking of the coming financial disaster, and the Republicans and Democrats arguing as to who was at fault, why would anyone expect the consumer to do anything but hunker down?

With the European Central Bank and Euro Zone enacting the same play across the ocean, there is little surprise that the last couple of months have stripped the MSCI World Index of some 27% of its value. But again, this problem has been kicked down the road and one would hope that the real solution being voted upon now, will pass all 17 Eurozone countries and finally begin the cure.

Gold

Mark Twain once said, “If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed.” The constant barrage of barely informed reporters constructing stories to explain the stock market, interest rate moves, or the value of gold, are more likely to misguide the viewer than inform. The story about gold is a good example. According to most journalists (most of which have very little or no personal investments), gold is in a bubble about to pop. And it has been for years, so now it must be true. They compare it to its inflation adjusted value or discuss the 75-year average return (the first 35 of which it was pegged by the government at $35/ounce so there was no gain). Liam Denning of the Wall Street Journal declares that it cannot be a hedge against the falling dollar since “gold’s 22% gain since April has happened while the dollar has not really moved”. Mr. Denning appears to miss the fact that he compares the dollar only to the dollar index, comprised mostly of the euro, along with the pound and yen. Certainly, it helps his case if you ignore the fact that the euro, pound and yen are all devaluing along with the dollar. I always liken it to four men standing in quicksand and comparing their height. You may not be believe you are sinking if you only look at your three doomed friends, but it will become apparent that you have been, once the sand is at your nose. Mr. Denning goes on to say that “the past few decades suggest it (is not a store of value), but again he misses the point. Gold is a real currency and has been for thousands of years. The dollar was an acceptable currency and store of value until persistent government deficits and an insurmountable debt. It was only then that wise investors determined that a return to a real currency, gold, was a good insurance policy against governments that owned printing presses that can churn out fiat paper currency at any volume desired.

Gold will rise – sometimes too fast, and gold will fall, only to rise again. And finally, gold’s rise will end, but I can only think of three scenarios in which that will happen (none are here today). The first is one in which the U.S. and European governments actually pass budgets that they can afford – no more deficit spending – no more currency printing to pay for their overspending. The second scenario would include a world in which currencies, again, are backed by gold or some other hard asset or combination of assets. The third scenario would entail a single world currency which only increased in volume based on a formula which included population and world GDP. Make real progress towards any one of those three scenarios and you can be assured that we will no longer own gold.

China

We truly are living in a “flat earth” economy in which every part affects every other. In stock markets this flat-earth effect is magnified by many ETFs which move entire sectors in tandem, whether or not the companies they hold are good or bad.

China was affected disproportionately in this latest blast of volatility, but the economy remains in a strong growth pattern. Infla­tion remains somewhat of a problem, but is overstated at this time. China has raised interest rates six times in the last year and bank reserve requirements some eleven, and are allowing their currency (renminbi) to appreciate, all of which bring real interest rates well above the inflation rate. The biggest threat to China remains external, not internal.

It is true that a slowdown in European imports from China would hamper the nation’s growth trajectory by a fraction of a percent according to the latest projections, but the market has re­sponded more dramatically, as if China’s entire economy could suffer a hard landing because of weak exports. The numbers do not bear this out. In fact this is a clear case of irrational markets at work.

Market valuations have now done much more than factor in a worst case scenario. They have priced in valuations of some companies well below book value. It is an absurd prospect to imagine that Chinese firms have been priced as if they will have no sales growth at all for years, but that’s what the market is saying right now and it is tough to argue with market volatility. The upside is that there will be buying opportunities as this phase of volatility passes. Stocks are very, very cheap. And, as the saying goes, it makes sense now to buy low and sell high later.

Investment Perspective

We are now beginning to move more cash back into the market. We will do this slowly in expectation of a positive European resolution and expecting Chinese monetary easing to take place in the next few months. We have been rotating our portfolio towards more companies that have high dividends, attractive valuations and are generating a large percentage of their revenue from non-US, non-European customers. Intel is a good example. It has a 3.9% dividend, a 10 P/E with an 8.9 forward P/E, a PEG of 0.83 and generates 75% of its revenues outside the U.S. and Europe. There are a number of technology companies, food companies (McDonalds & Yum Brands), and others who are growing their sales in China, which we own and will add to the positions where appropriate.

We are adding short-term bonds (Bernanke has given us a guarantee) and we are finding good bonds denominated in non-dollar currencies. Many large international companies issue bonds in a number of currencies where they do business. One might buy a General Electric bond in a number of currencies. They are (typically) backed by the same company and only the interest rate and currency exchange rate may differ. With most currencies appreciating against the dollar, a bond portfolio diversified among countries can offer the opportunity for higher yields and the possible appreciation due to currency appreciation. Hong Kong bonds denominated in the renminbi (yuan) are, in my estimation, some of the best since the Chinese will either continue to appreciate their currency or at worst, peg to the dollar.

Finally, in moderate to aggressive-risk portfolios, we will be adding more natural resource companies such as Freeport McMoran. Chinese copper inventories have been dropping – combine that with Chinese monetary easing and this beaten down sector is rotating back into favor. Other minerals and even oil and natural gas are attractive – natural gas will soon be exported to Asia and Europe in the form of LNG (liquefied), helping the exploration companies that have been beaten down by very low prices. Natural gas prices should rise to the $5 to $7 range in the next year or two as LNG is exported and the exploration companies exit remaining contracts that required them to drill to retain leases. They have met their requirements and the newer contracts contain pricing contingencies so they will no longer be required to drill when prices are too low.

享受好天氣和一個更好的股市 (Enjoy the good weather and a better stock market),

Frank

512.345.6789
2009 S. Capital of Texas Hwy. 2nd Floor
Austin, TX 78746

Beck Capital Management
Pro Player Investing

Beck Capital Management LLC, a Registered Investment Advisor, Frank Beck, Chief Investment Advisor. Fidelity Investments, custodian.

Austerity packages aren’t going to fix that problem (they might even make it worse by slowing economic growth). Italy needs either a way to grow faster — by ditching the euro and devaluing a revived lira— or pay lower interest rates —by financing some of its debt through Eurozone bonds.

The steep climb in Italian yields is an indication that financial markets have begun to focus on the need for a more far-reaching restructuring of the euro system. Neither of those items appears to be on the agenda for Thursday’s “non-emergency” summit. European leaders still seem to believe that they can “solve” the crisis by kicking the Greek debt problem down the road into 2014, A more accurate metaphor would be rolling the Greek snowball down the mountain, as the problem continues to get bigger as they balk at a real solution.

I think this all means that any relief rally from a new Greek debt package is likely to be short-lived and we will be living this deja vu once again. With Greece able to finance its debts through late August, thanks to a $17 billion payment from the first rescue package, the stalemate could extend into September. Sound a bit familiar? With the U.S. facing a debt ceiling deadline of August 2 it appears the dollar and the euro may take turns as the weakest currency on the planet for at least the next couple of months.

How to invest the meltdown

The question most investors are asking though has little to do with the best solution (i.e. the ECB issuing Eurozone bonds backed by the EU so there is common debt to go along with a common currency). Most investors are wondering how to protect their life savings or perhaps even make a little money while the politicians manufacture solutions to the problems they created.

Beyond what should be obvious by now, gold and silver will most likely be profitable safe havens during the currency turmoil. Shorting large banks is working and will likely continue until such day that real solutions to sovereign debt are found. At that point we can go back to worrying about the banks “assets,” especially those burdensome mortgage loans that just won’t go away. In the meantime, I believe the TIPS of non-Euro and non-US governments might be profitable as even controlled inflation produces reasonable yields in appreciating currencies.

But the crisis promises to ebb and flow as politicians on each side of the Atlantic prove more inept than their counterparts in handling their respective debts. European ineptness causes some dollar strengthening, hurting most stocks and commodities, while America’s politicians seem only capable of tactics, but no strategy, leaving the markets to daily, decide who is most inept.

Here at home most investors are trying to find a place to hideout or at least add some protection to their current portfolio. Should you hold dollars knowing that they buy a little less each day or will the stock market or US treasuries be a better place?

Though I don’t believe you should completely sell out of this market, I would encourage most investors to keep some cash ready for buying opportunities created by a delayed agreement in Washington. It is the type of cash that matters right now. It makes sense to own some dollars, maybe 25% of your cash, but then consider a mix of Chinese renminbi, Swedish krona, Swiss francs, Brazilian reals, and Australian dollars for the rest of your cash position.

Consider the fact that the euro and the dollar are losing value and the faith in each is diminishing, making gold the real currency. As such, I think it is appropriate to own gold in your investment accounts and to own some gold and silver coins as insurance against a currency meltdown. I do not believe we will get to that point but I carry fire insurance on my house and the odds are heavily weighted against a fire. Personally, I buy and recommend owning some one ounce gold eagles and silver eagles. These are not the collectible coins, but are widely recognized as containing one ounce of the respective metal. Should we ever experience a currency meltdown, you can use gold and silver coins to buy food and other necessities.

Once you have your precious metals and cash as anchors for your portfolio, you may consider adding some floating rate notes of major corporations or some TIPS from emerging markets. An easy way to get exposure to these is through the iShares ETF (ticker symbol is FLOT) and the WisdomTree ETF (RRF & WDTI).

I expect all of these can add some stability to your portfolio during this government induced mayhem without costing you once the clouds disappear. Remember, most multinational companies are very profitable and are flush with cash. Once agreement is made in Washington, we are likely to see a very strong and positive reaction in the markets.

Looking forward to analyzing companies and markets again,

Frank

I always emphasize the macro economy and its importance in making sound investment decisions and at this unique time it may warrant added consideration. With the developed economies’ governments and central banks having overspent, overpromised, and overprinted, the environment is unlike that which we have ever seen on a world-wide basis. While the developed countries central bankers print money to pay for spendthrift governments, the developing world’s central bankers are trying to slow their economies and deal with inflationary pressures. In the past, it was always developing economies or those of war-defeated countries that printed their way into hyperinflation – this time it is the developed countries who are nearing the tipping point.

The ending of QE2 (Fed’s 2nd phase of Quantitative Easing or money-printing in layman) has brought a significant, although I believe it will prove brief, contraction in commodity prices. The end of QE2 was made more significant with Greece, again, front and center. Then there was the repeated increase in margin requirements that forced significant selling in the silver market, which briefly spilled over to other commodities. After weathering a trifecta of investment challenges, one must consider where the market goes from here. Are these priced in or does Greece cause the euro to further devalue against the dollar? Has China finished raising interest rates and bank reserve requirements for now? Will interest rates move higher or even spike if the Fed does as they say, and end QE?

Lots of questions – I’ll attempt to answer the answerable and tell you what we are doing and what can be expected.

Sometimes there are events that cause short-term selling, or even, panics. When they are foreseeable, we prepare for them by reducing or eliminating some positions and adding to our cash so that we may take advantage of any opportunities which may result. That is what we have done in the past two months and we will likely sit on some extra cash until we can determine the effects of QE2’s end. Greece is of importance and they will likely default in some manner or another, on their government debt; sooner or later. If the EU decides to bail Greece out (again), effectively kicking the can down the road, the euro will likely strengthen against the dollar. If Greece is allowed some sort of negotiated default, the euro will likely fall against the dollar. Either event will likely be short-lived and either event will likely have little effect on the price of gold since there will be increased buying of gold by Europeans or Americans (depending on the declining currency). The other beneficiary, if it can be called that in this devaluation environment, would be the Swiss franc. I expect it is much more likely that the can will get kicked at least a few more times, so imminent default may be discussed many more times.

It is still the end of QE2 and its effect on the dollar carry trade that is of most immediate concern.

Since last fall when Mr. Bernanke set the course for QE2, buying some $75 Billion of U.S. Treasuries each month, hedge funds and investment banks have borrowed dollars at near 0% interest rates and then invested them around the world, often in emerging markets or in-betweeners like Australia, where they might earn 5% or more in interest or perhaps they bought silver or oil with their free dollars. For months I have given much thought to the end of QE2 and whether it would cause interest rates to spike and bring a flood of money back to our shores, causing commodities and the markets to drop in price. First thoughts were exactly that and I believe many investors who have just begun to give it some serious thought are thinking that today, so we have seen some market reaction recently, but much of the chaos was initiated by the afore mentioned trifecta.

Like the mortgages made in the fall of 2006 that were to reset in the fall of 2008, I’ve had many months to consider this as well. At this point, I firmly believe that most commodity prices will be significantly higher at the end of this year than they are now. Long-term interest rates will likely move higher while the Fed will keep short-term rates near zero. It is the near zero short-term rates that will allow the carry trade to unwind in a peaceful manner rather than the manner in which it unwound in late 2008. In ’08 it was not interest rates, but the mortgage-backed securities that caused a disorderly unwinding which resulted in half of the hedge funds in the world, going bankrupt and selling all their assets. Since the Fed can keep short-term rates low for a very long time, and the carry trade uses short-term money, I don’t see July resulting in anything significant, unless it surprises to the upside.

It is likely that much of the pullback in our space, is behind us, but since I don’t own a crystal ball, we have raised our cash position to over 25%, mostly held in foreign currencies. Though I am not expecting smooth sailing, I do believe we can continue to move forward and will have another good year. The long-term picture simply has not changed. Companies are very lean, they are growing their earnings abroad and due to strengthening currencies in the emerging markets, they are enjoying strengthening pricing power amid a devaluing dollar. The dollar, euro, yen and pound are all travelling down the same hole as illustrated by the charts below which illustrate the increasing number of dollars.

Measuring the Quantity of Dollars

Unprecedented Deposit Currency Creation by the Fed

The Federal Reserve in the past has only created cash (printed) currency. However, the unprecedented changes it has engineered over the past two years have resulted in a vast amount of deposit (electronic) currency. Instead of purchasing paper from the banking system solely with cash currency – the Federal Reserve since the start of the financial crisis has increasingly relied upon deposit currency to purchase paper.

Regardless how the Federal Reserve pays for the paper it purchases – cash currency or deposit currency – it is creating dollars and expanding the money supply. But the traditional definition of M1 money supply does not accurately capture this process when the Fed uses deposit currency to pay for its purchase. In fact, it is totally excluded. Because the Federal Reserve did not create deposit currency in the past, none of the Ms (M1, M2, or the now discontinued M3) take it into account.

Consequently, the traditional definitions of the Ms are outdated because they do not capture the total quantity of dollars in circulation. Because M1 is underreported, so too is M2.

The following chart shows the quantity of demand and checkable deposits, i.e., the amount of deposit currency, at the Federal Reserve since December 2002. From December 2002 until the collapse of Lehman Brothers in September 2008, the quantity of deposit currency created by the Fed averaged $11.8 billion, an amount that is relatively insignificant compared to total M1(money supply). Presently, it stands at a record high of $1,246.2 billion, which of course is highly significant. More to the point, none of this deposit currency is captured in the traditional definition of the Ms. The quantity of dollar currency is therefore significantly underreported, which is illustrated by the following chart.

The Federal Reserve reports M1 to be $1,937 billion as of May 2nd. When deposit currency created by the Federal Reserve is added to the traditional definition of M1, M1 after adjustment is actually 170% higher at $3,518 billion. Its annual growth increases to 29.5%, nearly 3-times the rate reported by the Fed.

This restatement of M1 explains why crude oil is back at $100 per barrel; copper is $4.05 per pound; and commodity prices in the main are rising in the face of weak economic conditions. The US dollar is being inflated and worryingly, the rate of new currency creation is approaching hyperinflationary levels. Unless the Federal Reserve changes course, the US may face a deposit currency hyperinflation like those that plagued much of Latin America in the 1980s and 1990s, along with Russia (1993-2004), Weimer Germany (1923), Hungary, China (’48-’49) Iceland (2008-’09), Yugoslavia, Belarus, and many others. I don’t expect U.S. hyperinflation, but considering gold was $35/oz. when we last backed our currency with gold – it must not be ignored. Consider the following:

Using the FED’s M1, gold would have to be $13,150/oz. if we were to return to a gold standard, assuming we actually have the reported 147.3M oz of gold (by U.S. Mint) . (1.716T reported M1 divided by 147.3M oz. of gold)

Adding deposit currency created by the Fed, gold would have to be $23,900.

To the contrary, China’s currency is Appreciating:

As I wrote in the March newsletter, China’s renminbi is appreciating and will likely continue for years. For the past nine months it has steadily appreciated about ½% per month, now up over 5% from the start. A strengthening currency is the best way for China to fight inflation and make its citizens richer. Combine the strengthening currency with rising incomes and it bodes well for companies selling goods and services to China and the Chinese. It is the one significant rotation that we have employed over the past eight months – that being from Chinese exporters to companies selling to the Chinese. It is still about China, but this rotation promises to be even more profitable, more predictable and longer lasting.

Though I don’t believe that either the end of QE2 or Greece will be the big problems that they were initially believed, I believe our raising cash will provide us an added measure of safety and perhaps allow us to take advantage of some buying opportunities over the next couple of months. Like I often say, “I’d rather lose opportunity than money”.

Looking forward to discussing the rotation within the energy sector, but that will have to wait.

祝你身体健康和盈利的投资 (May you enjoy good health and profitable investing),

Frank

Overview:

With recent volatility, I think a note on basic investing is valuable. First, markets move both up & down. Don’t get too elated when they make big moves up or too anxious when they make a big move down. Ask yourself if anything has really changed or is this a short-term reaction of traders. The difference between traders and investors is, over time, investors make money and traders do not. This does not mean that we will not reduce the size of positions and gather cash for future bargains, but wholesaling out of the market is almost always fruitless. The usual result is you catch a lot of the downside, or all, since no one can forecast the top or bottom, but usually you miss more of the upside than you missed of the down, resulting in a lot of activity which almost always results in lower returns and higher taxation.

I’ve examined years of client returns and this is almost always the case. It is human nature to want to be fully invested when things seem to be going strong and to be fully in cash when the market has a few bad days. The more one acts on those emotions, almost certainly, the lower the returns will be.

Ask yourself what has materially changed. If sectors are rotating due to macroeconomics, then I believe we should change with them. Remember, CNBC is there to keep you tuned-in. Almost every money manager who appears, is selling their book (wants you to buy what they own or sell what they are shorting). The hosts try to build a story around what is happening – but they are seldom accurate in their assessment and almost never get tomorrow correct.

Special Note: For MLP K-1s and the income tax forms associated with them, you may click on this link and download your specific forms. They should save you or your accountant time in preparing your tax return. Go to Tax Package Support for more information. 

Our Strategy:

In the summer of 2008, we increased cash and equivalents to about 50% because there was a material reason to do so. Thousands of sub-prime, adjustable-rate mortgages were about to start resetting in September thru December. These were the type that paid nothing down and nothing at closing, had monthly payments at a 1% rate with 6% added to the mortgage each of the first two years. Add closing costs which were rolled into the mortgage and these mortgages were typically 20% plus higher than the inflated purchase price – there was simply no reasonable expectation that these would not result in foreclosure.

Today, we are watching our oil supply. Unfortunately, we are reliant on countries with large populations of radical Muslims to provide us with the oil to keep our country running. Vast oil and natural gas reserves are literally beneath our feet, nuclear power is available but has been shunned, while we send our money overseas, much of which goes to finance the terrorists that we spend hundreds of billions to fight. I hope that changes soon, but for now the question is how to protect and grow our investments in this environment.

We are gathering cash from investments that do not lend themselves to high-priced oil, to reduce our overall exposure and to provide us the opportunity to buy good companies cheap. It is an important distinction that we are not buying hot stocks, we are buying solid companies which are well-positioned to grow in a world where millions of people are moving from being peasants to middle-class citizens every month.

Mid-East & Oil Turmoil…

Egypt, Libya, Tunesia and other Middle East nations have a host of human and political issues, but the impact on our markets has been somewhat muted. They’ve had the effect of making a market rally pause while the price of oil has risen some $20/barrel. Though the reduction in Libyan crude is not of the magnitude to cause an oil shortage, it does increase the susceptibility of the crude oil markets to other potential supply shocks. If the political unrest were to spread to Algeria, we might see a further spike in oil prices as the combination of Libya and Algeria supply constraints would be larger than Saudi Arabia could cover. It is in the world’s and Libya’s interest to help General Gaddafi find a new (not so pleasant) home as quickly as possible.

Shy of further contagion, we are likely seeing the near-term peak on oil prices, for Saudi Arabia has a vested interest in keeping the prices from rising so much that they choke the global recovery, or even worse, inspire the United States into adopting an energy policy which might reduce and eliminate our dependence on OPEC oil. Continued high oil prices should be bullish for natural gas since it is a low-cost, relatively clean energy source that is economically sensible. And now that Great Britain, the Eurozone, and the United States are all broke, I don’t believe we will see much movement towards solar or wind which require large government contributions to make them economic.

We have increased our holdings in the companies that do the drilling and service work on new wells as I suspect that big oil companies will have very active drilling programs with oil above $75 (right now most oil is priced around $115/bbl). You might call this the pick and shovel approach for it was the suppliers of basic tools who made the big and consistent money during the gold rush.

Still another area to watch is the copper market and infrastructure. Once the middle east settles, copper and other infrastructure related commodities and companies should rise quickly. This should give new money a chance to get in to some great companies that seemed to just keep running up, without giving new investors the opportunity to buy-in on a dip.

The dollar…

The dollar has long enjoyed its position as the world reserve currency. It has afforded us many luxuries such as cheap oil and gas and the ability to live beyond our means. Only now, our government has taken this to a level that the world will not tolerate. In 2005, our federal budget was $2.4 trillion. In 2010 it was $3.6 T and 2011 it is $3.8 trillion. $200 to $400 billion dollar deficits were uncomfortable, but last year and this year our federal government has seen fit to expand those deficits to $1.6 trillion each year! This does not count the Fed’s quantitative easing since their near $3 trillion is technically buying assets (of course most of those assets are IOU’s from the federal government. Don’t try this at home.

This seems to escape many if not most, Americans. Unfortunately, the traditional buyers of our debt fully understand that in the past two years the dollar has been printed and guaranteed future printing to the extent that it has fallen 20% against the Canadian dollar and the Swiss franc, over 30% against the Aussie and almost in half against gold. Even China is once again allowing their yuan to appreciate against the dollar. Just three years ago when the financial crisis began, the dollar was still viewed as a flight to safety. In fact for over 60 years, any time there was economic turmoil in the world, people would run to the dollar. Last year, when Greece was exposed, the flight to safety went to gold and the Swiss franc. Currently, with the middle east in turmoil, again the flight to safety went to gold and the Swiss franc. It is painfully obvious that the rest of the world is losing faith in our ability to pay our debts and fifty years from now it is very likely that this decade will be remembered as the decade that the dollar lost its status as the world’s reserve currency.

I know that sounds doom and gloom, but unfortunately that is exactly what is taking place. In fact, as much as Tim Geithner would like to convince you of our “Strong Dollar Policy”, he himself has chided China for keeping their currency undervalued. Congress and the President have done the same. Even Ben Bernanke said just two weeks ago that he was not responsible for inflation in emerging markets. He said “if they don’t want inflation, they should just let their currencies appreciate”. If we want everyone else to allow their currencies to appreciate against the dollar, we are practicing a weak dollar policy and the dollar will drop in value.

The silver lining (yes that is a hint) is that we do not have to be among the victims. Victims will include anyone holding cash savings, CD’s, bond mutual funds and long-term debt. If you are earning 3% in a CD, sending 1% to the IRS, leaving you with 2% earnings, while the dollar is declining in value by >10% per year, you have found a safe way to go broke without noticing. Using that scenario, you will lose 1/3 of your purchasing power in just five years. In ten years you could buy less than half as much. This is why we have so heavily weighted our portfolios towards companies that are not only profitable, but have hard assets. Hard assets will compensate you for the dollar’s devaluation. This is a sector rotation to hard assets and away from intellectual property and forms of cash.

In an environment where your currency is devalued, labor and intellectual property such as software and services, become cheaper while commodities and equipment become more expensive. I would rather own the things going up in value (probably does not need saying). By the same token, a bank holding a 30-year mortgage will actually make no money or even lose money on the mortgage. I believe as this unfolds, you will also find home prices stabilize and rise as astute investors realize that buying a house at or near construction cost and using a 30-year mortgage will almost certainly result in paying the mortgage with relatively worthless dollars in the future.

Again I may depress. But again, there is a silver lining. While the dollar burns, we do not have to be victims of the fiddling in Washington. There are many opportunities to insure our financial futures – they just require action. I believe our portfolios are well positioned to do just that. In fact, since rotating to this portfolio in early 2009 due to the new government spending and market conditions, we have considerably outpaced all major indexes. Of course there will be short periods when banks or computer makers or software does especially well and we will miss that, but I do not expect those times to be long in duration. The macro-picture of the world and of world currencies just does not support those sectors. They had their moments in the past two years, but had you owned the S&P 500 less those sectors, you would have out-performed the entirety of the S&P.

China…

Finally, the moment I’ve been waiting for… China has clearly begun to allow their currency to appreciate, again.

As QE2 started to cause inflation in China, they did what they always do to fight inflation. They raised their interest rates and raised bank reserve requirements. This is from the classic playbook for Central Bankers. It attacks inflation by choking down the economy. It has always seemed to me that a better alternative would be to allow your currency to appreciate with the economy. It fights inflation since each dollar or yuan is worth more so less are required to purchase a good or service. In effect, it makes your citizens richer – if your currency appreciates 20%, a $1,000 has the purchasing power of $1200, so income and savings become worth more and your citizens can purchase more goods, purchase gasoline cheaper, and boost the economy from within.

Number of Yuan Per Dollar

As you can see in this chart, China held the yuan firmly pegged around 8.35 yuan per dollar until July 2005. For the next three years they allowed it to appreciate an average of 7% per year. That continued until May of 2008 when the financial crisis erupted and China pegged the yuan again, but this time at 6.84 per dollar, almost a 20% appreciation in less than three years. The peg remained until a few months ago when the yuan began to appreciate just slightly, but now can be seen beginning to appreciate again at about an 8% annual rate.

As this continues, we will want to own companies who sell to these (richer) Chinese consumers. Whether the companies are domiciled in the United States, China, or some other country is of much lesser importance.

Hope you enjoy the longer and warmer evenings,

Frank

Managing money poses special challenges for women, but these 10 tips can help you get on the road to financial independence.

by S. Kay Bell

Everyone, regardless of gender, needs to have a financial plan. But women do have some special needs.

In most cases, women make less money than men in the same positions. Women tend to take more time from work to take care of family. That not only inhibits job promotion and the accompanying raises, but also reduces our contributions to pensions and Social Security. And less retirement savings are a big problem, since statistically, women live longer than men.

But even though women face some financial obstacles, here are 10 ways to get firmer financial footing:

1. Take control of your finances.

While most women participate in the day-to-day finances, some still leave money decisions to a partner. That’s a common mistake seen by Melanie Johnson, a Certified Divorce Financial Analyst (CDFA) and an investment adviser representative with Athena Financial Group, Inc., in Austin.

“Women don’t take part in the financial planning, especially when it comes to long term,” said Johnson. “They may take care of the checkbook, balancing it and everything, but when it comes to the 401(k), whatever he says goes.”

That too often leaves women surprised when there’s a financial crisis. Even without a money surprise, it’s not wise to let someone else have complete control over your financial future.

2. open your own account.

One sure way to have control is by opening your own account. This doesn’t necessarily have to be a secret savings or checking account; just one where you alone get to decide what to do with the money.

That allows you to use the money without feeling like you must ask for permission to spend it, said Johnson. And when each partner has a separate account, you both can come up with a spending plan for your joint money, as well as determine as a couple how much cash each of you gets to manage separately. That will ease some of the guilt you might feel about spending comingled money.

3. take care of your finances first.

Women are caretakers. This is something Johnson understands as a mother of four. But as a financial professional, she’s also seen mothers crack open retirement nest eggs to send children to college. “Regardless of your marital status, focus on yourself first,” said Johnson. “Youngsters have grants, scholarships, work programs and, as a last resort, loans,” said Johnson. But once you raid your retirement account, you might not be able to recover completely. Remember, before you can take care of anyone else, emotionally and financially, you must take care of yourself first.

4. Set financial goals.

Financial control is easier to achieve when you have goals. Figure out your big financial goals, such as early retirement, as well as smaller, short-term goals, such as buying a house or new car. As you achieve the smaller money goals, you’ll feel more successful and confident in working toward your longer-range plan. Evaluate your progress over time to ensure you stay on track.

5. get out of debt.

Becoming financially secure depends in large part on eliminating costly debts. A budget (check AW’s January 2011 Worth column for budget tips) can help you do that. Once you have your debts out of the way, you’ll have more money for saving and investing.

6. get some credit.

This tip might seem fiscally counterproductive, especially after just being encouraged to get out of debt. But some credit, managed wisely, is crucial in today’s world. “I’ve seen higher net worth women who didn’t need credit cards, then something happens – divorce, a spouse passing away, or another emergency – and they needed credit but couldn’t get it because they didn’t have a credit history in their own names,” Johnson said.

7. know your own risk tolerance.

Women tend to be more conservative than men when it comes to investments. But that also means that their investments often don’t grow as quickly. If you understand your own risk tolerance, that knowledge can help you work toward an investment plan to meet your long- and short-term goals.

8. pay attention to taxes.

This is a sister tip to knowing about your finances. “Financially those tax returns can be very important,” said Johnson. “Uncle Sam can come back to you. I’ve seen women who just signed their name and then something happens and they have a $14,000 tax bill and they don’t know how.” Bottom line, don’t sign any tax return, one you file singly or one filed jointly with a spouse, without knowing what’s on it.

9. get professional help.

Don’t be embarrassed to seek professional help. Although money managers and advisers charge for their services, the benefit of their experience and knowledge can be worth the cost.

10. start now.

It’s never too late to start putting your finances in order. Your financial success depends on your attitude about money and your willingness to take your financial future into your own hands. Set your goals, begin saving and investing as much as you can, reduce your spending, get help as needed. Your efforts will eventually pay off.

Get the latest tax tips and general financial advice at S. Kay Bell’s blog, Don’t Mess With Taxes (dontmesswithtaxes.typepad.com).

To read the article, click here:

By David Gaffen
Rob Curran reports:

The U.S. stock market is so rough that even Major League Baseball players are scared — and stockpiling government-guaranteed bonds.

Frank Beck manages money for professional baseball players and other heavyhitters as chief investment manager at Capital Financial Group and affiliate Pro-Player Investing in Austin, Texas. During the summer, Mr. Beck reduced stock weightings for his sports clients to about 25%, positioning about 50% in cash, with 6% in gold bullion and the remainder in bonds.

Recently, he started buying his clients agency mortgage bonds, the securities sold by Fannie Mae and Freddie Mac that are now guaranteed by the government.

Among stocks, Mr. Beck likes natural-gas pipeline operators structured as dividend-paying master-limited partnerships. These companies, like Boardwalk Pipeline Partners LP and El Paso Pipeline Partners LP have sold off sharply with natural gas — even though their business models are more dependent on volumes than prices of natural gas. Plus, they pay a generous yield — 12% in the case of Boardwalk Pipeline, and 9% in the case of El Paso.

Mr. Beck also placed clients in an exchange-traded fund that takes a short position on European and Asian stocks, the ProShares Short MSCI EAFE. That’s up 59% for the year, to date, as markets from Ireland to Australia feel the economic effects of what started as a financial crisis,even moreso than the U.S.

The principal reason Mr. Beck is positioning portfolios for more economic weakness at home and abroad: “The sheer amount of debt people are carrying,” he said. With the unemployment rate rising, home prices falling and stock portfolios losing value, Mr. Beck expects more debt crunches for the U.S. consumer, something that has repercussions for the U.S. economy and for exporters in Europe and Asia.

The “negative feedback loop” between credit and economic activity is a powerful force, markets have learned recently. As Federal Reserve Chairman Ben Bernanke outlined in a speech Wednesday: When people miss debt payments, banks run into trouble and reduce lending. That slows business activity, hurting the job market and causing people to miss payments all over again. Another reason Mr. Beck is bearish: Monday’s naive reception of the latest bank-recapitalization plan as the long-awaited panacea.

“Another ultimate outcome of this, and why I think gold will go up, the sheer amount of dollars being created by our government and other governments” will have an inflationary effect, Mr. Beck said. Gold is a traditional hedge against inflation: as paper money loses its value, the relative value of the hard asset increases.
Of course, sports guys are often risk-takers, and some clients are tempted by the high yields on the very mortgage-backed securities that capsized Bear Stearns Cos. and Lehman Brothers Holdings Inc.

For the most part, Mr. Beck and junior partner Justin Simmons direct these clients to agency mortgage bonds because of the explicit government guarantees. Those agency bonds can yield as much as 7% to 7.5%, with even higher yields to maturity,Mr. Beck said.

In 2006, Mr. Beck befriended Mr. Simmons, who pitched the winning game for the University of Texas in the 2002 College World Series before joining the Los Angeles Dodgers system. Mr. Beck and Mr. Simmons, who has a degree in finance, got to talking about the niche for managing the money of sports pros.

“I always believed the niche was there; how to approach it was the tough part,” said Beck, an avid sports fan. “As we got to know each other and talk more about it, we decided it was something that would make our jobs enjoyable.”
In May 2006, Simmons joined the firm, tapping his contacts in the game to launch Pro-Player Investing. Out of $1.1 billion in assets under management at Capital Financial Group, about $150 million is in pro-player accounts. Beck said they were particularly strong in baseball.

For the year to date, the average return on all accounts at the firm was a loss of 16.2%, Mr. Beck said, compared with a loss of 38% for the Standard & Poor’s 500 Index. For 2007, Beck’s average return was 23.7%.
Sports-pro money management brings its own challenges. Different strategies are required for different career stages, for example. “If you’re in minor-league baseball, you have a certain amount of money … usually a big bonus paid when you signed up,” Mr. Beck said. “Once you get that first big contract, then life changes.”

Then there’s the conflict of interest caused by client loyalty.

“We’ve got players on competing teams in the playoffs right now … who do you root for?” Mr. Beck said.

Happy New Year and may 2011 investing be as profitable as 2010 which saw our accounts quadruple the returns of the World Stock index and double the U.S. markets, which were the best in the world last year.  As we enter 2011 we can expect a mixed bag of opportunities and challenges.  Emerging markets continue their growth while the U.S. hangs on and Europe fights for survival under mountains of debt and devaluing currencies.  Since August, when Ben Bernanke, Fed Chairman, began telegraphing his intention to launch QE2, Treasury and corporate bond prices have dropped sharply, while the stock markets have climbed higher.  This has the effect of prolonging our current positions of commodities, precious metals and stocks (those companies which have hard assets and/or sell to emerging markets).  This trend can continue until interest rates rise high enough to compete with this list.  At that time, bond fund investors will have been decimated and bonds will sell at discounts that should offer us very attractive returns as we rotate parts of our portfolio to the newly advantaged sectors.

One of the biggest errors in investing is the view that the economy and the markets act as one.  It is important to understand that the European and U.S. markets are made-up of hundreds of multi-national companies (MNCs) whose revenues have grown so large that they dwarf the GDPs of many countries.  The MNCs earn their profits outside their host country avoiding countries with adverse taxation (such as the U.S. which now has the highest corporate tax rates of any competitive country).  It is estimated that there are more than 20,000 MNCs operating in the global economy, with over 100,000 overseas affiliates running cross-border businesses.  Through a tactic known as “transfer pricing”, MNCs allocate income to subsidiaries in tax havens while attributing expenses to higher taxing countries.  Governments will no longer be able to rely on corporate taxes as a means for more spending.  However, countries like Brazil are realizing this now and have reduced corporate taxes and are reaping the benefits of full employment.  They are actually importing labor as there are more jobs than people.

For investing, there is a more important ramification of QE2 and MNCs.  In its simplest form, “quantitative easing,” (QE) is nothing more than massive money printing, designed to dilute the value of US-dollars floating in circulation.  And since most globally traded commodities are priced in dollars, when the value of the dollar goes down, the prices of commodities and precious metals usually climb higher.  China’s trade minister Chen Deming lamented, “Uncontrolled printing of dollars and rising international prices for commodities are causing an imported inflationary shock for China and are a key factor behind increasing uncertainty.” The US money supply, as measured by MZM, has mushroomed by nearly $500 billion since late April, and is fueling the explosive surge of the “Commodity Super Cycle,” to record heights.

Therefore, the only viable option left for Beijing that could hold down the cost of soaring raw materials, is to succumb to pressure from the Fed and US-Treasury, and allow the yuan to climb further against the US-dollar.  Right now, Hong Kong based currency dealers expect the yuan to gain roughly 6% this year, hitting 6.25 /dollar in late 2011.

Further, QE2 is contributing to the global trend away from the dollar.  I expect that sometime this decade we will see the dollar’s role as the world’s currency reserve, be replaced with a global basket of currencies and/or commodities.  Though the dollar will certainly remain an important ingredient in such a basket, it will still have to weaken.  Going from the sole currency reserve to a shared position means that precious metals and commodities will continue to rise in dollar prices.

Missing the importance of this has prevented most investors from participating in the gains that hard assets have provided.  More unfortunate is the fact that most Americans are not investors – they may have a 401(k) which offers very limited choices.  Sadly, those choices seldom offer much or any exposure to precious metals, commodities, or MLPs and participants are typically invested to a fairly large percentage in cash and bond funds – the two areas which will suffer the most.

INVESTMENT OPPORTUNITIES

There are very few Amazons, so investment opportunity, today, requires finding companies that are selling to the emerging markets or have needed resources or strategic hard assets.  I’ve discussed emerging markets, high dividend stocks, hard assets, and natural resources in many issues over the past five years, so there is not much new to report, other than that they are still in tack and should remain so until interest rates rise enough to compete for investment dollars.  At that time, bond fund investors will have been decimated and bonds will be selling at attractive discounts, providing us another opportunity.

CHINA

Predicting the future of the Chinese economy rests on a trend that has held true for thirty years. Like a boulder rolling down a slope, China’s economic growth continues to pick up momentum.  The immense force of 1.3 billion people struggling to rise above poverty is the driving force behind that momentum. Although China has become the world’s number two economy, the na­tion remains much poorer than western countries on a per-capita basis. That means the Chinese dominant obsession will continue to follow the maxim of the late Supreme Leader, Deng Xiao Ping. He famously said, “To get rich is glorious.”

The Chinese are doing just that and consumer spending is growing at a rate near 18% per year.  Along with government spending, there are hundreds of billions of dollars being poured into companies building infrastructure or serving the needs and desires of the growing numbers of the middle class.  From cell phones to hamburgers, the growing consumer class wants the same types of luxuries found here.  Even Rolls Royce sales in China will soon eclipse those in the United States.  This year, they expect to sell 800 of the ultra luxurious Ghost sedans at a price of nearly $1,000,000 each.

Though we only held a few positions in the BIC (Brazil, India, China) this year, and none in Russia (I don’t like the idea of making 30% until the government decides to own 100% of my assets), I expect their markets to be attractive again, once they no longer feel the need to raise interest rates or otherwise tighten fiscal policy.  Another example of sector rotation, this should offer us another opportunity to re-enter these markets in a significant way, at attractive prices and attractive long-term growth potential.

UNITED STATES

Though the economy struggles to add enough jobs and the dollar is under attack, the U.S. is still the world’s biggest economy.  It is the most innovative and it is highly efficient by any standard.  Surprisingly, only one in five Americans believes that the U.S. has the largest and disappointingly, only 30% of Americans say their portfolios have reaped notable gains since the market low in March 2009.

This should be the year for the large multi-nationals which have accumulated mountains of cash and are operating lean and efficient businesses.  Generally they are selling at attractive valuations and can offer growing dividends.  Choosing those with the best valuations and the best exposure to emerging markets should provide us another profitable opportunity.

Of course we will pay close attention to the amount of leverage at hedge funds and banks, which combined with the bad mortgages, caused the worldwide pain of 2008.  If interest rates rise, we will rotate our portfolios accordingly (as noted above).  The wildcard is Europe.  We will monitor the sovereign debt problems there and act accordingly as Europe and the U.S. are economically conjoined.

BOTTOM LINE

I never expect a smooth ride, but this year offers opportunities in almost every scenario, though it will certainly require making changes along the way.  We should be able to make any rotations needed while still managing for another year of gains without much taxation.

May 2011 be your best year for good health, good luck and good fortune,

Frank

PH. 512.345.6789 (5, 1 thru 9)

Frank@BeckCapitalMgmt.com

www.BeckCapitalmanagement.com

www.ProPlayerInvesting.com

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THE ECONOMY:

QE2 is all over the news these days and I am not referring to the transatlantic ocean liner.  Quantitative Easing, part II, Ben Bernanke style, includes another $600 Billion of money-printing with another $200B-$300B of rollover (notes due and being refinanced).  The Fed’s idea was to keep interest rates near zero by purchasing Treasuries in mass quantities.  The Fed also believes that this additional money-printing will increase asset prices, making Americans richer so that they may resume “consumerism” and possibly even create some private-sector jobs.

Interestingly though, the Fed told us in advance, what they would be buying.  Upon the announcement of the imminent purchases, big banks used near 0% money provided by the Fed, to buy the same Treasuries the Fed would soon begin to purchase.  Interest rates dropped, but since the Fed began its purchases, the Banks began to sell.  Interest rates have spiked higher with each Fed purchase rather than drop, all due to the Banks cashing in on their ability to front-run the Fed.  Even asset prices have not gone the Fed’s way, though I believe Mr. Bernanke will ultimately win on this front – at least in the short-term.  Thus far, equities have about broken even, while bonds, and especially bond funds, have taken a beating (evidenced by the muni bond ETF chart here).

Ironically, the Fed might better be able to keep rates low and spur asset prices by ending QE2, or at least purchasing some other assets.  So far, QE2 looks more like a transfer of taxpayer dollars to the Big Banks than it does any kind of real stimulus.

I’ve said for months now that a bond fund meltdown is on the way, though I expect the real pain to be inflicted when the Fed no longer has Congressional support for debasing the dollar.  It is likely that there will not be a QE3, so come June when QE2 is spent, that will likely be the end.  At that time, or as recent results have indicated that it could happen sooner, rates will rise.  Once you lose a big buyer of bonds, interest rates rise as the bond prices fall.  That spells disaster for bond funds and also those 401(k) darlings called “Target Date” funds which carry a large percentage of bonds.

Don’t confuse a bond fund for a well-structured ladder of bonds.  Individual bonds have maturities and a ladder of bonds will have bonds maturing each year so if interest rates rise, your bonds still mature at full value (par / $1,000 per bond).  You can spend or reinvest interest and as bonds mature, you can purchase new bonds at the higher interest rates.  Say you have a seven-year ladder with approximately 1/7^th of your bonds maturing each year for the next seven years.  A year from now, 1/7^th of your bonds mature and your ladder has remaining bonds which will mature each of the next six years.  The interest from all the bonds may be used for income while you use the funds from maturing bonds to purchase additional bonds that will mature in seven years, thus keeping your seven-year ladder in tack.

Bond funds have no maturity.  You cannot simply wait for your bonds to mature to get full value.  If interest rates rise, the bonds will drop in value and it is reflected in reduced share prices.  Some of the fund’s investors will sell, causing the bond fund manager to liquidate some bonds prior to maturity, in order to raise cash for investor redemptions.  As rates rise further, the number of redemption requests increases and the fund’s manager must sell even more bonds at a loss.  Since this occurs at all (or near all) funds at the same time, it becomes a buyer’s market.  That is the time where we can step forward and build our bond ladders at bargain prices.

If you have any bond funds in your retirement plans at work or you know someone who owns bond funds, please share this with them.  Don’t let history fool you.  The last 30 years have been a bond fund’s dream world where interest rates fell from around 20% in 1980 to near 0% in 2010.  It makes many an investor believe that bond funds are always safe because that is all they have known.  Well, that was then and this is now.  We can profit from owning bonds, but the only near-certain way going forward, is by buying bonds from distressed bond funds, at bargain prices.

NOTES:

RMD’s must be taken by December 31^st.  If you have turned 70 ½ this year or previously, you must take your Required Minimum Distribution from your IRA’s and other Qualified Plans.

Roth Conversions taken this year qualify for deferred taxation, one half of the taxable amount added to 2011 income and the second half added to 2012 income.  It is a great opportunity for many of you.

GOLD – The Saga Continues:

I read an interesting quote about gold, by Warren Buffet recently. He said “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.  It has no utility.  Anyone watching from Mars would be scratching their head.”

Mr. Buffet missed the tech boom because he “does not understand it”.  I think he is missing the point of gold too, although somewhat humorously, since the same Martians might find it equally puzzling that the Fed can take a $100 tree that has been cut down and turned into paper that we color with green ink and then pass it off as 600 billion dollars.

What Mr. Buffet and others are missing is that gold, silver and other hard assets are anti-currency investments.  Gold has been the true currency for thousands of years and it has only been the last 39 years that we have experimented with fiat currencies.  Unlike gold, governments have found it very easy to print more money, making it worth less in the terms of gold or other hard assets.

Of course, I also favor silver, copper, coal, trees, grain and water, along with a host of other hard assets that are used in industrial activity or for food.  The pipelines and the rare earth metals are two more examples and have been all the rage in recent months – I am glad to say we were well ahead of the curve on them.  In fact, the pipelines have made consistent money for us for many years – they continue to offer attractive dividends, growth, and a hedge against a devaluing dollar.

BOTTOMLINE:

For now, we will continue our theme of investing in companies with hard assets and companies selling goods and services to the growing middle classes of the emerging economies.  The anti-currency trade is alive and well.  If Washington gets its house in order, we will adapt, but many of these sectors will benefit in that environment as well.

I’ll continue to look forward to buying bonds at deep discounts.  In the meantime, I hope everyone enjoys Thanksgiving.

Frank

512.345.6789

Frank@BeckCapitalMgmt.com

www.BeckCapitalmanagement.com

www.ProPlayerInvesting.com

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