Bearish News

The dollar hit a new low for 2009 on Tuesday, and it looks feeble on a technical basis (see breakdown in chart to left, from FinancialSense). With Helicopter Ben reappointed and no policy changes in site, the dollar-pummeling should continue unabated.

How to Play It?

Foreign currency and precious metals can offer protection from a depreciating dollar. International stocks can also offer upside, but this article will focus on how retail investors can get exposure to currency and metal.

Merk Hard Currency Fund (MERKX)

Alex Merk’s flagship fund has a single purpose: to benefit from a falling dollar. It invests in countries with sound monetary policies, through currency and government bonds. Their record so far is solid, outperforming the short-dollar trade by 3-1 since 2005:

Overview of MERKX holdings:

From Merk’s official site:

This strategy seeks to take advantage of the dollar’s decline relative to these currencies, may help to diversify your portfolio, and potentially decreases downside risk against a decline in the dollar. The Merk Hard Currency Fund indirectly provides access to these currencies, while seeking to mitigate stock market, credit and interest risks incurred by alternative means of access, such as the typical international equity or bond fund.

Most of us will never have the skill required to play Forex and foreign-debt markets. Paying a pro like Alex Merk 1.3%/year to mange this part of your portfolio is a steal. Note: 13% of the fund is currently invested in gold. There’s a PDF with more details on MERKX here. Merk also offers an Asian currency fund. They apparently offer exposure to the Chinese Yuan, which is quite difficult because of international restrictions. Haven’t looked into this one much though.

Evergreen Precious Metal Fund (EKWAX)

This gold fund is up a whopping 531% over the last 10 years. Compare that to the S&P 500′s dismal -24% performance. It’s up 46% since January ’09 when I wrote this piece. EKWAX primarily invests in gold miners, but has exposure to silver, copper, platinum, and other metals. From the January article:

Chasing past performance is usually a bad idea, especially with mutual funds. But this is a unique period in America’s history. We have unique risks like hyperinflation, and the only-whispered possibility of dollar collapse. Plus, gold stocks have taken a beating over the last year. EKWAX is down from a high of $81 to $46 today. So at least you’re not buying in at the very top.

Every investor should have some exposure to precious metals. There are a few ways to achieve that: physical ownership of bullion (coins/bars/grams), stocks, or mutual funds like EKWAX. Picking individual gold stocks is hard, it requires a lot of industry-specific knowledge.

Gold and silver have been on a tear lately, so waiting for a pullback might be prudent. But timing these neurotic markets is near-impossible. Dollar-cost-averaging into positions works well (spread your buys out over time). If we get another big pullback, I’d look to add to metal positions, as I did in Jan/Feb. If you’re interested in riskier metal plays, see Investing in Palladium.

Dollar Demise

The Chinese are not fans of Ben “Saved-The-World” Bernanke and Geithner. They see unsustainable deficits and QE resulting in dollar devaluation, and aren’t happy about it. This NYT piece makes the case. It describes China’s effort to establish Yuan-denominated bonds interationally.

A historical shift is clearly underway. The move has been gradual, so far. Hopefully it will stay that way. But a growing minority think a dollar-collapse is inevitable, with countries panicking in a rush to dump dollar assets. It’s impossible to say if/when such a move will happen. But so far America has dismissed calls for fiscal discipline, insisting that lenders not worry (and keep that cash coming).

Long-term, it seems wise to position for a declining dollar. We’re up to our eyeballs in debt. Does anyone really think America is going to cut spending or raise taxes enough to make up the shortfall? Seems fanciful. Dollar devaluation is the easy way out.

Disclosure: Long EKWAX, GG, gold, silver, palladium. No position in other stocks/companies mentioned.
Disclaimer: Nothing posted here is investment advice. It is for educational purposes only. Always consult a financial professional when making investment decisions.

The Onion has emerged as one of today’s best sources for insightful economic commentary. What this says about American journalism, I don’t know.

Update: The embedded Onion Video was causing load problems, so I’ll just link to it instead:

New Live Poll Allows Pundits To Pander To Viewers In Real Time

On a more educational note, Jesse just posted this great gold chart + commentary:

Hat Tip LOLFed for the Onion vid

Jim Rogers had an interesting quote about Chinese equities in a recent Bloomberg piece:

“Selling Chinese shares in 2009 would be like selling U.S. ones in 1909,” Rogers said. “My children were born in 2003 and 2008 and I expect them to hold my shares someday.”

The rest of the article focuses on dollar and t-bond weakness:

“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency,” he said in a telephone interview today from Singapore. “The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.”

I humbly agree with Mr. Rogers. And while it might be prudent to trim exposure to China after the huge rally, timing this ridiculous and manipulated market is tough. Related:

China, Google, and Apple – from January 2009

Disclosure: Long FXI, PGJ, BIDU, AOB, GXC

The San Francisco Fed recently published a dreary outlook. The unemployment commentary was particularly negative (for the Fed, at least). But if the past is any sort of guide, in a few years these Fed “worst cast scenarios” will look like rosy pipe-dreams. More on that later. Here are some excerpts from the FRBSF:

The long and gradual return to pre-recession unemployment levels implied by the Blue Chip consensus forecast is consistent with a labor market recovery that is slightly weaker than that experienced in 1983 and slightly stronger than that experienced in 1992. However, should labor market conditions instead proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011.

They also provide this handy alternative unemployment chart, which includes involuntary part-time workers (people who want to be full-time, but can only get PT):

Not Pessimistic Enough

As dire as these predictions seem, they all assume growth is right around the corner. Look at the graphs, they all assume a few more months of recession at most. What if we’re in the modern equivalent of 1930? A rebound in consumer spending is always just a few months away, according to most analysts/economists. But spending and revenue are staying down, for the first time in a long time. And I don’t think it’s temporary shift, nor is it enough to turn the tide. While saving is up from negative territory, to 6%+ last month, it’s still not nearly enough to pay off our tremendous debts (public and private).

If the spending-bubble does stop here, we still have a lot more pain coming. The traditional Keynesian solution is more debt and unsustainable bailouts. That worked for a long time, but our decades-long debt spree is finally catching up with us. We  may be at the breaking point. Discretionary spending has never seen a pullback like the current one.

Gov intervention is the only thing preventing a total collapse. Such a collapse would arguably be preferable in the long-run, as it would solve the horrendous moral hazards and “reverse darwinism” we face, as Peter Schiff says. But that doesn’t change the fact that a collapse is highly unlikely, as I argue in this piece. The Gov will fight it tooth and nail, using whatever means necessary. So even bigger deficits are in the cards, and sustained inflation is very likely.

Those who think the Fed will start sopping up liquidity from the system are delusional. That would just pull the rug out from under the “recovery”, causing another crash and resulting in more bailouts and Keynesian magic (unless there were somehow a huge shift in philosophy among the economic powers that be).

There are just too many negative catalysts near-term.  State governments going broke (or getting bailed out), pensions doing the same, CRE’s awe-inspiring collapse, dwindling tax revenue at both the Federal and State level. When unemployment benefits start to run out, consumer spending will plummet further.

And with Summers, Bernanke, and Geithner as top-dogs in the administration, the most likely outcome is inflation. Those who doubt their ability to encourage inflation ignore history. They’ll find a way. Unless they let a collapse happen, wiping out debt via devaluation of the dollar will be the only option at some point. If that’s the “growth” green-shooters are harping about, count me out. Omnisan Investment posed an excellent question to those who advocate an inflationary outcome:

After all, if the Dow hits 30,000, but you’re celebrating by drinking a $150.00 coke… are you really any richer?

No position in any stocks mentioned. This is not investment advice, posted for informational purposes only.

Palladium is one of the lesser-known precious metals. It has some unique attributes that set it apart from the “big three”: gold, silver, and platinum. So if your goal is to have a diversified portfolio of precious metals, investing in palladium can be a good choice.

Before you go out and buy bullion/coins, it’s important to realize that palladium prices are quite volatile, and fluctuations are more dependent on industrial demand than metals like gold. In 2001 the price of palladium peaked at over $1100 per ounce. It currently trades around $250. A drop like that will pique the interest of contrarian investors, and cause heartburn in more conservative ones. Rightly so, on both counts. It’s a more speculative play, and therefore research/homework is required. Consult a professional you trust if you aren’t comfortable. This chart shows palladium prices from 1992-present:

Palladium is a member of the platinum metals group, and has many industrial uses (more below). I would classify it as among the riskier metals, but the potential upside is great. It may prove to be a good hedge against an inflation-fueled recovery. As the world continues to print money in an attempt to stimulate industry/consumers, demand and inflation could increase dramatically. This may in turn cause commodities like palladium to rise significantly, as governments artificially goose the markets. I don’t like this scenario, but am positioning myself for the possibility.

What is Palladium used for?

The primary industrial use of palladium is in the manufacture of Catalytic Converters (devices that clean automotive exhaust). This unique metal converts harmful gases, like carbon monoxide, into more benign ones like carbon dioxide. The decline in car sales is partially to blame for the fall in palladium prices. But with governments worldwide artificially stimulating auto-sales, palladium could see a spike in price as demand rebounds (temporarily, at least).

Growing Popularity In Jewelry

Palladium is also widely used in the jewelry market. It’s an essential ingredient of white gold, and is used as a cheaper alternative to platinum. Palladium is very similar to platinum, but a bit less dense. It makes fine jewelry, and is starting to replace its more expensive cousin as the base metal used in engagement rings and other products. It’s easy to see why jewelry-makers and consumers like palladium: It sells for around $250/ounce compared to platinum at $1250/ounce.

It is also widely used in the fields of electronics, dentistry, and medicine. According to Wikipedia:

Palladium is found in many electronics including computers, mobile phones, multi-layer ceramic capacitors, component plating, low voltage electrical contacts, and SED/OLED/LCD televisions. Palladium is also used in dentistry, medicine, hydrogen purification, chemical applications, and groundwater treatment. Palladium plays a key role in the technology used for fuel cells, which combines hydrogen and oxygen to produce electricity, heat and water.

How to invest in Palladium?

Coins or Bars are the most common methods. The Royal Canadian Mint produces beautiful .9995% pure palladium coins that are legal Canadian tender. But they’re pretty hard to find these days. A more accessible option is palladium bars from reputable mints like Pamp Suisse. I recently bought some of these 1 oz bars from Apmex.com, an online metals dealer I’ve had good experiences with (no relationship/interest/payola). They had the best prices I could find for small-mid level buyers like me. From what I’ve seen, they ship what is promised, and do it on time.

What about Palladium Stocks?

There are very few pure-plays in the palladium mining world, so investing in common stock is much more difficult than gold/silver. The only equity pure-play that I know if is North American Paladium (PAL). It’s a very small company, and recently had to shut down production because of low palladium prices. Supposedly they’re going to restart soon. I don’t own PAL, or know anything about the mgmt, so do your research before buying and realize it’s a very speculative play.

Russian Stockpiles of Palladium – Potential Problem?

Some of the most productive palladium mines in the world are located in Russia. And their government has not been very forthcoming about levels of production or stock. Some people think Russia’s stockpile of the metal is more sizable than the market assumes, and that it may continue dumping metal on the market to generate cash during a lull in oil prices.

However, it is in Russia’s best interest not release too much metal at once into the market, to make sure prices stay at profitable levels. Price could go down much further if demand continues to decrease as supply increases. Russia doesn’t have a monopoly on palladium by any means. There are mines operating in many countries (such as South Africa). So we’re not looking at a DeBeer’s type of situation here. But it is a factor to consider when investing. If the Russian government/corporations were to sell substantially more metal on the open markets, things could get nasty for spot prices of palladium.

More info:

• Jewelry professionals/buffs discuss the pros and cons of palladium and platinum
• Palladium article in Wikipedia
• ‘Sell Platinum, Buy Palladium’ – Bloomberg

Disclosure: Long Palladium, Gold, and Silver Bullion. No positions or interests in other companies/stocks mentioned. Price chart from of Kitco.com.

Those aware of the financial mayhem taking place are scrounging for ways to protect themselves against inflation (and other turmoil). Gold and silver are the traditional go-tos for preserving wealth during inflationary times, and rightly so. Gold has 6,000 years of history-cred to back it up. But for the most part, metals do just that: preserve wealth, not grow it. Starting a small business involves work, but can provide a source of revenue that grows organically, on top of inflation.

Small Biz: A Better Option For Some

Because “work at home” has such a scammy taint these days, let’s get this out of the way: I’m not selling anything. I’m posting this here because it seems relevant in this environment. There are probably tons of good small biz opps out there, but building websites is the only one I’m experienced in. So I’ll try to share some of what I’ve learned in my 6 years in web-development and internet-marketing. And I promise I won’t try to sell you an e-book or 6-cd program.

The Problem with Metals

Precious metals simply aren’t a good option for everyone: they’re costly and illiquid.  But if you’re motivated and patient, it is possible to earn a living from a small business, using very little capital up front. I started one, working nights/weekends, using less than a $500 initial investment in 2005, and it eventually provided me a good full-time income.

Building a Site

My gig was/is building content-websites and monetizing them with ad-networks like Google Adsense. Building a site is absurdly simple these days. For example, BearishNews.com took me about 3 hours and $35 to build. This site isn’t a goldmine by any means, but traffic is steady and growing. Also, I’m keeping ads to a minimum. That’s important at first. If you don’t have dedicated readers, people won’t put up with ads all over the place. I envision bigger things in the future. It takes patience and dedication to build a successful site.

You don’t need to be a programmer to build a site. Web Hosts make it really easy to build a fully-functional site these days. I highly recommend WordPress for newbies. It runs this site, and is really easy to customize and install. Make sure your web-host offers Fantastico, a program that makes installing blogs like those run by WordPress really easy.

As an alternative, you can use wordpress.com or blogspot.com for a pre-packaged blog platform. However, that limits you to a domain name like bearish.blogspot.com. I wanted the domain www.bearishnews.com for this site, so I bought the name through Godaddy.com and used Hostgator.com for hosting (no affiliation or arrangement with either). Hostgator plans start out at around $5/month, and offer plenty of bandwidth, plus Fantastico. There are also other limitations when using hosted Blogspot (owned by Google) and WordPress.com-hosted sites.

What topic to start a site about?

There are two basic philosophies for choosing a niche to build a site around: One you are passionate about, or one you think will be profitable enough to keep you interested in. You’ll need to generate interesting, original content. So picking a topic you are passionate about is the easier route. But if your hobby is paper airplanes, don’t count on a steady income from it. Not many companies want to advertise on sites like that. Topics like technology, finance, health, are all crowded. But there are multiple niches within each of these topics that have plenty of potential and room left for newcomers.  And they’re all probably better choices than a paper-airplane site.  It’s a balancing act, but try to choose something that it both interesting to you and has a healthy base of advertisers.

Internet Marketing 101

Internet Marketing sounds a lot harder than it is. At its most basic level, it is making comments that contribute to the conversation on other related blogs. Make natural connections with people who have similar interests. Link to other people generously. Write good articles and get them published on other sites. SeekingAlpha.com. is a good example of a site that collects, or “aggregates” articles from other sites in the finance niche.

Email influential people in your niche when you think it’s appropriate. You might write them about a new article you just published, which their readers might be interested in. Many successful blogs publish a “Roundup” type of post, which they just link to other articles from around the web. Don’t be pushy or annoying, but if you have something you think is good, don’t be shy about sharing it.

The cliche phrase in web development is “Content is King”. It’s a good phrase, and it is extremely important to have good content. But you also have to make sure people see it. Sometimes you need to push it a little to make sure it gets seen, cause the web is crowded. You are your best advocate.

Avoid Sketchy Transactions

Try to avoid things like link-exchanges or link-buying. These can provide temporary boosts, but can result in severe punishments from search engines (more below). Some exchanging of links is natural and OK to search engines. But avoid large programs designed to manipulate search-engine rankings. And start out with little or no advertisements. It looks tacky when a brand-new site, with zero traffic is covered in ads.

Working from home is not a scam, it’s just hard

In 2005 my sites had started generating more net profit than my annual salary at my day-job. I eventually left the day-job, and actually lived the “working from home” dream. Sometimes I watched movies and played X-box all day. But it takes hard work. In my case, that work had been done the previous year. So I coasted along for a while and stopped working on my sites for a while. I found some easier ways to build links and traffic to my site, so used them.

Avoid Shortcuts & Cheating

After working for over a year on my sites and getting some initial success, I tried using shortcuts to artificially inflate my search-engine rankings. They worked magnificently, for a while. I was making up to $500/day in Adsense revenue. But Google has become extremely good at detecting cheats like this, and my sites were smacked down hard in 2007. Google doesn’t like it when you fool with their algorithm, and I’ve accepted that they are smarter than me.

My advice is to create a site with useful information, update it as frequently as possible, and to study internet marketing. My sites still generate a good amount of revenue, but not enough to support a family on. So I’m working a day-job for now, and plugging away at night. Success takes time. And don’t try shortcuts, they’re not worth it.