Friday, October 3rd, 2008...8:52 am
Strange Days
Pittsburgh, Pennsylvania
- Dow sells off another 348 – more blood in the streets,
- 3-1 gains on every dollar invested in gold’s perennial bridesmaid,
- When losing the least means winning the most and plenty more…
Joel Bowman, reporting from Muscat, Oman…
Investors hoping for a bit of reprieve yesterday were no doubt left bitterly disappointed. The market continued its broad and indiscriminate selloff, heaping pain and suffering atop the guilty and the innocent alike.
Every sector, from basic materials to utilities to healthcare, technology, transportation et al. finished the day nursing significant losses. Financials, already with most of their key players either in the infirmary or the morgue, faired stronger than most. The Financial Select Sector ETF (XLF) turned in a relatively stellar performance, finishing down “only” 4.98%.
“Relatively” is, of course, the key word. In absolute terms, a loss of 5% in a single day is a kick in the teeth for any investor. Nobody likes to look at their computer screen and see it covered in red. But compared to losing 10% (as the basic materials sector did yesterday) it looks pretty good.
During times of plenty, people measure their financial worth not by their own stash of wealth, but by how it compares with their neighbors’. They want a bigger house, like the Smiths; a flashier car, like the Johnsons; more exotic vacations, like the Browns. You could give a man a million dollars but, if the Jones’ got two million, he’d still feel inadequate.
“Darn those Jones’,” he’d say. “It’s impossible to keep up with them!”
Money, at least as it exists today, really has no intrinsic value. The richest man on the block could be paid in pineapples, for all he cares; provided he is paid more pineapples than everyone else, he’s content. Just ask the people in Zimbabwe if you don’t believe us. They are all multi-billionaires.
It is curious then, that during times of depression, recession and market contraction, people choose to narrow their vision, concentrating on and agonizing over their own position, without considering their standing against the crowd. Why, since we don’t enter into monetary exchanges with our own self, would this even matter?
If a general were to count his casualties against his own original tally, and not against that of his enemy, he would taste bitter defeat in every battle, regardless of the outcome. Sometimes in finance, as in war, victory is awarded not to he who wins the most, but to he who loses the least.
In the column that follows, Byron King takes a look at the battlefield and identifies a few spots where, although casualties have been sustained, victory appears the likely outcome. Please enjoy and, as always, fire off any comments to the address below…
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Strange Days
By Byron King
This is a strange time. It’s historic, but strange. The business model for Wall Street is crumbling. We are seeing unprecedented things occur.
Wednesday, Sept. 17 was a strange day for me. A couple of things happened that derailed me from the usual routine. So I was preoccupied and only got around to reading the morning newspaper late in the afternoon.
It was a strange feeling. A lot happened in the course of a single day. If you had cable TV or satellite radio, you could have followed it on Fox Business, CNBC, Bloomberg or the like. In fact, by the afternoon, the morning newspaper was almost worthless, except for the weather map and sports page. I was thinking, “These headlines are so… yesterday’s news.”
In particular, by late Wednesday, the U.S. government was deep into its AIG takeover, while the morning headlines were flagging the previous day’s Lehman Brothers bankruptcy. Really, can you say “old news”?
And all day on Wednesday, gold was soaring upward in price. At the close of daily trading, an ounce of yellow metal cost almost $90 more than when you were eating breakfast. That’s a world-class record, worthy of a … well, a gold medal. And silver had its biggest percentage gain in 30 years, since the late 1970s, when the Hunt brothers tried to corner the market.
But something else happened, too. Or more accurately, something didn’t happen. None of the other precious metals — platinum, palladium and rhodium — shared in the wealth. And the rest of the base metals just held steady. (Although the price of oil jumped upward later in the day.)
So gold and silver melted up. But it was not a broad-based commodity surge. It was a classical rally in traditional monetary elements. So was it a flight to quality? Or simply chart breakouts? Was it cyborglike computerized trading run riot? Or was it good old-fashioned short covering? Maybe some of everything? Or was it the start of something else? What else?
Sure, Lehman Brothers filed for bankruptcy protection. And the U.S. government committed $85 billion and, effectively, nationalized the AIG insurance group. And just for good measure, there was a breakdown in some money market funds in which the par value actually fell below $1. Meanwhile, Morgan Stanley was on the ropes as Goldman Sachs stock tumbled. And there was poor Washington Mutual, lying on the mat and hemorrhaging. It was just another day at the office, right?
Whatever the cause, people everywhere sought safety. They bought Treasury bonds to the point at which the yield is almost zero this morning, per The New York Times. And according to the Financial Times (online edition), “The panic in world credit markets reached historic intensity on Wednesday, prompting a flight to safety of the kind not seen since the Second World War.”
Since World War II? A flight to safety? That sounds serious. In fact, people bought gold and silver with both hands, and from the look of things, they must have filled up the entire bed of the pickup truck. So is there widespread concern that the dollar itself may be at risk? Apparently so. This morning, the always-sober Wall Street Journal headline reads, “Worst Crisis Since ’30s, With No End Yet in Sight ”
But what comes after a big price rise for gold and silver? More price increases? Or a big pullback? A collapse? Hey, you have to be cautious. Do you really want to dive headfirst into a rising tide that is this turbulent? Pardon me, but rational markets aren’t supposed to behave this way. It’s nice to see precious metals rise in price, but not by double-digit rates in the space of one day.
It’s actually a scary scenario. The average man or woman — people you see in stores and pass on the street every day — does not own mining shares. Almost no one has a steel safe full of precious metal ingots and coins. Most people have most of their non-real estate wealth deposited in a savings account, a brokerage account, an IRA or a managed retirement account. And a lot of people receive a set salary, if not a fixed income.
So a monetary or financial meltdown — complete with pyrotechnics like the rocket shot of Wednesday’s increase in gold and silver prices — is not going to be a pretty sight. It will crush a lot of people. Most people — even some pretty sophisticated investors — won’t know what hit them. Almost nobody will know what to do. (Will anyone know what to do?)
And what happens when people look for advice? Where do you go for help in explaining this kind of scenario? The politicians are clueless. But on that point I repeat myself. Can anyone from the permanent staff of the Fed or U.S. Treasury explain it? All they ever seem to do is discuss interest rates. Are you going to look for advice from the big names on Wall Street? They’re busy right now. You’ll find some of them down at the courthouse, awaiting their bankruptcy hearings.
Most of the world’s university-trained economists don’t understand gold. In school, they learned something like the phrase “Gold is a barbarous relic.” Then they went on to study modern monetarism. So even the professionals will have a hard time making sense of things. They never read Chapter 2 of the gold book.
Actually, I truly hope that we don’t have any more “big” days for gold and silver. If that happens, we will be in a panic. And nothing good comes from panics. I’d be more than happy for a nice, slow buildup in the prices of gold and silver. I don’t even want it all at once.
[Joel's Note: In the latest edition of his newsletter, Outstanding Investments, Byron identifies five beaten down precious metal stocks that offer real value for money. All of these companies have great management, trade well below their highs and boast serious amounts of “ore in the ground.”
As the dollar falls, investment banks fail, the U.S. government nationalizes insurance companies and people worry, these stocks ought to be leading the pack. For access to the latest issue, click here.
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[Rude Endnote: Look for a quick open to the upside this morning. Stock futures are buoyed on speculation the Fed, pressured by a weak jobs report, will take the axe to the dollar and cut rates once again.
The day begins with the Dow at 10,482.85, gold at $847 an ounce and the dollar index still above 80. Good luck soldier!
Until next time…
Cheers,
Joel Bowman
The Rude Awakening
aussiejoel@the-rude-awakening.com
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