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uclayoda87 (29.24)

Earthquakes and Tsunamis, life in the age of Bubbles.

Recs

82

May 06, 2010 – Comments (8) | RELATED TICKERS: VMW , EMC , CNI

Since the beginning of this century the instability of our bubble economy has created a series of disasters that were at least partly predictable as proven by Peter Schiff’s Crash Proof and others who had written and profited from these events.  The easy money policy, which facilitated this new economy does not appear likely to change in the near future, therefore it would seem prudent to analyze our recent history to try to help manage the risk of the next event.

I view the bubbles as a growing amount of potential energy, like that which is built up in an earthquake fault.  When an earthquake takes place, this energy is released causing the brief, initial destruction.  If an earthquake is associated with a large body of water, then a secondary tsunami may result, which can cause further devastation.

The markets have seemed to follow a similar pattern.  With persistently low interests rates and quantitative easing, the world governments have supplied a growing amount of potential energy into the market, raising equity and commodity prices, while destroying the incentive to save.

With each successive bubble we find ourselves reliving a children’s game, musical chairs.  We have a sense that current political agendas and the easy money policy, which I noted above, distort the markets.  What we don’t know is when the trigger for the next economic earthquake will happen and whether it will be short and uncomplicated or long and associated with a financial tsunami.  So like the children’s game, we are constantly eyeing a chair to allow us to sit the downturn out.  We know that there are not chairs for everyone, so someone will lose when the music stops, but whom?

Over the last two weeks, it feels like we have entered a new event.  The trigger appears to be the crisis over sovereign debt in Europe.  The initial financial earthquake was the recent abrupt sell off in the markets, while gold was supported by the euro flight to gold, even while the US dollar index hit a recent high.

This event by itself may have resulted in a limited financial earthquake followed by a short recovery time.  What may be transforming this event into a complicated financial tsunami is the news regarding energy production and mining activity.  Specifically, the Massey mining accident, BP rig accident and the recent refinery explosions.  This mixed with politics during an election year will further add instability to the markets.  Some have already begun diving for the chairs, most made of shrinking denim US dollars and a few made of gold.

As the water recedes from the shore, we know we have to act soon.  A few have survived a tsunami and have sold their story to the media, but this is probably not a good business plan.  The question again comes down to what is really safe and will hold its value, besides gold and silver?  The US dollar may be safe in the short-term, but not many believe that it will hold its value, especially if money funds and bonds pay very little interest.  I had written two prior blogs this year concerning this topic:

At World’s End

A new theme for 2010 or just another sequel?

This current blog is just an extension of the ideas that I had in the prior blogs.  What is new for me is the idea that if market events (crashes) can be expected to occur at shorter cycle length but with greater destructive power, then I would aim to build a portfolio that does not require me to time the market well on the sell side but allows me to keep most of my holdings intact, even if a 2008 tsunami happens again.  In addition to the areas that I still agree with in my prior blogs, I would like to add two focused areas:

Canadian energy and transportation (CNQ and CNI).

US computer technology for the next generation of servers and monitors (VMW, EMC and PANL)

I have also recently mentioned APPL and FCX as two other great investments, which I own as part of my long-term portfolio.

My financial recovery since 2008 has been based mostly on a series of bets on Canadian miners and smaller energy companies like PDS and CNQ.  As I continue to look for companies that could survive and profit given anything short of Armageddon, I realized that I should look at my own business for clues.  I am a physician who helps runs a single specialty cardiology group.  My main focus recently has been budgeting and planning our next generation server and computer upgrades.  Like many businesses over the last two years, we have cut all discretionary spending, including our IT infrastructure.  The potential to replace our 12 existing servers with two or three servers using VMW and EMC products with a substantial cost savings landed these companies high on my investment list.  If there are many businesses like our own who have put off necessary upgrades over the last two years, then they may also find relatively inexpensive replacement solutions from these two companies.  So the companies that continue to survive the “recovery” may further the recovery of VMW and EMC.  PANL is the company with the next generation of monitors and lighting, which I believe will track the other two IT companies.

Canada has a great landmass, low population, relatively sane governance and a wealth of natural resources.  They have a proven track record of working with Asian governments in mutually beneficial investment agreements.  Examples include the stories of TCK (China) and TGB (Japan).  This is key since Canada is an ideal exporting commodities country, located safely between its importing trading partners, Asia, the US and Europe.  To facilitate the movement of products outside of Canada, CNI provides a low cost and well-run rail system, which covers most of the country.  CNQ and other energy companies in Canada may become more important to the US, especially if politics and environmental concerns dramatically decrease our US domestic energy production for more than a short period.

I think I see the water leaving the shore.  I’ve found some high ground with stocks that saved me from the last tsunami and I have reinforced my Ark with a broad selection of new miners, which I pick up in February 2010, during the precious metal and miners sell off.  I have also recently added EMC, VMW, PANL and CNI. And with what was left of my speculative play money (US dollars); I also bought DGW at $23.50 today, which is a long-term China water infrastructure play that reached my limit order today.

Now I am all in

This BEAR has just called the top. 

Good luck.

 

 

 

8 Comments – Post Your Own

#1) On May 06, 2010 at 9:04 AM, russiangambit (29.30) wrote:

I grew up in environment where there was scarcity of pretty much everything. And thus the idea of expecting something for nothing was eradicated from me at a pretty early age. You have to produce value to get something. And this is how balanced economy should work. Ironic, that I learned this lesson in a communist country -)).

I think the bubbles are only possible because too many humans expect something from nothing, i.e. getting rich by not doing anything productive just reselligns stuff to each other. Everytime they think they are able to do so because they are smarter than everyone else  or found a golden goose. But in reality it is only possible because of the fiat money when supply outstrips demand.

To be able to prevent bubbles in the fiat money system you have to accurately calculate how much "value" is expected to be created  ina given peruid and then manage the flow of money accodingly. Of course, it is impossible to do in such complex systems as a country's economy and so central banks error on the side of "too much" and cause inflation.

There are really 2 ways out of it :1) change human nature so that humans don't expect something for nothing - can happen but only after a major and very prolonged crisis like Great Depression 2) make money supply self-regulating where money is "issued" as it is needed and not ata predetermined target, i.e. do away with the central banks.

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#2) On May 06, 2010 at 10:16 AM, uclayoda87 (29.24) wrote:

  russiangambit

Outside of Chile, I have not seen any example of good financial stewardship recently.  In the case of Chile, this happened only after that country almost failed.

WSJ ECONOMY   MAY 27, 2009

Prudent Chile Thrives Amid Downturn

The simple way to prevent bubbles would be the return to a gold/silver standard for the world reserve currency, which would not be the US dollar.  This would allow individual countries to maintain their own fiat currency at their own risk.

The euro failed because the incentives for an individual euro member was not adequately alligned with the incentive of the whole.  Basically, Greece wanted to party and have Germany pick up the tab.

So I believe that it is possible to correct the bubbling economy.  But I don't think that this will happen until it has to happen, which means the current system has to fail so badly that no one is willing to trust fiat currencies or central banks anymore.  Unfortunately, a lot of pain will be generated by those in power in their attempt to preserve the current system, because it benefits those in power.

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#3) On May 06, 2010 at 10:48 AM, SamTheHobbit (29.97) wrote:

It seems that Peter Schiff times his new book sales to begin just before a market correction, which I guess is good marketing.  If this pattern keeps up, this might be a way to time equity sales.  I have a similar portfolio, concentrating on items of real value.  Outside of Apple, I hold few tech stocks, primarily because this field appears to be evolving so fast that it was hard to guess what was a real innovation and what was hype.  I will definitely look into the three tech stocks that you listed.  It appears that they have all done well over the last 6 months.  In terms of CNI, it makes sense they they would remain profitable, but up until recently their price was somewhat high.  This appears to be a good pick on a price pull back.  If FCX drops below 70, I'd likely buy more shares.

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#4) On May 06, 2010 at 11:48 AM, DarthMaul09 (29.72) wrote:

 uclayoda87 -

My life's work in blogging is listed below and as you can see in the related tickers they match many of your own picks.  But thinking with the mentality of a surgeon and not an Internist/Cardiologist I don't need to create a broad based differential diagnosis to find a solution to the financial investing problem.  If you have a resectable cancer, cut it out.  If your gall bladder is giving you a problem cut it out and if you have critical aortic stenosis then replace the valve.  Medicine doesn't have to be hard and investing can be made simple as long as you don't try to over think the problem.  I agree with SamTheHobbit that you should invest in things that have real value, but if you believe that the primary event is going to be the collapse of fiat currencies with growing sovereign debt and you believe that precious metals will preserve and potentially grow in value as these currencies devalue, then why risk diversifying your portfolio too much by trying to capture the next Apple or Google.  If you just stick with CEF, FCX, SLW, TGB, NGD and its related Canadian Miners you will likely come out ahead of an S&P 500 index or world fund.  Energy stocks can be a reasonable buy, but as was seen recently with BP and Massey, they can also be quite risky.  So with my real money I concentrate on the miners, with some speculative money on GRO and PHO, where I am looking to make a short term profit.  But even as the market is selling off again today, the miners and metals appear to be resisting this slide, because they are more than just metals, they are real money.

Deja vous - all over again.

September 26, 2009 – Comments (16) | RELATED TICKERS: FCX , PHO , GRO

What a Sith can teach an Investor

December 07, 2009 – Comments (4) | RELATED TICKERS: FCX , SLW , TGB

From V to W, casting a big net with buy limit orders.

January 24, 2010 – Comments (6) | RELATED TICKERS: SLW , FCX , NGD

 

 

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#5) On May 06, 2010 at 6:54 PM, uclayoda87 (29.24) wrote:

SamTheHobbit

It would be interesting to see if Schiff actually made money in the market today.  His books I'm sure did, especially Crash Proof 2.0

DarthMaul09

Today your focused approach did well and I believe that it will continue to do well.  You are right that I'm trying to hedge my bet by expanding to other areas that I feel will do well.  Today created some buying opportunities in these areas, but since I'm all in I just get to watch other investors get in on these great buys.

I'm not worried about the market correction today since my portfolio held up very well, which was my stated goal.

 

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#6) On May 07, 2010 at 12:55 AM, binve (< 20) wrote:

Nice post my man!!

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#7) On May 07, 2010 at 7:06 PM, Robuh (24.30) wrote:

"Canada has a great landmass, low population, relatively sane governance and a wealth of natural resources. "

Ha ha, this is awesome. If only you knew how "sane" our government really is. Canada is in the midst of a huge subprime lending bubble that will likely pop in the next year.

Although our impact on the worldwide economy is nothing compared to the U.S., we're going to get slapped around pretty bad. You don't like government bailouts? Our mortgages are already backed by the government so when things go boom the taxpayers are automatically on the hook for it. Our banks are lending money completely risk free and only care if you meet the dreadfully low CMHC requirements. Our government is writing mortgage backed securities up here. We cut out the middle man.

Keep your eye on the news over the next 12 months and then tell me how good Canadians have it, particularly in Vancouver and Toronto. At least you guys can walk away from your homes if you go underwater. We don't have that luxury.

 

 

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#8) On May 10, 2010 at 10:29 PM, vriguy (72.29) wrote:

Robuh, all you said is true, but ucla did say relatively sane governance.  Between redistributionists on the left and the tea party types on the right, I sometimes think our political class belongs in an asylum.

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