Stocks & Equities
Warren Buffett reported this week that his holding company,Berkshire Hathaway (NYSE: BRK-A), has over $50 billion in cash on hand. That’s the most ever in the more than four decades he’s been chief executive.
Bill Gross, the investment chief of Pimco and another contributor to our Oxford All-Star Portfolio, said this week, “It appears the only safe haven is the front end of the U.S. yield curve.” The really short-term stuff, in other words.
Should you be holding a lot of cash now too? Perhaps surprisingly – since cash and short-term bonds are paying essentially nothing – my answer is “yes.”
Don’t get me wrong. I’m not saying you should sell your stocks and flee the market. I’m only suggesting that you hold cash to put to work in the future.
Why? One reason is that the market has gone a long time without even a middling correction. Trust me, that won’t last forever. Without cash, you can’t take advantage of stock bargains without selling other companies that may have become bargains themselves.
There are plenty of people saying you should be in cash right now, of course. Many, if not most, of them were saying the same thing two, three, four and five years ago.
Where the Puck Is Going
But Buffett is a business evaluator, not a market timer. He did not earn his reputation by holding a giant cash hoard. Rather, he and his partner Charlie Munger have become two of the world’s richest men by following – and improving on – the value discipline pioneered by Benjamin Graham.
When the financial crisis hit a few years ago, he told investors to get out of cash. In the fourth quarter of 2008, Buffett penned a New York Times op-ed piece titled “Buy American. I Am.” Here’s a relevant excerpt:
Today people who hold cash equivalents feel comfortable. They shouldn’t.
They have opted for a terrible long-term asset, one that pays virtually
nothing and is certain to depreciate in value… Equities will almost certainly
outperform cash over the next decade, probably by a substantial degree.
Those investors who cling now to cash are betting they can efficiently time
their move away from it later. In waiting for the comfort of good news, they
are ignoring Wayne Gretzky’s advice:”I skate to where the puck is going to
be, not to where it has been.”
Buffett’s $50 billion cash hoard speaks volumes about where he thinks the “puck” is headed now.
Over the last few years, Buffett has put a lot of his cash to work, making some of his biggest deals ever. In hindsight, I’m sure he wishes he’d bought even more during the chaos of late 2008 and early 2009.
Yet he’s not going to make up for that by paying too much today.
Buffett is clearly biding his time, waiting for a better buying opportunity… what he calls “a fat pitch.” He knows it’s just a matter of time.
I know, I know. It feels wrong to sit in cash and earn nothing. But even a slightly negative return after inflation beats the heck out of experiencing a 10% to 20% market correction with your freshly invested capital.
Charlie Munger once said, “It takes character to sit there with all that cash and do nothing. But I didn’t get where I am by going after mediocre opportunities.”
A word to the wise is sufficient.
Good investing,
Alex
Today a legendary trader and investor warned King World News that a 1987-style crash is coming, and for now he says investors need to hold on to their gold. Last week he warned that we would see an “avalanche of selling.” The next day the Dow plunged more than 300 points and has continued lower ever since. Victor Sperandeo has been in the business 45 years, and has worked with famous individuals such as Leon Cooperman and George Soros.
Incredibly, Sperandeo was interviewed in Barrons in September of 1987, where, with astonishing accuracy, he predicted that the stock market would crash. The market crash took place one month later and it just added to his legendary reputation. Continue reading the warnings issued by Sperandeo.
Gold & Silver Trading Alert, plus USD & Mining Stocks Commentaries
Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective.
Yesterday’s price action in the precious metals market was very specific. Gold declined very little, silver declined much more, and mining stocks moved a bit higher. When we see a mirror image of such action (gold pauses, silver rallies and miners decline a bit), it’s usually a sign of a top. Have we just seen a local bottom? Let’s take a look at the charts (charts courtesy of http://stockcharts.com), starting with silver.
In short, the self-similar pattern remains in place. At this time the pattern is proportionately bigger, but remains similar in terms of shape. Big declines in the precious metals sector have been very often preceded by silver’s short-term outperformance, even if this outperformance was preceded by a visible downswing in the price of the white metal. What we saw in February and March serves as a perfect example.
Why has silver underperformed recently? As always, there is no clear explanation behind any price move (other than because someone pushed the “sell” button), but it seems to us that it can be in a large part attributed to the sharp decline in the general stock market.
If we are just seeing the beginning of another huge decline, then we are still quite likely to see a sharp rally in silver, just before the big drop. In other words, what we have written about the silver market previously remains up-to-date:
The current situation is similar to what we saw in March. Silver declined after a local top was formed close to the turning point, then bounced a bit and then it moved a bit below the previous low. Back in March it rallied for a few days only to disappoint and plunge shortly thereafter. This scenario seems quite probable at this time, not only because of the similarity on the above SLV ETF chart but also because of the situation in the currency markets.
Click Chart for larger version
Turning to the yellow metal, we see no new low. Gold has basically remained where it closed on Monday, which is a sign of strength, given that the USD Index moved a bit above its previous high. Overall, what we wrote yesterday remains up-to-date:
The trend is down for both the short and medium term, but since gold has not declined as much as it “should” based on the dollar’s rally, it still seems likely that a correction is just around the corner.
Mining stocks remain above the declining support line, which means that the situation in this part of the precious metals sector hasn’t changed much. Actually, the situation improved a little, because miners could have declined based on Friday’s big intra-day reversal – and they didn’t. With this negative factor out of the way, we are left with the support line as a bullish factor.
All in all, the situation is unclear for mining stocks – but with a bullish bias.
As mentioned previously, the USD Index moved higher once again, but it seems that the index will at least take a breather soon. The dollar is right after its cyclical turning point, which makes a pullback likely even without the overbought status, and the USD Index is definitely overbought in the short term (note the reading on the RSI indicator in the upper part of the chart).
Moreover, individual USD-related currency pairs are reaching their respective support and resistance levels, thus suggesting that a turnaround or a pause is becoming more and more likely, even if it is not seen in a day or two.
Taking all the above into account, we can summarize the current outlook in the same way as we did yesterday.
Summing up, it seems that even though the next big move in the precious metals sector is still likely to be to the downside (we have not yet seen actions that are usually seen at important bottoms, like huge underperformance of silver [what we saw this week was not huge enough], and gold is not actively hated in the mass media), the odds for a corrective rally are relatively high. We plan to re-enter short positions when we see either a small rally an some kind of confirmation that the next local top is in (more likely scenario in our view) or a confirmation that there will be no visible correction (for example a continuation of the dollar’s rally despite the current turning point). At this time, we prefer to say out of the market.
To summarize:
Trading capital (our opinion): No positions
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Thank you.
You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As always, we’ll keep our subscribers updated should our views on the market change. We will continue to send them our Gold & Silver Trading Alerts on each trading day and we will send additional ones whenever appropriate. If you’d like to receive them, please subscribe today.
“The Art of War” was an ancient Chinese text written by general Sun Tzu some 2,000 years ago. The exact timing is not known but historical scholars have narrowed its origin to sometime between 200 BC and 200 AD. The book is written in 13 different chapters, some of which I will fast forward and compare to Chinese actions in current day. The text has been translated into several languages, first into French in the late 1700’s and again into English about 100 years ago. After reading many of the quotes, I have no doubt that Sun Tzu was a very wise tactician of Eastern thought and someone that even the “masters” looked to for guidance.
Sun Tzu believed that wars were inevitable and there would always be winners and losers both physically and economically. Interestingly enough, one of his main themes was that if a war had to be fought, it should be done swiftly and thoroughly because no one benefitted from a long and drawn out war. Before going any further and describing any of the chapters to you, please understand that there is a definite difference between the “Eastern and Western mindsets” in many facets of life. Sun Tzu’s “The Art of War” is certainly one of the early reasons for this difference.
Chapter 1, “The Calculations” speaks to the planning phase and learning all that you can about your opponent and as many of the surrounding conditions as possible.
Chapter 2, “The Challenge” looks at war from an economic standpoint, what are the costs versus the potential gains.
Chapter 3, “The plan of attack” speaks to five critical parts that are essential to win a war, Attack, Strategy, Alliances, Army and Cities.
Chapter 4, “Position” teaches the importance of holding ground until a push forward can be done safely and that it is most important not to give your enemy(s) an opportunity to exploit.
Chapter 5, “Energy” goes into the importance of creativity in the guidance of forces and the timing of movements.
Chapter 6, “Illusion” offers insight to opportunities created by the moving parts and by any weaknesses of your opponent.
Chapter 7, “Engagement” warns of the dangers of direct engagement especially when it is not of your choice.
Chapter 8, “The Variations” stresses that one needs to be flexible because unforeseen change makes this necessary.
Chapter 9, “Movement” describes the various possibilities an army may find when invading and the importance of knowing your foes intentions.
Chapter 10, “Positioning” speaks of 6 different types of ground positions, the pro’s and con con’s of the variations.
Chapter 11, “Nine terrains” is a focus on commanding forces through nine common situations.
Chapter 12, “Fiery attack” offers advice to weaponry and the use of your foes environment as a weapon. It also speaks to the response to a foe using your own environment as a weapon against you.
Lastly, Chapter 13, “Intelligence”, this chapter tells of how important good and real information is.
For anyone wishing to read the 1910 translation by Lionel Giles M.A., the full text can be found here http://www.chinapage.com/sunzi-e.html
In order to tie this thought process together with current times, I thought it might be a good thing to offer a few short quotes from the text and relate them.
Two of the most famous quotes are “The supreme art of war is to subdue the enemy without fighting” and “Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win”. In my opinion, China is currently “living” these two quotes almost verbatim. They have sat back for the last 15+ years and watched as the U.S. mortgaged their future, spent past goodwill and savings (gold in particular), and generally become weaker financially, spiritually, economically and militarily. I don’t believe that China wants any bullets to fly, I believe that they would be happy if there was no bloodshed but I also think that they are aware that the probability is quite high. As for my opinion of the first quote, China hopes that the U.S. defeats itself. The second quote, China is and has been planning the defeat of the U.S. since the days of Mao, he knew that the best way to defeat a foe is to debase their currency. How better than to let your foe debase their own currency?
Two other well known quotes are “There is no instance of a nation benefitting from prolonged warfare” and “Move swift as the Wind and closely-formed as the Wood. Attack like the Fire and be still as the Mountain.” These quotes speak to China’s knowledge that any war must be swift and that they are costly in not only economic terms but in terms of life. Please do not forget, war is not just a physical or military undertaking, it is also an “economic” undertaking. I believe that the Chinese would like to strike swiftly from an economic standpoint when they finally pull the plug. They will demand delivery of all sorts of COMEX products, particularly gold and silver. They will default on many derivatives and leave the Western banking system holding the bag. Oil and resource contracts will be triggered where the flow moves East as opposed to West (think Saudi Arabia and others here). The wholesale dumping of U.S. Treasuries and dollars will also be a distinct possibility. And as you know, the prices of gold and silver will be marked up and away from the grasp of “buyers” who finally “get it” but just a little bit too late. Of course, the flow of manufactured goods and even necessities that we no longer produce in the U.S. will cease. In short, we will economically be put into a vice grip overnight.
One last quote for you and this one I believe is very pertinent, “When you surround an army, leave an outlet free. Do not press a desperate foe too hard”. I would equate this to the current and common saying that “desperate people do desperate things”. This as you know by some of my recent writings is a great fear of mine and I believe also a great fear of the international community. The actions or should I say “reactions” by the U.S. to losing power is of the greatest importance and unfortunately of least certainty. No one really knows exactly what the U.S. will do or how they will respond to various situations because policy has become “reactive” at best. From what I have been able to see, I believe that the U.S. has had “intentions” of war over both Syria and Ukraine, the only reason this has not happened in my opinion is because of the “chess” like maneuvering of the Chinese and Mr. Putin.
The above quote is pertinent because I believe that the Chinese (and Russians) would like to allow the U.S. a “graceful” fall from grace so to speak. If the U.S. would accept the reality that we are no longer the manufacturing giant of the world and that our standard of living needs to decline, it could be done peacefully. We need to accept the fact that the dollar is over printed and over valued and that foreigners wish to change the reserve currency status.
Will we? Will the American people accept it? How about our government? Sad to say, I don’t think so. I don’t think that Washington can in any way accept being pushed into 2nd or even 3rd world status and I don’t believe the population will take it sitting down either. As for the populace, this would mean a dollar that is worth only .50-.60 cents of today’s current dollar literally overnight. It would mean that life’s savings are devalued overnight. It would mean that current paychecks would in many cases no longer support life. It would mean that “subsistence” payments like social security, welfare and food stamps would no longer support life. Sadly, I see those who saved and also those who did not, rising up in anger with no “out” or recourse other than starting over or going to work.
If you can see things in this manner then you can understand why it is so important to have savings and investments out of the system and available. There is a “side door” available to those wishing to exit. China has been using this exit for years, following their lead is wise because in my opinion they will soon head the group “making the rules”. By the way, the Chinese understand “paper money” and the hazards attached to it. They invented paper money and I believe have blown up more paper currencies than any other country, they already know the fate of the dollar.
Regards, Bill Holter
Gold has declined slightly, from around $1,320 to $1281 in the last few weeks. Rick commented that this was normal for a recovery in resource stocks. You expect gradual rises and subsequent consolidations. Today, he lays out his three big drivers for a recovery in the ‘junior’ resource stocks.
Rick, are we still on our way towards a recovery? What catalysts might take the market higher?
“The market for junior resource stocks, as you can see from the performance of the TSX.V, the ASX, and the LSE AIM, marked a bottom around a year ago. They’re in a gradual recovery now, and I believe the uptrend will continue, albeit marked by the same volatility that we’ve seen in the market so far. We’ve experienced three advances and subsequent declines this calendar year – and that’s normal for the early stages of a resource recovery. These advances need to consolidate, which they have already done nicely.
“There are three key drivers to this advancement. First, there’s the incredible amount of capital that the junior market raised five or six years ago and the fact that sooner or later, investors will realize that they’re playing with ’25-cent dollars,’ as many juniors are trading well below the value of their cash and other assets. Second, there are the extraordinarily low valuations attributed to some of the best companies in the sector. Third, there is the increasing pace of mergers and acquisitions. This is a good thing, as horizontal mergers decrease G&A expenses, while in ‘top-down’ mergers, larger mining companies buy up select juniors to add to their exploration and development pipeline.
“Besides these three points, there is also the fact that we are in a nascent boom in the discovery cycle. There has been an increasing pace of new discoveries, and the market certainly appreciates genuine discoveries.
“In my experience, Henry, bull markets begin when the market as a whole exceeds expectations. Since expectations are currently exceedingly low, it won’t take much to beat them. Moves up from lower bases, discoveries, mergers and acquisitions, and particularly the generally low valuations today relative to market norms for the best companies in the sector, all point to a continued uptrend among resource stocks.
“I would urge you, if you are interested in the sector, to increase the pace of you investments now. Do it selectively because the sector will continue to be volatile and the recovery will continue to be gradual, though perhaps not tepid. I do believe that the risk is to the upside, not the downside.”
You mention that we need to be selective, but don’t “rising tides raise all ships?” How important is analyzing resource stocks ahead of a recovery?
“Important point, Henry. The sector is already so risky that you should try to minimize those risks, not increase them. Bad management teams make the risks of the sector even worse. My friend Doug Casey often says that ‘when the wind is blowing even turkeys can fly.’ The problem though is that the turkeys need to stay fed long enough that they can last until the wind picks up.
“If you took all the juniors together, merging them into a single entity – they would probably lose around $2 to $5 billion a year. Therefore buying the sector as a whole is an excuse to go broke. Meanwhile, the 5 or 10 percent of the best companies in the sector can create such spectacular increases in shareholder value that they add visibility – and sometimes luster – to the overall sector. Confining your portfolio to the best people, the best projects, and the sturdiest balance sheets is not that constraining, but it is critical to maximizing your returns through both upswings and declines in the resource sector.”
P.S.: The audio recordings for the Sprott Vancouver Natural Resource Symposium have just been released. Enjoy all the bombshells, the laughs, and the impromptu remarks, delivered straight to your inbox. Recordngs offered for a fee through Agora Financial.
P.P.S.: Interested in how to perform due diligence? Check out Rick Rule’s Guide to Natural Resource Investing, available free right here.
About Rick Rule
Rick is the Chairman and Founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. Sprott Global is an affiliate of Sprott Inc., a public company based in Toronto, Canada. Mr. Rule leads a team of earth science and finance professionals who form an intellectual pool for resource investment management. He and his team have experience in many resource sectors including mining, oil and gas, water, agriculture, forestry, and alternative energy.
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.
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