The Yajnik Letter

Yesterday I heard an interesting story via a radio show about Greece. Apparently, Greek tax collectors canvassed wealthy neighborhoods in and around Athens asking residences if they had a swimming pool in an effort to enforce an existing swimming pool tax. So how many admitted to having a pool? 324 residents. With that said, that same tax agency decided to investigate more and even had helicopters plot the skies to count the number of pools. As it turns out there are 16,974 swimming pools in those neighborhoods! Classic…so is that massive corruption or massive resentment toward a government that takes from wage earners to support a mammoth government that provides 1/3 of the nation’s jobs? Generally speaking, the motivation to cheat and lie is enhanced by anger and frustration. Don’t get me wrong…I am not condoning you to lie and cheat. It’s just an interesting relationship that could produce similar results anywhere.

Today’s rioters will be individual investors looking to recoup losses from yesterday’s fiasco. There is no doubt this mess is going to cost a lot of money to clean up at one point during the session the market was down nearly $1 trillion dollars. That’s real money even these days. The word is that NASDAQ will cancel stock trades up or down 60% or more between 2:40 and 3:00. Here is the list of companies whose trades will be canceled. In the meantime I’ve read conflicting reports on that infamous Proctor & Gamble (PG) trade. The early word, as mentioned in yesterday’s post, was a trader at Citigroup put in a trade but hit the “B” key rather than “M” which sent the shares spiraling. The NYSE and Citigroup denied the trade ever happened. If there was in fact a bad trade, the details remain to be seen.

The other question is what happens with high frequency traders? Already a focus of regulators, its likely even more pressure will be put on this group of electronic cowboys. On April 13th, the SEC voted unanimously to tag high frequency trades with ID numbers that would give the SEC access to information. I agree that more transparency is needed. The plan will cover about 400 of the largest traders. Parameters to be tagged:

• Trading 2m shares a day or $20 million a day
• Trading 20m shares a month or $200 million a month

This all comes at a bad time for the NYSE Euronext, which is close to opening its new 400,000 square foot facility 35 miles away from Wall Street. The $250 million facility in Mahwah, New Jersey, is designed to handle the electronic trades from high frequency traders.

Enjoy your weekend! Have a drink as it’s been a crazy week.

-Samir

Today was definitely a crazy day with the stock market. The Dow was down almost 1,000 points at one point today. It ultimately closed down 347 points or 3.2%. I really think there is some sort of market manipulation going on. Several stocks traded down to $0 or pennies from it! Some of these include Boston Beer (SAM), Exelon Corp (EXC), CenterPoint Energy (CNP), Eagle Materials (EXP), Genpact (G), Brown and Brown (BRO), and Casey’s General Stores (CASY).

This sudden drop that happened today is the #1 reason why I have written at great lengths in the past as to why you should NEVER physically input stop loss or trailing stop loss orders. If you had input this such order for Boston Beer, for example, at a level of 10% below yesterday’s closing price, it could have blown right through this and actually sold your shares at near $0! So, never physically input a stop loss/stop limit order; but, rather, keep it in a spreadsheet or notebook or something else for quick viewing.

So, how did this happen? It’s complete crap in my opinion. Apparently, someone at Citigroup mistakenly typed a “B” for billion instead of an “M” for million on a trade. If this is true, that person better have been fired on the spot and the company fined big time. You can read more about it here.

Also, this is why I despise computer driven trading platforms at many of these hedge funds. It creates an unlevel playing field for retail versus institutional investors. For example, it will take a few to several minutes for you or me to input 5 trading orders. These same 5 orders plus a 10,000 more will take microseconds for these computer trading platforms to execute. It creates unnecessary volatility in the markets and decreases the confidence that folks, such as you and I, have in the markets. There needs to be legislation passed to prevent this or even eliminate these algorithm/computer driven platforms being used at many trading firms.

I would be interested in hearing your thoughts. Definitely, a frustrating day for many of us.

On a positive note, if you did buy EUO and some form of gold and/or silver since I have been recommending them over the past year, you are sitting on some nice profits. For example, EUO is up almost 25% since end of December 2009, which is when I started recommending it. Don’t be shy to take some profits off the table as nobody has ever gone broke taking a profit. With that said, I expect EUO to rise more over the near term and long term as the Euro should continue to break down due to continued troubles in Greece and inevitable problems to surface at other EU (European Union) member nations, such as Spain and Portugal.

As always, if you have any questions, don’t hesitate to post a comment or email me directly at customerservice@yajnikletter.com.

-Samir

It’s times like this in Europe that makes me want to play Tom Petty’s Greatest Hits CD and listen to “Free Fallin’.”

If you decided to short the euro by buying EUO for example, you must be having a nice morning. I had a nice walk along the intracoastal waterway here in Florida at 6:45am today because the bad price action this morning by the euro on so-called good news doesn’t bode well for the euro if you consider all of the negative factors in the market.

Not sure if you are familiar with Milton Friedman. He is a man whose faith in the market, and brilliant summaries of how it really works, has proven so consistently right for so long regardless of his most followed naysayers. Mr. Friedman was quoted as saying this in 1990: “It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.” All I got to say is “WOW!”

Over the past few weeks, I have had colleagues and friends express the collective concern that the euro could surge if Greece is saved. It’s true…it could…granted Greece is indeed saved. However, I would view this as a short term movement to allow us to short the euro even more if you choose to do so. However, over the longer term, the dynamics surrounding this currency are still very much negative. With Greece receiving a bailout, this would only prompt the other troubled EU members, such as Portugal and Spain, to ask for similar bailouts. The way I look at it is that the euro is damned whether or not bailouts occur. So, in the short term, I really feel that bailing out Greece is simply a band aid to cover up a long term problem with a short term solution.

Here is a simplistic summary of recent events surrounding the euro:

1. Market realizes that Greece is in trouble and, as a result, yield spreads push higher. Keep in mind it was publicly known that Greece, Portugal, Italy, Ireland, and Spain should never have been able to leverage themselves to the stratosphere.
2. Finance Ministers are confident that Greece can handle this problem alone, but their friends are there to help if needed.
3. Well, maybe Greece debt is more than it can handle; this is a problem the Eurozone can effectively deal with. We won’t let our friend default.
4. Well, maybe there is a little more debt exposure than we fist realized, so we are going to call in taxpayers outside the zone (IMF) to help us save our good friend Greece. There is no danger whatsoever of this issues spreading to other EU members. The euro is rock solid baby!
5. We’re thinking 60 billion euros will be more than enough to help out Greece.
6. Ooops, did we say 60 billion, we meant 110 billion euros! My bad!

Thus, showing us in real time one of the major flaws facing the single currency: none of the EU members really like each other and, as a result, there is very little if any political unity across the zone.

I expect the euro to continue falling over the longer term and could even get to a point that it is 1:1 with the U.S. dollar.

-Samir

Check out the below video which showcases Jim Rogers and two other chaps discussing the next crisis which is unfolding before our eyes.

Seriously, I don’t think you should quit your day job and go become a farmer. However, we should start thinking that there may be a shift in power, as it relates to the global markets, from the financial wizardry and engineering in Wall Street to those actually producing and mining tangible goods.

-Samir

An article in the Chicago Sun-Times (“The Millionaire Next Door”; March 31, 2010) reported that Grace Groner passed away in January at the age of 100. What was unexpected was that she left $7 million to her alma mater. How could someone who was orphaned at age 12, attended college, was cared for by neighbors, and spent 43 years as a secretary for Abbott Laboratories in Chicago manage to amass this amount of wealth? It’s simple…with a little bit of luck, the turtle wins the race every time. Specifically, she never married, never owned a car, always walked and bought her clothing on sale, and lived for much of her life in an apartment before moving to a small one bedroom house which was willed to her by a friend.

Her $7 million estate was a product of a lifetime of simplicity, living below her means, and some luck. She had purchased three shares of Abbott stock for $60 each, reinvested the dividends, and never sold them over a 75 year period which included the shares splitting many times over these seven decades. These shares lost almost one-third of their value in the bear market of 1937, for example, and did not exceed the mid-$50 share of March 1937 until March 1944. She continued to hold her shares despite plunging prices in 1962, 1970, 1074, 1982, 1987, 1990, 2002, and 2008.

So, am I encouraging you to pick one stock and blindly hold it forever? Heck no! I just wanted to illustrate to you the power of buying world dominating companies with a historical record of increasing their dividend payments because the idea of compounding could be the key to you ultimately making a fortune.

-Samir

As you may have saw in my twitter feed, I took on a new position today in SIL (Global X Silver Miners ETF). It’s a newly created ETF (exchange traded fund) dedicated to silver mining companies. It’s the first pure play on a basket of large, liquid silver mining companies. It has 25 stocks in all with Canada and Mexico each making up a larger percentage of the fund that US silver companies. Specifically, it tracks the Solactive Global Silver Miners Index, comprised of the largest and most liquid silver mining companies in the world. The majority of holdings are Canadian based companies but also include companies based in the US, Mexico, Peru, and Russia. It can obviously be very volatile but if you think that silver will trade higher in years to come and possibly bridge the historic gold to silver ratio of 16, then this will have significant upside.

The top 10 holdings are: Pan American Silver (12%), Industrias Penolas (12%), Silver Wheaton Corp (12%), Fresnillo Plc (12%), Hecla Mining (4.75%), Silvercorp Metal (4.75%), Silver Standard Resources (4.75%), Coeur D’Alene Mines Corp (4.75%), Gammon Corp (4.75%), and Polymetal GDR (4.75%).

You can read more about it here with additional links to the left of the page: http://www.globalxfunds.com/FundSummary.aspx?FundId=116

Let me know what you think.

If you’re a trader, you’re most likely a loser. That’s what a Journal of Finance study found. As the two Journal of Finance researchers said in their article, “Trading is hazardous to your wealth.” They studied over 66,465 online trading accounts for a period of six years, from 1991 through 1996. They found that the average trader’s returns were about 6.5% less than the overall market. That’s even worse than most mutual fund managers, who routinely do about 4.8% worse than the market.

Generally speaking, the more active the average trader is, the more he/she loses. For one thing, there’s too much competition. As a trader, you must compete against gigantic firms, like Goldman Sachs, that have billions of dollars of trading capital and armies of people sifting through mountains of information – information they often get before anyone else. Also, they are market makers and have the ability to place multiple trades before you even get one trade closed. Their executives are in touch with the highest levels of government around the world. No wonder traders do so poorly on average. Another thing is, most traders have no idea that they should use small position sizes and strict stop losses. They take huge risks against the Goldman Sachs of the world. So one bad trade can blow them out of the water.

There’s a much better alternative to getting involved in all this action. Building enormous wealth in the stock market is possible and chances are it’s not by following the herd or the likes of Wall Street, CNBC, and a zillion newspapers and magazines would have you believe. If you want to make money through investing, you should listen to and read about people who have actually done it. A few people that come to mind are George Soros, Jim Rogers, and Warren Buffet. Rogers wrote Investment Biker about how he drove around the world on a motorcycle looking for new investment ideas. He’s not sitting in front of a computer trading his online brokerage account all day.

Here’s what Rogers says you should do. “Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to. Then something will come along where you know it’s right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is. You’ll know when to sell again, because you’ll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you’ll make a whole lot of money.”

Billionaire investor Warren Buffett doesn’t day trade either. Like Rogers, he’s an investor. A few years ago, in Omaha, Buffet was interviewed about managing money. As usual, he gave simple, easy-to-follow advice that made sense. “Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.”

That just means you should keep your money in cash and wait for an investment to come along which you understand well, is safe, and looks like a winner. Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash and equivalents of more than $46 billion, equal to about 27% of the entire company’s current market value. That’s a boatload of cash. He’s been very active the past year or so, but he still keeps plenty of cash on hand. You should do that, too.

There’s just one problem with this simple strategy of sitting in cash and investing only when circumstances are ideal: human nature. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results in that Journal of Finance study, they really just want to buy and sell quickly, whether they make a fortune or not.

So, how does this apply to what I have been saying? I feel that our economy may have stabilized for now but there is still plenty to be worried about such as impending inflation due to our monetary policies, a mountain of commercial debt maturing over the next few years, and global economic uncertainty surrounding the major currencies (Euro, Pound, and US dollar) to name a few. All of this means that precious metals, class A real estate, and large globally dominant companies should prosper in years to come. This is why I have been recommending gold and silver since I started this website service over a year ago. With regards to keeping money in short term investments, I recommend straight up cash or large globally dominant companies with a strong dividend and a track record of increasing dividends. As for a play on the bashing that certain companies have taken over the past year or so, I have been recommending Citigroup but have advised, via my twitter account and the twitter feed on the right side of my homepage, to take some of the profits off the table and have a stop loss in place.

-Samir

Reuters reported on Feb 24 that the Reserve Bank of India was poised to be a buyer of the 191.3 tonnes (6.74 million ounces) of gold that the IMF is looking to sell. Obviously, no confirmation either way was made by the bank. Nonetheless, the bank did say that gold would be a safe bet and that they are focused on this sector.

The article then quoted an unidentified official from the China Gold Association as saying, “It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility.” However, the next day, Finmarket news agency in Russia said that China “confirmed its intention” to buy this gold. “Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market.”

So, which is it? India is interested. Is China interested? If so, could there be competition for the IMF gold? If India makes an offer, I could see China tapping India on her shoulder and say, “Hold up a minute. We are also interested.” If that happens, it would send fireworks in the gold market similar to what happened when India bought 200 tonnes of IMF gold last Nov 3. When that happened, gold surged 14% in 4 weeks. Now, if both banks get into a bidding war, I am sure the surge would be much higher.

Now, the scenario I have laid out is speculative but very possible. India and US have good and improving relations. US and China’s relations are that of need, not desire. China needs US to continue buying Chinese goods and the US needs China has China is a major buyer of US treasuries. India and China’s relations aren’t exactly that of best buddies. So, if India makes a bid, I wouldn’t be surprised to see China counter. Keep in mind China has been on a buying spree for mining companies and anything that has real value and is comprised of real assets. Also, buying gold would be a good way to lessen their exposure to US currency.

The World Gold Council reported that floor traders now consider $1,054 as a floor in the market. Why that number? Surprise, surprise! That was the average price that India paid when they bought 200 tonnes of gold from the IMF last fall.

So, what has our government been up to? Check out the chart above (click on it to make it bigger). What’s the fancy word Washington DC and other central governments around the world has been using? Ahhh yeah! Quantitative easing! Why not just say what it really is? Governments trying to bail themselves out by recklessly printing currency at will. Since Dec 2008, the monetary base here in the US has grown from 1.69 trillion to 2.18 trillion, a 29% increase and let’s get the drum roll going….ANOTHER NEW RECORD!

With all of this activity going on globally, it doesn’t surprise me that many central banks have become net buyers of gold. All of this printing will eventually lead to crazy inflation. When? I am not smart enough to know. But, I am slowly preparing myself for when it does become a mainstream reality.

-Samir

So who do you think will be next…Spain, Portugal, Ireland? It may be Italy due to its massive government corruption and its high debt to GDP ratio. This is what Columbia’s Charles Calomiris, who predicted the Argentina sovereign debt crisis, said on Bloomberg TV. I have attached a link to the video below.

Columbia\’s Calomiris Interview on Greek Financial Crisis

-Samir

Please see the below video. Rob McEwan, chairman and CEO of U.S. Gold and Lexam Explorations and founder and former chairman and CEO of Goldcorp Incorporated, predicts that gold will hit $2000/oz by year end and $5000/oz before the bull market is over. His reasons center around the quantitative easing measures that have been taking place globally, the increase in national debt levels, and the continued economic uncertainty.  During these times, people tend to move to real assets such as precious metals and real estate.

Now, the hedge funds are getting involved…specifically Paulson & Co. and George Soros’ investment group. You can search through my archives to get the details on this.

As I have said on multiple occasions, there are several ways to play this in the precious metals sector: bullion (coins and bars), ETFs (GLD, GDX, and SLV to name three), futures contracts on the underlying assets, and miners (GoldCorp, Silver Standard Resources, Pan American Silver, and AshantiGold to name four).  Mining companies give you the most leverage and bullion will have a direct correlation to the underlying spot price movements.

$2000/oz Gold by Year End, Rob McEwan

-Samir