Smolski Investment Newsletter
Stock Market Update, Gold Break Out and T-Bills
Daniel Smolski
Jan 29, 2009
Just a few days into the administration
and we are already starting to see cracks in the walls. Rumors
have been surfacing Obama's much heralded stimulus package will
not pass in congress as many republicans, including John McCain
promise to be "faithful opposition party members."
The opposition is unfortunately not against the spending but
rather, against not enough spending. There are demands to make
Bush's tax cuts permanent while democrats instead want to shift
the tax burden onto the "rich." It was expected that
Obama will enter politics with so much tailwind behind him, that
he would be able to pass any bill in the first months in office.
However, whether this stimulus bill is passed or not it conveys
a well known problem that the legislative system is simply too
slow. Once a stimulus package is approved, it will realistically
take another year for shovels to hit the ground. There is an
unfortunate lag that always occurs and tax dollars end up being
spent when the economy is already, naturally, transitioning out
of the trough and into an upswing. The money ends up, essentially,
being spent needlessly but in today's world every tool, available
to us, is being brought out to save the day.
The guessing game continues
with how to resolve the banking fiasco. Henry Paulson's auctions
have saved us from a financial meltdown but have done nothing
to increase the flow of liquidity in the system. The Fed's attempt
at direct cash injections into banks has simply ensured executive's
bonuses and provided banks with cash to acquire one another.
The most recent, "Obama solution" (originally actually
touted by Paulson), has now been to create an aggregator bank,
dividing banks into "good" and "bad" banks.
This approach was initially employed in Sweden as the Securum
model with great success. The crisis in the early 1990s in Sweden
was of similar nature, based on a real estate bubble that brought
the banking system to its knees. The government moved in and
pumped cash into banks that were deemed to have temporary liquidity
issues and completely took over a couple of them. It thus provided
creditors with a blanket guarantee but shareholders were wiped
out. The government was then able to sell the nationalized assets
years later. In the end, the government actually turned a profit
from the whole process. The difference today is our administration
has, so far, indicated that it is in favor of shareholders and
thus the prospect of us ever seeing our money is heading, ever
closer, to nada. Had the government taken control in exchange
for emergency aid, taxpayers would be in a much more secure position.
Do not get me wrong, the argument here is for the worst of two
evils. I believe no business should ever be state owned and run
but in this case, it looks like the taxpayers are simply getting
the absolute worst end of the deal.
Even the proposition of such
a holding company conveys that it is a desperate attempt to keep
the system rolling. The establishment of a shell where taxpayers
are not aware of what they are on the hook for or what they own
is shameful. Level 3 assets should have been illegal to begin
with and it is a disgrace that the SEC simply ignored their growth.
These assets have no market and thus cannot be valued, it is
a game of don't ask, don't tell. We are now at the point where
a decision must be made because as long as theses toxic assets
remain on the balance sheets of banks, the banks will remain
technically bankrupt. A certain level of confidence must be restored
and perhaps this new aggregate bank will provide the hope that
markets need.
Whether or not this Swedish
invention works in America is yet to be seen but the creation
of such a holding bank could provide the catalyst for a more
sustained rally that we are expecting. It is finally an initiation
of a model that does have some history of success and whether
or not it works, it may provide us with the confidence boost
we are looking for.
The gyration continues as the
markets consolidate with a downward bias. We still would not
be surprised to see the market break below its recent support
and hit November lows. The retest will provide us with ample
opportunity to add to positions. Such a low would establish a
launching pad that will take us up to 10,000. It is possible
that the indices are already forming a bottom here and will just
move up. The markets in Europe have been performing notably weaker
as the UK , Germany and France have already tested November lows.
Asian markets have been mixed but overall, have been holding
up relatively well. We have, thus far, not seen any material
break downs and this bodes well, as weaker economies would be
leading the decline if one was imminent. Going forward, if this
recent support ends up being the bottom, we will simply maintain
our current positions and ride the markets up. Surprises, however,
have all been to the downside this past year and we are ready
to extend our positions in gold, airlines or purchase SSO if
the market does retest.
Some may be hoping this is
it for the decline but we must keep in mind that the longer and
deeper this current correction gets, the larger the rally will
be. If we simply head higher from here, we could top off under
10,000 in a couple months. If we add to the declines and form
a double bottom at 7500, I would expect the rally to go through
10,000 in the spring. It will not only lead to greater profits
in our current long positions but will also provide a higher
price from which to establish short positions. A further decline
here will benefit us both in going long and in going short. The
more pain we experience here, the greater will be the reward
in the future.
The excitement of late has
been in the precious metals arena with the gold price exploding
$40 on Friday and breaking out. With the increase, we have officially
formed an upside breakout, gold appears to have freed itself
of the shackles of the downtrend line. It has been stuck in a
rut of lower highs since July and some new life has finally been
brought into gold. Going forward we would not be surprised with
a retest of the breakout but $1000+ gold is in the cards
for 2009.
One area of concern is relative
strength in gold shares. Gold stocks always lead any bull run
in gold and although they have been picking up steam the past
few months, they are still considerably below the historic average.
This is mainly due to the extreme selling pressures of the past
few months but strength needs to pickup to convince us this is
the beginning of something bigger. We are very excited by the
developments the past few days and continue to maintain our positions
in gold stocks. We will continue to monitor the progress.
Gold stocks have been one of
the leading sectors in the stock market, in terms of relative
strength, as the general indices enter a large consolidation
phase. Their performance bodes extremely well going forward.
We believe the precious metals stocks will be one of the leaders
going into 2010. Physical gold and gold stocks are to be cornerstone
of any portfolio for 2009, both for the potential of capital
gains and for capital preservation during these trying times.
We continue to believe that,
in this era of bubble creation, treasury bills are the final
balloon to pop. They have broken down out of a head and shoulder
pattern and it is expected they will inevitably reach their 50-day
MVA. As some stability is found in the markets, investors will
increasingly refuse to accept zero percent yields and move their
money into asset classes that provide more opportunity. The endless
saga of money creation will eventually come home to roost. Zero
returns will sooner or later, result in zero interest at an upcoming
government t-bill auction. We continue to maintain our position
in TBT, that is now firmly in the black. It is a great long-term
holding that should provide us a great return in 2009.
The markets of late have not
provided us with much excitement, as they continue their grind
east. The coming days should provide us with information on whether
this market is going to test the November lows or whether a bottom
has already been established. My belief is that further declines
are still to be had and if they are in the cards, we will be
waiting to deploy cash in appropriate sectors. Timing the market
is never easy, as people often act too quickly for reasons of
greed or too late, for reasons of fear. Patience is a virtue
and we believe, the next few days will continue to be reserved
for patience. We will let this market play out and see what it
brings us. We never attempt to force anything by deploying cash,
unless it has met our parameters. It is however a very exciting
moment as if a decline comes and we are able to establish new
positions, the upcoming months should provide us with double
digit gains. There is a lot to look forward to in the coming
weeks and we will continue to keep our subscribers up to date.
Daniel Smolski
email: smolski@gmail.com
321gold Ltd
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