Thursday, June 4, 2009
A Little Advice from Mark Twain
It is 5:36 AM, clean cups are on the hook and the coffee is hot. The ole Colonel is going to chat a bit with the old timers this morning but the young folks are welcome to stay in the break room, there might be something here for everyone. I was sitting on my favorite bench in front of Raine's Market the other day with my faithful sidekick, Loquita. By the by, if you're having a difficult day go sit there a spell, I swear that bench has magical qualities for soothing the soul. I must ask Scott about its history, maybe it has been there since the old Kitchen Market days.
A reader of the Report passed by with two great questions for the Colonel. We're both retired and neither of us are looking forward to returning to the salt mines if we can avoid it. The first question was about the recent rally in the stock market (can it last?); and the second, about the possibility of debilitating inflation in our future. These are important concerns even if you're not retired but getting close to going fishing.
I am reluctant to give anyone advice on what they should do with their money but am not shy about telling you what I'm doing. I'll leave the advice part to Mark Twain who once remarked, "I am more concerned with the return of my money than the return on my money." This is such a sage quote that it was repeated by Will Rogers during the Great Depression and is sometimes attributed (incorrectly) to the famous British economist, John Maynard Keynes. Keynes is important to my story because he had the radical idea that governments should spend money they don't have in hard times to save the ship. More on that in a moment.
Last Fall, it was not unreasonable to fear a massive run on the banks. That didn't happen and I'm convinced our government will sell George Washington's false teeth on E-Bay before they allow that to occur. The Colonel had money in two failed banks, Silver State in Henderson and Washington Mutual, and it was quickly returned by the FDIC. Kudos to Sheila Bair.
That covers the "return of my money" part, what about the "return on my money"? I once explained a conservative approach to investing to a young buck and he remarked, "If you're not making double-digit returns in the stock market, you're an idiot!" I have often wondered how that feller fared in 2008.
I believe there is too much emphasis on getting big returns on your investments especially for older folks. You hear all sorts of crazy stuff like, "you must get at least a 7% return or inflation will eat your life savings away." Talk like that pushes people into the stock market and some poor souls lost 40-50% of their dough last year. Let's face it, even with the recent rally, we're still in a bear market and will probably stay there for a while longer. My rule-of-thumb is no more than 10% of your savings should sit in stocks during such times and no more than 20% in the best of times.
Don't fret too much about your lousy CD returns at the bank for now. Remember it is the difference between yield and inflation rate that counts. Few people complained when inflation was 3% and CDs yielded 5%. Presently inflation is zip (and there is a chance the economy could deflate) so that lousy 2% CD is just fine.
Inflation down the road is a big concern since the government has been borrowing and printing money like A-students in John Keyne's Eco-101. If the economy rebounds and the government can quickly reduce all this funny money at the proper time, books will be written for decades about their success. If their timing is off; books will be written for decades about their failure and the return of double-digit inflation.
Gold is still the best hedge against inflation and it is a wise move to include some in your portfolio. The standard rule-of-thumb is no more than 10% but if things start spinning out of control, I might head a little north of that number. Gold is threatening $1000/oz lately so I'd wait for a good pullback this summer to buy. The ole Colonel will stick to his prediction of $1050/oz by Christmas. These were my thoughts April 6 in the Report:
"Gold stumbled another $20 in early trading to bring us to solid 8-handle country at $877.9 (June contract). Am I discouraged? Hell no. The Colonel bought a little chunk Friday and I'll buy a little more if we fall further. Does anyone really believe there won't be any inflation down the road?"
If we fall back to $920 it might be time for another little chunk.
Have I answered my good friend's questions? There will probably be a good dip in both the stock markets and gold this summer but probably not at the same time. Low rate CDs are good for now but I wouldn't commit to more than a 6-month to 1-year CD at these low yields. Buy gold a little bit at a time on pullbacks, sleep tight at night and join the Colonel on the Raine's bench if you're feeling a little stressed out.
Enough old timer talk, let's walk the walk:
Oil is up $1.66 to $67.78 (July contract); Gold is up $8.0 to $973.6 (August contract); Silver up $0.200 at $15.510 (July contract); Copper is up 0.0365 to $2.2485(July contract); Molybdenum holds at $10.25.
The DOW is down 36.17 points to 8639.11; the S&P 500, down 1,74 points to 930.02. The miners are mixed:
Barrick (ABX) $37.17 up 1.72%
Newmont (NEM) $46.70 up 0.60%
General Moly (Eureka Moly, LLC) (GMO) $2.60 down 3.08%
Freeport McMoran (FCX) $54.51 up 1.58% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are mixed (a "tell" for General Moly):
Nucor (NUE) $44.15 down 1.30% - domestic steel manufacturing
ArcelorMittal (MT) $33.58 up 0.09% - global steel producer
POSCO (PKX) $81.00 down 1.85%- South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is down 0.14% at $1,061,862.