Gimme Shelter

Oh, a storm is threatning
My very life today
If I dont get some shelter
Yeah, I'm gonna fade away
--Rolling Stones

From where I sit, the probability of a major deflationary period--perhaps on a worldwide basis--is increasing. If it occurs, then as credit contracts and prices generally fall, a pile of cash should feel pretty good.

But I'm wondering what happens to gold in such a scenario. On one hand, to the extent that the Yellow Dog has been bid up as part of the general speculative credit binge, gold price should decline during deflation as speculators unwind their leveraged trades on the path towards risk aversion. On the other hand, gold could be viewed as the real money that it is and hoarded big time as the ultimate safe haven. In this case, gold price should stabilize and perhaps rise.

I have not seen much data presented on gold's actual performance during broad deflationary events. I'll be digging into this more. Any data you might have would be welcome.

position in gold

Pharm Camp

I went back to the doctor
To get another shrink
I sit and tell him 'bout my weekend
But he never betrays what he thinks
--The Who

Like Mr Practical, I think risk is high and that cash is a very attractive asset class in this environ (an environ that may persist for quite some time). There is one stock market group that has caught my attention: Big Pharma. As a group, they've largely gone nowhere for a few years--prolly w/ good reason as patents expire and pipelines shrink. Plus there's political uncertainty in front of a presidential campaign where health care & and 'big bad business' will be a major stump for some candidates.

Offsetting that is the favorable long term demographic of aging boomers. Plus the nice cash position of many.

Prof Adami recently reviewed the fundies at Pfizer (PFE) and, like him, I dig the overall picture. I'm attracted to the near 6% yield and the $20+ billion cash hoard after the company peeled off its consumer biz to Johnson & Johnson (JNJ). The stock price has been leaking for years-- primary concerns are 2011 patent expiry on mega blockbuster Lipitor and a thinning pipeline.

At PFE's current market cap of about $135 billion, my EVA/discounted cash flow work suggests that the stock, while not massively undervalued, is decently priced if you believe that the company can average 5-7% sales growth without big margin declines or huge increases in invested capital.

Indeed, in the universe of larger cap stocks that I follow, PFE is one of the few that I can find remotely close to fair value from a DCF point of view.

Others in the drug sector have recently come under pressure. I love the JNJ franchise but not the stock price. Every few years, though, something usually happens to cause Mr Market to serve up a nice price for JNJ.

Mr Market may have done just that a couple years back with Merck (MRK). In Fall 2005, the company was selling for about $70 billion and a 5%+ yield in the midst of legal issues surrounding Viox and a shrinking pipeline. I clearly missed that one (at the time, I thought it could actually go lower). Now, MRK is once again under distribution over legal concerns about Vytorin--a compound successfully developed and marketed with Schering Plough (SGP). Technicals are starting to suggest to me that MRK may have a date with the low $40s.

As bearish as I am, I'm attracted to the prospects of owning a few pharma companies that offer a strong payout as a margin of error (particulary if interest rates continue heading south). If/when dividend yields of JNJ and MRK approach 4% or better, I'll be looking hard at these names as long term investments (not trades). Until then, am willing to wait on Mr Market.

position in PFE

Snipping Bips

Is there any just cause for feeling like this?
On the surface I'm a name on a list
I try to be discreet, but then blow it again
--Cutting Crew

The Fed responded to another round of overnite market carnage overseas with a 75 cut in the discount rate prior to today's opening bell. Pepe is suggesting that the Fed's action was not about the stock markets but that's hard to believe seeing as the Dow was indicated down over 500 pts prior to the premarket intervention.

The Dow wound up down 'only' about 130 and was close to green a coupla times. Will this central bank stimulus do the trick? Maybe, but not something I want to bet on.

I am in lockstop with Prof Lewis on the positive ramifications of the Fed action on gold. As he notes, this is likely a signal that 'the whole planet is going to print money like it is going out of style.'

position in gold

Splattered

What a mess! This town's in tatters
I've been shattered
My brain's been battered
Splattered all over manhattan
--Rolling Stones

US markets off today for MLK day but world markets were, um, active last nite. Euro markets down about 5% on ave w/ Asian markets down more. Japan's Nikkei (NIKK) has opened tonite down almost another finski (5%).

Commodity mkts have not been immune. Oil down a duece and gold down about $30.

Can u say deflation?

Should be an interesting day on The Street tomorrow.

position in gold

Clinical Depression

Purple haze was all in my eyes
Dont know if it's day or night
Youve got me blowin', blowin' my mind
Is it tomorrow or just the end of time?
--Jimi Hendrix

The pyramid of debt supporting financial markets worldwide has begun to crumble. The dominos have been hitting each other since problems surfaced mid-July at some leveraged CDO hedge funds at Bear Stearns. As expected, government enablers have been quick to administer some Dr Feelgood to the leveraged addict. Stimulants, however, are not what this patient needs. They merely add to the cost of treating tomorrow's crack up.

Secret Separation

We are matching spark and flame
Caught in endless repetition
Life for life we'll be the same
I must leave before you burn me
--The Fixx

When measures are proposed to make Federal Reserve activities more transparent, officials balk, citing the need to keep the Fed 'independent of politics.' But this is an agency linked to the government. How else can an agency be accountable in a democracy unless the people better understand its workings? Per Rothbard (1994), if a government sphere exists as a self-perpetuating oligarchy accountable to no one, then the associated elite are more suitable for a dictatorship rather than a democracy.

Emotion in Motion

I'm gonna soak up the sun
I got my 45 on
So I can rock on
--Sheryl Crow

Whenever people involved in a social movement claim that their cause should be accepted because its validity has garnered support of the 'experts,' those contrarian hairs on the back of my neck stand at attention (how 'bout you, Dr Kuhn?)

The escalating 'consensus' behind global warming is a good example. I've been distant from the scientific flow but my rudimentary understanding of the complexity of earth's climatology invites skepticism that we can predictively model with accuracy--particularly as it relates to the movement of one (i.e., CO2 levels) of the myriad factors that might influence global climate. That meteorologists struggle with forecasting weather conditions a couple of days out should cast some doubt about the validity of longer term global climate modeling.

I do plan to piece together some data to become better informed. A couple of observations from early effort. I've seen graphs similar to this one touted by the pro global warming crowd in their stream of evidence that 'proves' we have a problem. (Keep in mind that, if the earth is indeed ~4 billion yrs old, this graph encompasses only the most recent 10% of the planet's existence.) Beyond measurement issues (for both instrumental and reconstructed data) which certainly influence the validity of the data, the graph suggests that the earth's temps and CO2 levels cycle together. Also, we seem to be near the top of previous cycles w.r.t. temp. One more note: the data suggest that past cycles have not been symmetrical--i.e., both temp and CO2 spike up, then gradually decline over 100,000 yrs or so.

If I'm understanding the graph correctly (the labels of 'preindustrial' and 'human contributed' make me wonder), then current CO2 levels (however measured) have surpassed all previous levels. Here's my question. Why isn't temp following CO2 levels higher? If there's truly direct causation between CO2 and temp, then shouldn't temps be rocketing to record highs as well? Something seems awry w.r.t. the long term relationship (Boo is whispering the word 'spurious' in my ear). Seemingly, the 'greenhouse effect' on temps depends on more than just CO2 levels.

That's what this MIT climatologist suggested back in 1992. In addition to thinking that this piece could have been written yesterday, I found it informative in terms of the factors that confound easy understanding (and prediction) of earth's climatology as well as the political backdrop of the global warming movement.

Out for Justice

Confusion that never stops
The closing walls and the ticking clocks
Gonna come back and take you home
I could not stop, that you now know
--Coldplay

What is law? According to Frederic Bastiat, law is common force organized to protect the liberty of individuals and their right to own property. The law is justice, pure and simple. Penned more than 150 years ago as socialism escalated in France, Bastiat's The Law is one of the finest essays on the relationship between liberty and politics that I've read.

Vice Grip

Seems so long I've been waiting
Still don't know what for
There's no point escaping
I don't worry anymore
--Phil Collins

Allota terms bubblin' up from the market lexicon. CDOs, mark-to-model (# 3 here), subprime--many of them emanating from probs at the mighty Bear (1 & 2 here). Of course, Bear Stearns is just the tip of the iceberg. If this ocean of mismarked, illiquid derivatives comes for sale, we'll see fireworks that'll put pending July 4th exhibits to shame.

Parallel Form

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world.
--Tears for Fears

Two phenomena have consistently occured (I believe without exception) throughout the history of civilized man. One is that governments always seek more power. The other is that governments have always debased currency.

Can you see why these are related?