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Weekend Edition
The Best of The S&A Digest
July 19, 2008
 You'll be happy you own gold and silver once you read this: "Sovereign wealth funds," foreign government investment pools, are dumping the dollar.
One big fund in the Persian Gulf has cut its dollar-denominated holdings from more than 80% a year ago to less than 60%. China's State Administration of Foreign Exchange (SAFE) is working out deals with European private-equity funds to diversify away from the dollar. SAFE holds the majority of China's $1.6 trillion in foreign currency reserves in U.S. dollars.
Gold and silver were up as much as 3% this week. They rose steadily as news about Fannie and Freddie got progressively worse.
I believe the mortgage crisis, which led to Fannie and Freddie's insolvent condition, will mark the end of the global dollar standard. If I'm right, the prices of gold and silver – especially silver – will soon begin a parabolic ascent. (Please see the most recent issue of my newsletter, PSIA, for more details.)
Should we cover? That's the question I'm faced with every single morning. I recommended shorting Fannie Mae at $27 and Freddie Mac at $25. Subscribers who followed my advice are now sitting on huge profits (76% on Freddie Mac, 68% on Fannie Mae by Wednesday afternoon).
These gains are critical to offsetting the other losses we've all taken on stocks this year. I still don't think the government will do anything directly to bail out shareholders, though I'm growing more concerned that indirect actions – like the recent ban on short selling – may conspire to push up the share price.
Yes, I still believe both stocks are zeros, but it's foolish to fight the government. Who knows what rule they'll make up next?
Steve Forbes is a national treasure. At the FreedomFest conference last week, he made a great point about the importance of sound money, asking what the world would be like if the number of minutes in an hour changed each day, depending on the mood of the Treasury secretary.
Bill Ackman made headlines this year shorting bond insurers MBIA and Ambac. He also announced a short position in Fannie and Freddie recently. But... investing in hedge funds has risk.
Last year, Ackman started a $2 billion hedge fund to invest in one, secret stock. He raised all the money without telling anyone what he was buying. He bought Target, and shares are down 38%. Yet Ackman is still buying... and raising cash. When Ackman finds a stock he likes, he rides it all the way down. He did the same thing with bookstore Borders, which fell 78% in a year. We're not hedge-fund managers... maybe that's why we prefer to cut our losses.
From a reader: What are the ramifications of dark pool trading for a small trader like I me?
"Dark pools" refer to the liquidity pools available to execute transactions off the floor of the exchange. For example, if Goldman has an institutional order to sell a stock, it may choose to handle it internally by matching it against buy orders from other Goldman clients.
Goldman saves itself from paying exchange fees and keeps a bigger portion of the commission for itself. To the extent they provide more liquidity, dark pools benefit investors. More liquidity means tighter bid/ask spreads and a more fluid market.
To the extent dark pools hide the identity of buyers or sellers, that's where the potential for a blowup exists. Since trades are done off the exchange floor, buyers and sellers can be anonymous. That opens up the potential for insider trading, rumor mongering, etc... And it's in this area where there is potential for abuse.
We all know gold and silver are great to own during inflationary periods, but how about Google? Google raised the price of its online advertising 19% in the past year.
And the worst-performing industries, mortgages and retail, are paying the highest prices. Google raised mortgage-company advertising rates 35% and retail rates 9.3%. Bloomberg expects Google shares to rise 25%.
General Motors is suspending its dividend, cutting payroll by 20%, and selling assets to raise at least $15 billion in the next 18 months.
From a reader: Since you believe silver will skyrocket, how about some thoughts regarding purchasing silver on margin? I believe it's the best way to max the returns for hogs like me.
Jeff Clark recently recommended an options play for silver in his S&A Short Report. He believes you can nearly triple your money on this trade.
Buying these options will juice your returns without having to buy on margin.
S&A Research
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