The Sane Investor

October 10th, 2008
So throughout these rattling times, I always try and take a step back and think how things aren´t actually that bad, at least in my life. I mean, things could of course be better, but applying that type of metric in terms of trying to find happiness really results in nothing good. I can for the least say that I have a roof over my head, food, and really great friends and family. Although I´m a total optimist, and I really do think that the innovative American spirit can save our economy from the current crisis (my hope is currently invested in alternative energy), the world of investing to me contains nothing of the same free-floating optimism.

I talked yesterday about the disadvantages of liquidating your assets in favor of cash, however including that it might make sense to stop automatic contributions to your retirement account. I´m still heavily in favor of gold and silver, and after both of those assets got pummeled today, I think the outlook is still pretty bright.

I think what´s keeping those markets relatively quiet is the strength that the dollar has maintained against the usual suspects (i.e. the Euro and the Pound, but it has however fallen prey to the Yen). If you remember back a few months ago, when gold was ripping up above $1,000 an ounce, there was some really bearish concerns with the dollar.

I think what´s happening right now is most institutional investors feel pretty safe with cash right now, and unless they start feeling like the value of the dollar is starting to come under attack, I can understand why they wouldn´t want to move in to gold. I think right now everyone is defaulting to the typical trade, which is in times of crisis buy the dollar. People are really scared, and until we start to see some actual safe havens in terms of countries, the dollar is going to continue to be the reserve currency. Once you see that fall start happening (I think the unprecedented level of debt we´re loading up is going to add some serious concerns to major dollar holders) there is going to be a very swift buying spree in gold and silver.

The Title of the Post

Since the Dow is hovering in the 8,000 region (wow, just…wow), I think more and more people are going to start pulling the ¨not that bad argument¨. It doesn´t seem real to be reading all of this, and you start to wonder whether it´s a mistake. With things dropping so far in price and companies hitting historic lows, some of the full on bears are starting to feel like things are basically at their lows. I still feel like we have a long ways to go, and because of this, I think if you´re going to be buying anything other than gold, silver and treasury bills/TIPS, you have to implement what I call cold steel investing.

To me, cold steel investing bascially means you divorce yourself from your emotions and your perceptions of companies. I think to really do well in this market, and to do well in the short term in any market, you have to divorce yourself from the idea of what the company stands for. My example of this would be a company like Google. I think Google is one of the best companies in America in terms of innovation, and if I were to have to pick five companies to invest in for the next twenty years, they would be one of them. However, we´re not doing ¨20 year¨ picks. We´re doing survival picks, which are picks that will make you money in the short term as you try to navigate your portfolio towards safety. For this type of market, if you want to see any types of gains, you´re going to have to invest for the next 1-3 months tops. We´re facing some serious bearish pressure right now, and no matter how good the technical analysis looks on a company, it is very likely that credit problems will cause those technicals to deteriorate or just general fear and panic will push that stock down.

My Example of What A Cold Steel Pick Would Be

So to give you an idea of what I´m talking about, I´d like to bring to the table a company like Phillip Morris International (NYSE: PM). This is a company that was trading at $50 a share a month ago, and today fell as low as $33.30. Now although I think this will be a great stock for the next 3-5 years, I´m not comfortable throwing my money in to the wind and hoping I landed right with this one. Instead, I´m banking on the idea that PM will beat their third quarter results. The reason I think they´re set to do this stems from the fact that they sell a low ticket item with a basically built in audience. I don´t expect that demand for cigarettes will be hit anywhere except countries like the United States, whose ¨sin¨ taxes have pushed the cost up much higher and made a smoking habit there a much bigger chunk of your pay check.

However, internationally the cigarette market is expanding, and cigarettes are still pretty cheap. If you were to pick up PM in the sub $35 region prior to their October 22nd earnings announcement, I wouldn´t be surprised if you saw them rally back up to a price in the mid 40s as their results confirm that type of valuation. The plus with a pick like this is if you see some really stellar results, you can turn it in to a long opportunity as well. I think you should take your gain, however, and stick to it.

If You´re Looking for Safer Debt with a Higher Return, Look to Emerging Markets

After the news that Iceland was likely going to have to default on their debt, I´m guessing the siren went off around the world to watch for other countries that might do the same thing. Because of this, funds like Morgan Stanley Emerging Markets Domestic Debt Fund (NYSE: EDD) are trading at a +40% discount to their Net Asset Value (NAV), resulting in yearly dividends that at some points today got up to 30% as the share price fluctuated.

Now when you hear the word ¨emerging markets¨ and ¨government debt¨ in the same sentence, your immediate reaction is likely to cringe. Indeed, throughout the nineties it was the problems that emerging markets were having with repaying their debt that brought in the IMF and caused a huge flight of capital and solvency concerns. After that debacle, most countries have essentially removed themselves from the practice of pegging their currencies (one of the practices that caused them the problems), and with most running twin surpluses (budget and commercial/current), the threat of them defaulting on their debt really isn´t as big as everything thinks it is.

It should be mentioned that Government debt funds like EDD should be strongly separated from ones that combine commercial debt and government debt. Although countries will likely continue to nationalize and/or bailout banks as problems occur, I do strongly believe that after Argentina´s legendary government default in 2001, most developing countries know that they cannot sacrifice the government´s credit rating to save the private banking arena. Because of this, I feel like emerging market government bonds are actually very safe, and I´ll continue to snap these up in the current future as negative price dips put them in to good territory.

In General Though, I´m All Government Debt, Gold and Silver

I´m essentially using government debt in emerging markets to hedge myself in case things actually end up not being that bad. The hedge for me comes from the idea that a less than apocalyptic credit crunch would result in an upward valuation of the emerging market debt that I´d be holding. In terms of stores of value, I see these types of assets as the only ones that I trust, since to me a ¨AAA¨ corporate bond rating doesn´t really mean that much anymore.

Disclosure: the author of this article is long GLD, DGP, SLV, SIL, FCX and trying to build a position in EDD

Questions? Comments? E-mail me at thesaneinvestor@yahoo.com

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© 2008 Andrew Jarmon

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