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Weekend Edition

The Best of The S&A Digest
Saturday, August 25, 2007

We've gotten several questions about gold. While the price hasn't moved much since last month (down from $680 to around $650), lots of folks thought gold would perform much better, given its role as a "safe haven" investment. Well, it turns out that most of the world still prefers three-month T-bills to gold. As the crisis reached a peak last week, three-month T-bills experienced their biggest rally in 19 years.
 
As long as the dollar remains the world's reserve currency (and no one knows when the eventual run on the dollar will begin), gold will primarily function only as a hedge against inflation. With banks in trouble, loans going bad, and mortgage lending coming to a halt, we expect the economy to slow rapidly. The collapse of the mortgage industry will be deflationary.
 
Looking back to the last big credit crunch (1990), which was centered around S&L lending to commercial real estate developers, we see that gold fell from around $400 in 1989 to a low of $327 in early 1993 (about 20%). We would be surprised if gold didn't fall at least that much during the next 12 to 18 months, which would put gold at around $550.
 
Beijing will now allow individuals to buy offshore securities for the first time. Investors can open accounts at Bank of China branches across the country to trade Hong Kong-listed securities, whose markets (unlike the mainland's) are globally integrated. The investments will be exempt from a $50,000 limit on the amount of foreign currency Chinese citizens can buy or sell every year. The government hopes these actions will relieve upward pressure on the renminbi. Americans hope the Chinese will buy their mortgages...
 
Li Ka-shing, Asia's richest man and chairman of Cheung Kong Group, announced that Sjuggerud Confidential pick Cheung Kong (0001.HK) has no U.S. subprime exposure. Shares of the international conglomerate gained close to 3% on the news, and readers have made 39% on the recommendation.
 
Billionaire Eli Broad, who recently bailed out Goldman Sachs' failing hedge fund, made an interesting prediction regarding the aftermath of hedge funds going belly-up... "The art market will soften, and an adjustment in values will take place, but it may not happen for six months to a year." His reasoning: Many big-time art collectors are investors in hedge funds and have lost serious capital in recent months.
 
S&A Oil Report pick Petrobras (PBR) will spend $100 billion to become one of the world's largest integrated oil companies by 2020. The company plans to tap into its cash flow and produce income from new oil and gas reserves to fund the investment. The Brazilian state-owned oil major – the seventh-largest oil company in the world – will have already spent $25 billion by the end of the year. Readers are up more than 15% on the investment.
 
From our resident quant, Ian Davis: Since 2002, the DJ AIG Precious Metals, Industrial Metals, and Energy Indexes have all soared by staggering amounts... precious metals are up 101.7%, industrial metals 249.2%, and energy 83.6%. We are clearly in the midst of a commodity bull market. Yet one category is noticeably being left behind...
 
The DJ AIG Softs Index (equally weighted in coffee, sugar, and cotton) has fallen by 18% over this same time period. In particular, sugar is down 20% on the year. Now, it's as cheap relative to oil as it has been in 20 years, according to Bloomberg.
 
Fitch Ratings placed $92.1 billion of securities backed by subprime mortgages "under analysis," which is the first step toward a possible downgrade. That's a huge amount of bonds... Fitch said the $4.2 billion of bonds ranked below BBB are the most likely to face a downgrade. The mortgage mess may take a long time to unravel. Lots of folks – both homeowners and lenders – will have to take a "haircut." If the losses are written off, through failure, bankruptcy, and foreclosure, the damage to our economy will be contained and should pass quickly. My fear is that the government will come to the "rescue."
 
Foreclosure filings surged 93% nationwide since last year. "While 43 states experienced year-over-year increases in foreclosure activity, just five states – California, Florida, Michigan, Ohio, and Georgia – accounted for more than half of the nation's total foreclosure filings," said RealtyTrac Chief Executive James J. Saccacio. Our dream of buying a beachfront condo in Miami might finally come true. I'm waiting for a seller so desperate he's crying on the phone...
 
If the Fed cuts the fed-funds rate, conditions would be ripe for Steve Sjuggerud's "virtual banks" to make a killing. Sjug is recommending two of them right now in his True Wealth portfolio. Make sure you're familiar with his strategy... It might be the best way to play stocks for the rest of the year. For more details, click here.
 
Regards,
 
Porter Stansberry




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