Customer Service 1 (888) 261-2693
Advanced Search

Weekend Edition

This advice enraged our readers
Saturday, May 7, 2011

Just over a week ago, I told my subscribers to hold cash because stocks, bonds, and commodities were too risky. Since then, selloffs have hit risky stock and commodity markets... prompting a flight into (what else?) dollars. This week, the Wall Street Journal says Treasury yields are hitting their 2011 lows. Yields hit lows when prices hit highs.
You can tell me everybody hates Treasurys and it's the right thing to do, and I'll agree on both counts. But even that doesn't matter when investors are barely aware of their demand for dollars. They're too eager to get out of whatever they're in to stop and think about that. They become suddenly aware of a desire to unload mining stocks or silver ETFs, and the system does the rest. Perhaps you'll say, "But oh! Mexico has big dollar reserves and it just bought gold!"
True enough, but what did the seller take in payment? Dollars or pesos or some other currency... some form of the cash I've been telling you to hold. And really, who's smarter? Central banks or people who sell things to central banks? Do you really want to be on the same side as a central bank? It's like following a pension fund into a trade.
Pension funds wait until everybody else is in and the committees that run them can prove by looking at magazine covers they're right... THEN they buy. They're morons. They're among the worst investors on the planet. Central banks are established and controlled by governments, possibly the only capital allocators worse than pension funds.
When central banks sold gold in the late 1990s, the metal bottomed. Now they're buying. We think it's proof we're right. Since when? What else can it be but a top, even if it's only an interim top on the way to much higher gold and silver prices (and much more central bank and pension-fund buying)?
One day – probably sooner than anyone would believe – it'll matter big time that the dollar is under attack from its own stewards. Then, the gold and silver bullion we continue to recommend you hold will look a lot smarter than it does right now... much the same way earthquake insurance looks smart when your house is lying in ruins.
I saw some research that suggested if you hold 25% of your cash in gold, you'll preserve your purchasing power during times of inflation. And after all, gold is money. So yes, hold gold. Hold cash. Hold money. Lighten up overvalued stocks and bonds and overbought commodity plays.
In the long term, the dollar is doomed. But right now, everyone hates it. So I'm inclined to hold it right now.
 Howard Marks of Oaktree Capital gave one of the best presentations I've ever seen at an investment conference. Marks is a brilliant investor. His firm was deploying a half a billion dollars per week in the aftermath of the crash of 2008. But he's best known for his "Memos from our Chairman."
They're excellent reading. They cover a broad range of investment topics and spell out a well-articulated investment philosophy centered around risk control and value. Marks recently culled several memos into an excellent, must-read book, The Most Important Thing. His presentation earlier this week covered some of the ideas in the book.
Speaking via satellite to attendees of the Value Investing Congress in Pasadena this week, Marks reminded us of Mark Twain, who said, "When you find yourself on the side of the majority, it's time to reform." Then, as if Marks were stumping for my Extreme Value letter, he quickly followed by saying, "It's inherently lonely and uncomfortable [to be right] and we must tolerate it if we are to hold extreme value positions." Hear, hear!
As if he'd read the mountain of e-mails generated by my cash recommendation, Marks told the crowd successful investors must take the chance of doing something embarrassing. As an amateur actor in several comedies, I may have a competitive advantage there...
In the May issue of Extreme Value, due out Monday, I show subscribers how to make more by holding cash than you'll make in stocks. Click here to sign up. If you aren't prepared to have your expectations shattered, take a pass. But a word of advice: Don't sign up looking for a hot tip and cancel when Extreme Value's rational tone grates on your nerves. The Extreme Value crew is fiercely loyal and close knit. We only like to add new members when they refuse to go home.
Good investing,
Dan Ferris

Market Watch
Symbol Price
S&P 500 1335.10 -0.9% +14.5%
Oil (USO) 38.87 -1.1% +5.2%
Gold (GLD) 145.30 +1.3% +22.6%
Silver (SLV) 34.48 +2.3% +99.1%
U.S. Dollar 73.12 +0.0% -13.2%
Euro 1.45 -2.0% +13.5%
Volatility (^VIX) 18.40 +1.1% -43.9%
Gold Stocks (^HUI) 535.12 +0.4% +16.9%
10-Year Yield 3.16 -0.3% -7.1%

World ETFs
Symbol Price
S. Korea (EWY) 66.65 +0.7% +43.0%
Taiwan (EWT) 15.83 +1.0% +38.8%
S. Africa (EZA) 72.06 +1.3% +36.8%
Singapore (EWS) 13.84 +1.0% +28.3%
Israel (ISL) 17.34 -1.6% +25.2%
Russia (TRF) 21.78 +1.3% +23.7%
Canada (EWC) 32.28 +0.8% +23.6%
Lat.America (ILF) 51.70 +1.2% +22.6%
USA (SPY) 134.20 +0.4% +21.2%
China (FXI) 43.78 +1.0% +17.8%
India (IFN) 30.01 +0.6% +11.8%
Japan (EWJ) 10.52 +0.6% +5.6%

Sector ETFs
Symbol Price
Internet (HHH) 77.99 +0.2% +39.1%
Basic Mat (IYM) 80.21 +0.7% +37.6%
Semis (PSI) 18.13 +1.0% +35.8%
Telecom (IYZ) 24.64 +0.6% +30.9%
Oil Service (OIH) 147.58 -0.3% +30.4%
Industrials (IYJ) 71.57 +0.6% +26.7%
Big Tech (QQQQ) 58.47 +0.3% +26.5%
Transportation (IYT) 99.25 +0.3% +26.2%
Real Estate (IYR) 60.98 -0.5% +25.4%
Software (PSJ) 26.70 +0.9% +23.8%
Biotech (PBE) 22.99 +1.5% +23.8%
Retail (PMR) 21.67 +0.3% +22.8%
Consumer Svcs (IYC) 73.19 +0.1% +22.8%
Media (PBS) 15.37 +0.3% +21.3%
Health Care (IYH) 73.92 +0.7% +20.6%
Utilities (XLU) 33.29 +0.6% +18.7%
Big Pharma (PPH) 70.96 +0.6% +18.2%
Insurance (PIC) 16.85 +0.2% +17.5%
Water (PHO) 19.62 +0.5% +15.9%
Defense (PPA) 20.39 +0.9% +13.1%
Construction (PKB) 13.73 +1.5% +11.9%
Alt. Energy (PBW) 9.85 +0.9% +8.2%
Financials (IYF) 58.58 +0.2% +8.0%
Nanotech (PXN) 9.44 +1.8% -3.2%

Recent Articles