Did you ever wonder why they call it hamburger? There’s no “ham” in it?

Did you ever wonder why they call a building where everyone lives really close together an “a-part-ment”?

Did you ever wonder how an economy can lose a million jobs eight months into a recovery? Did you?

To quote Edward Crotty, Chief Investment Officer at Davidson Investment Advisors, speaking about the better than expected U.S. jobs report on Friday:

“The next data points will let us know if it’s truly a peak or a peaking process, but any month we could see a creation of jobs,”

The Dow was up over 2% on the week, and all is well because the economy, only lost 36,000 jobs. Happy days are here again, and any month we could see a creation of jobs.

Am I the only one who is stunned by the fact that we are talking about almost being at the job creation phase? Here’s the way it usually works: a recession ends, and then jobs start to be created. I’m not an economist, but if you look at where the bottoming of output was, it was around eight months ago (which makes sense, since the stock market bottomed exactly one year ago today, on March 6, 2009 where the S&P 500 was at 683; it’s up 67% since then). Normally eight months into a “recovery” the U.S. economy has created about a million new jobs. In the last eight or so months we have lost around a million jobs.

In a normal recovery we should be creating between 100,000 and 150,000 new jobs per month.

This is clearly not a normal recovery.

The latest GDP data showed the U.S. economy growing at an annual rate of 5.9 per cent in the last quarter of 2009. So, normally in the two months after a quarter where the GDP grows by almost 6% you would see at least 200,000 new jobs created. Instead, we’ve lost over 30,000 jobs. Two months of declines have never happened after a quarter of strong GDP growth.

It’s obvious to see why. If the economy is growing, that means more products are being produced, and more services are being consumed, so more workers are needed to produce those products and provide those services, so more workers are hired, so employment increases. Makes sense. But that’s the opposite of what we have just seen.

This is clearly not a normal recovery.

Again, I’m no economist (and I’m thankful for that), but it appears obvious that companies have cut staff, and are making whomever is working work harder. The economy is more productive (higher GDP output, done by fewer people), but higher productivity does not create jobs. It creates profits, which presumably is why the stock market is up, but doesn’t create jobs, which is why unemployment remains high.

(If we were all replaced by machines, GDP would go up, but theoretically we would have 100% unemployment. Would that be bad? Presumably if we could produce everything we want without working for it, that would be great. But I digress).

Here’s another viewpoint: The average business owner realizes that the growth in GDP was not accomplished with real demand, but instead is a result of government “stimulus”. Obviously printing money is not sustainable forever, so businesses are not hiring, or if they are, they only hire temporary or contract workers. At the first sign of weakness, those temporary workers are gone, and there goes the recovery. In these uncertain times the average business also won’t invest in new capital equipment; it’s too risky. If you want to grow you may use your cash to buy a competitor to gain market share, but again, that’s not creating jobs, that’s just eliminating redundancies. Or, as the Wall Street Journal puts it, a lack of capital spending will end the productivity surge.

Cut staff. Be more productive. Merge. Acquire. Profit goes up. Don’t bother hiring or investing. Cut more staff. Be even more productive. Lather. Rinse. Repeat.

And did I mention wage deflation? High unemployment drives down wages. Which leaves less money to spend, which doesn’t stimulate demand and jobs. The good news is that wage deflation leads to general deflation, or at least very moderate inflation. Unit labor costs — a key inflationary gauge — fell sharply in the third and fourth quarters, according to the Bureau of Labor Statistics. For all of 2009, unit labor costs fell 1.7%, the most since the records were first kept in 1948.

Message: for the next few months, worry about deflation, not inflation. (Don’t worry, hyper inflation will get here eventually; it’s inevitable given the massive government spending, but it’s not imminent).

The conventional wisdom is that inflation is good for the price of gold (since it’s a store of value), but deflation is bad for gold (since if prices are dropping, you don’t need protection against inflation). That would not appear to be true, based on past history. For example, during the deflationary period from 1920 to 1933 operational wealth would have increased 2½ times if you held gold. Here’s a good summary of gold and deflation theories.

So what’s my theory?

This is clearly not a normal recovery.

However, gold does well in deflationary periods, so if you want a guess, I’d be betting on gold (click for a larger image).

It would appear that the short term correction that started at the beginning of December has ended, and $1,000 gold may be not be seen again, perhaps forever.

Longer term, golds uptrend since the start of 2009 remains intact, which is also good for medium term price support.

There still remains a very real risk of a general market correction. In fact, it’s almost a certainty at some point. When? I have no idea. So, this week, I gradually added to my gold holdings on dips, and I continue to leave my stink bids in place to buy more on any weakness. If the price is going up, it makes sense to be invested. However, I am still maintaining a large cash position, as protection against market weakness.

Time will tell. And I will continue to post quick updates on Twitter, including links to any interesting articles that cross my desk.

Thanks, and have a good week.

A hockey game lasts for an hour, so there are lots of opportunities to make adjustments and recover from mistakes. That’s not the case in the “sliding” sports, where one mistake can cost you the race (and, in the very tragic case on the first day of the games, it cost a Russian luger his life). If you are a ski racer, or a speed skater, or any other “slider”, you have two strategy choices:

1. Be cautious. You won’t win if you don’t finish the race, so be in control. Go fast, but not so fast that you risk losing control. The goal is to finish, and hope that you have enough speed to both finish and win.
2. Go as fast as you can. Take every chance, because all of your other competitors will be doing the same. The one who goes the fastest and doesn’t crash will win, so go all out and hope for the best. You will either win or place 25th, but if the goal is to win, that’s how to do it.

What’s the correct strategy? That depends. If you are highly skilled, you can probably go fast, and take some chances, and still finish. A good example of this strategy would be Apolo Ohno, the American speed skater. He’s very fast, but he will take chances if necessary. He just doesn’t take a lot of stupid chances.

There are many contrary examples, of racers who perhaps went faster than they should have, and were not completely in control, but they stayed upright just long enough to win the race. A good comparable would be a home run hitter in baseball, who hits a lot of home runs, but also strikes out a lot. In baseball if you hit one home run and strike out three times every game, you are a superstar. The big win is much more important than the big loss.

So what;s the correct strategy in investing? If you have a chance for a “ten bagger” (ten times return on your money), then you can take a very risky approach. If you make ten equal investments, and one of them goes up 1,000%, and the others all go bankrupt, you still break even. Unfortunately, finding a “ten bagger” is not easy, so basing an investment strategy on the hopes of massive wins is probably a stupid plan.

A better approach is to risk less on speculative plays and more on less risky investments, because the most important goal of any investment is capital preservation. Risking everything for a big win is gambling, not investing. Speculative plays are fine, but only for a portion of your portfolio. The rest of the portfolio should go fast, but not so fast that you are out of control. My hope is that as the world continues to deteriorate, I won’t crash.

It would appear that many people were pre-occupied this week, as not much of anything really happened on the markets. The S&P 500 changed by less than half of one percent. I didn’t get filled on any of my stink bids.

One item of note was a company in my portfolio, ADM.V – Andina Minerals Inc., a gold exploration company with a big project in Chile. Given their size they are a potential take over target, so I owned a small number of shares in the speculative section of my portfolio. Alas, this was not a good week for Andina:

On February 24 they issued a press release indicating that, oops, we thought we could cheaply leach the gold out, but now, after further study, not so much. They followed up with a February 25 press release saying hey, it’s not really that bad. So what do I do when a company I own has a major set back, and drops 30% in a two day period? I buy more, of course.

Leaching is a cheap and easy way to process the ore. Of course it has the downside of losing some of the gold, because it leaches away. Now that leaching won’t be possible, more money will need to be spent for milling operations, but while that will cost more, it may also mean that more gold can be recovered. So, it may be good news. Since I’m not sure if it’s good news or bad news, I’ve decided to average down and buy more. You can ask me in a year whether or not that was a good idea. So much for the cautious approach.

There are more things to discuss today, but having to stay up late watching Canada win at hockey has made me tired, so I will end with three links for your further consideration:

First, here’s a link to onlooker’s post on precious metals where he links to the McAlvany Weekly Podcast. I subscribed to this particular podcast through iTunes, so I can listen on my iPod. Well worth it (and it’s free).

Second, here’s a link to Sidewinder’s new blog. His post on Alexander Haig is brilliant. I’ll be watching with interest to see sidewinder’s future posts. Again, it’s free, and it’s better than anything you’ll read in the newspaper.

Finally, I’ve decided to try posting quick updates on Twitter. If during the week I see an interesting article, or something else of interest, I’ll post it on Twitter. You can also read my Twitter stream at the top right of this page.

Thanks, and have a good week.

Sometimes I get lucky. My purchase of PBG.TO – Petrobank Energy and Resources Limited back on February 9 at $50.35 is looking good; it closed Friday at $54.69.

My trades on my gold portfolio were less than spectacular, unfortunately.

I came to the conclusion that with the massive up trend in the general markets over the last many months, we were due for a correction, and obviously this year the market has pulled back. Year to date the Dow is flat, but that’s only thanks to the rally over the last two weeks. My assumption was that general market weakness would lead to a weakness in precious metals stocks as well. I assumed this would be short term weakness, and I didn’t really want to sell my holdings, so I did some covered writing with options. As most of you are aware, you can sell call options on stocks you own. This is a strategy that works well if you like the stock and want to keep it, but also want to increase your returns.

For example, on February 4, 2010, with K.TO – Kinross Gold Corp. trading around $17.54, I sold the February 17 calls for $1.10 each. I assumed that with market weakness, Kinross would drop in price between February 4 and February 19, option expiry day (the third Friday of the month). Had that happened, I would still own my shares, and I would keep the $1.10 in premium I pocketed from selling the option.

Oops.

Despite some weakness at the end of the day on Friday, Kinross closed at $19.23, so my shares are gone. The holder of the calls will exercise their right to purchase my shares for $17, and I’ll get the $17, and I get to keep the $1.10, so in effect I sold my shares for total proceeds of $18.10, ignoring commissions. Unfortunately had I not sold the calls I could have sold the shares today for $19.23, so I lost $1.13 in the process.

I did the same with some of my shares of AEM.TO – Agnico-Eagle Mines Ltd.. I sold the February 54 calls for $2.50. Agnico-Eagle closed on Friday at $60.72, so my shares are gone for net proceeds to me of $56.50, instead of the $60.72 I could have made had I not covered, and waited until Friday, and then sold them. Looks like a bad decision, right?

Yes, this month it was a bad decision. But in January I did the same thing; I sold call options on AEM for 75 cents (they were out of the money, and close to the expiration date), and they expired worthless. So if you add that money to the pot, in effect my shares generated $57.25. That’s still a “loss” from the $60.72 I could have made, but not as bad as it could have been.

What’s the lesson here?

First, don’t do anything I do. Do the opposite, and you’ll do fine.

Second, if you want to pocket some cash by doing covered writes, you want the options to expire worthless, so you are best to sell options that are out of the money, and near expiration. That’s what I did in January, and they expired worthless. In February, I was selling calls that were at the money, or slightly in the money, so I generated a large premium ($2.50 in February, as compared to only 75 cents in January), but in the end I lost my shares because the price went up.

Third, I didn’t have to have my shares called. On Friday afternoon I could have simply re-purchased the options I sold. (Technically I “sold to open” when I sold them, so I would be “buying to close” this time). Had I done that, I would have lost money on the options, but I would still own the shares. So why didn’t I do that? Because I still expect some weakness in the shares over the next week or two, so it’s quite possible that I will be able to buy more shares at better prices.

And that’s exactly what I plan to do over the next week. I sold my shares in Kinross for the equivalent of $18.10, so I will place a bid at $18, or perhaps even lower. If I get filled in the coming week or two, I’m smart again, because I will end up with my shares, and my premium again. Is that likely to happen? Let’s look at some charts:

Gold may, or may not, have broken out of it’s consolidation since the peak at the beginning of December. My guess? We have one more test of the lows yet. We need a double bottom, to confirm the bottom, just like happened in the circled area on the chart, back in April and May. A drop back into the $1,050 to $1,075 range would represent a double bottom, and that will probably be our final buying opportunity, before gold resumes it’s rise. In other words, that’s when you back up the truck. I’m not convinced we are there yet.

As this chart of G.TO – Goldcorp Inc. shows, the previous consolidation ended with a double bottom, and we’ve been in a trading range ever since. I’m placing buy orders at $36 (with perhaps an additional order at $35, just in case in drops that far), and that’s where I’ll be buying, hopefully over the next few weeks.

So, to sum up:

I lost many of my gold shares today (technically options expire on the third Saturday of the month, not on the Friday, but I think in terms of Fridays), but I believe I can buy them back at less than the price I sold them for, so even though I’m heavily in cash, I’m not concerned. I haven’t lost anything, and if there is a pullback, I’ll be back in at good prices.

More on Physical Gold and Silver

The other reason I didn’t repurchase my options before the close on Friday was I was on the road, away from my computer. Every few months I make a trip to Scotia Plaza in Toronto, headquarters of Canada’s largest gold and silver bullion dealer, The Bank of Nova Scotia (today branded as Scotiabank). (You can read more in the How To Buy Physical Gold page). You can read about some of my previous trips in October 2008 and October 2009. In October 2008 there was a big shortage of physical gold and silver. I wanted to buy 100 one ounce silver Maple Leaf coins (total value $1,200) and they would only sell me 25. In October 2009 there were no shortages. This week, also no shortages, so physical supply has caught up with demand.

There was a line up when I arrived, but not a long one. It frustrates me that every transaction takes half an hour, since they have to manually fill out the purchase order, so if you ever go there, prepare to wait.

The guy beside me wanted to buy silver as a gift, so he ended up buying five silver Maple Leafs. A friend told him it was a good investment; why he didn’t do any actual research himself, I have no idea.

I asked about the prices for bars, instead of coins. Coins are easy to buy and sell, and they are divisible and easy to carry. Unfortunately in Ontario you must also pay 8% sales tax when you buy them, so the price is inflated by 8%. (Starting in July the new Harmonized Sales Tax increases that to 13%, so there goes the gold coin market). Bars carry no sales tax, and the premium is lower. On Friday a 100 ounce silver bar, all in, including commissions, was about $1,974 Canadian, or about $19.74 an ounce. That’s significantly cheaper than the $25.93 per ounce cost of a silver coin back in October 2009 (including taxes, in Canadian dollars).

A 20 ounce gold bar was quoted, all in, at $24,327 Canadian, or $1,216.36 per ounce Canadian. The exchange rate was 1.07, so in U.S. dollars that’s $1,136.79 per ounce. The spot price of gold closed yesterday at $1,117.50, and was as high as $1,126.80 on the day, so the bars were trading at a premium of around $10 per ounce, which considering commissions and exchange isn’t much.

On October 7, 2009 the spot price was around $1,045 US, and a one ounce gold Maple Leaf was $1,210 US, so obviously the premium on a coin is significantly larger than the premium on a bar. The premium over spot is $165, with the 8% sales tax on the coin representing $84 of the premium, leaving $81 per ounce in other premiums for buying a coin. A $10 premium on a bar looks pretty good.

So if you want small quantities that are easily transported and stored, buy coins. If you have lots of money and want to pay the cheapest price per ounce, buy bars.

I will spend some time this weekend calculating all of my stink bid prices to re-enter the market.

Before I go, how about that fake apology from Tiger Woods? I may screw up by selling options when I should be buying, but that pales in comparison to that guy. Here’s a great take on Tiger Woods and his fake apology.

But enough about Tiger; back to my calculations; see you next week.

I’m betting on the latter, but what do I know?

Over the past two weeks I bought puts on the S&P 500, and sold them at a profit, then bought calls, and sold them at a profit, and then on Thursday I went short again, picking up a few shares of RSW – Rydex Inverse 2X S&P ETF, on the expectation of further weakness. These trades are all pure gambles, not with any real money.

I continue to hold my gold and silver positions, and this week I added a new stock: PBG.TO – Petrobank Energy and Resources Limited. (Full disclosure: this is NOT a Dines or Casey stock, so you can blame me for this one). This is an oil play, both in Saskatchewan and Columbia (although I assign no value to the operations in Columbia). It’s an interesting story, with upside. They have some interesting technology for exploiting the oil sands, that is already working, so this is not a start up or an exploration play. Even better, they have recently restructured their balance sheet, converting debt into equity. I’ll leave it to each of you to do your own due diligence, and as time permits I may have more to say on this in the future. In short, I want to diversify away from just gold and silver, so other resource stocks will be added to the mix as time goes on.

Speaking of diversification of one’s portfolio:

The only other story in the past seven days was the 2010 Superbowl, and the only real story (unless you are a New Orleans fan), was my new favorite commercial, from ETrade. I’ve watched it a dozen times, and each time is funnier than the last. But I guess that’s just me.

My gut still tells me that we are in for interesting and volatile times over the next few weeks. Perhaps it will be a terrorist attack, or a renewed outbreak of H1N1 at the Vancouver Olympics. (They got off to a horrible start with the death of a luger in a training run on Friday). Perhaps it will be something from Iran, who keep making noises. Perhaps it will be something else.

Perhaps I worry too much.

If so, I spent Friday skiing with my boys, and I’m taking the rest of the weekend (and the Family Day Holiday here in Ontario on Monday) off to visit with family and friends, so perhaps I will be less cynical when I return to these pages next Saturday.

See you then.

Thanks to sidewinder on the Buy High Sell Higher Forum for this chart of Friday’s action (the original image is here, or in his post on the Forum).

Strange, eh? 10,000 on the Dow (or 1,000 on the S&P 500) are important psychological barriers, and as the Dow fell under 10,000, all of a sudden, massive buying ensued, and the market closed slightly up on the day.

I guess most of the luck came from the jobs report; everything is great there. In the United states there are just under 130 million workers. Unfortunately that’s the same number of workers there were in 1999, and the working age population has increased by 29 million during that time period. Employment dropped by 5 million in 2009, and that was after billions in stimulus spending. That doesn’t sound good to me.

More numbers: The S&P 500 peaked around October 5, 2007 at 1,557, then fell so that by March 9, 2009 it was at 676, a drop of 56%. From that 676 level to the peak on January 19, 2010 at 1,150 the market recovered 70%. Or, stated another way, the market has recovered about half of what it lost in the 2007 to 2009 crash.

So the market miraculously recovers with two hours to go on Friday, to close just about 10,000 on the Dow. The market has recovered 50% of it’s losses from the peak. Sounds either like a manipulated market (probably), or a technically driven market (also probably). If it’s technically driven, a 50% bounce probably leads to at least a 50% retracement (so if the bear market rally has lifted the market from 676 to 1,150, a 50% retracement would take us back to around 913 or so on the S&P).

So what’s coming? As I said last week, the eerie silence will continue until we break one way or the other. I assume Monday and Tuesday will be up days, and then later in the week we will trend downwards, since that’s what’s been happening the last few weeks. I bought some puts a week ago, and sold them on Friday at a slight profit, and on Monday I may by some calls, hold them for two days, sell them, and repeat the process. Of course I won’t do it with real money; just pennies, for gambling purposes only. The bulk of my money will remain in cash, and will be deployed on better bargains in the coming weeks.

Gold

As for gold, we’ve had a correction, eh? From $1,225 to $1,065 in just over two months, or over 13%. Is the correction over? Who am I, Nostradamus? I have no idea.

If you want a guess, I would assume that support exists around the $1,050 blue up trend line, or around the 200 Day Moving Average around $1,018. So, my guess is $1,000 is good support, and a few dollars below that wouldn’t bother me in the least.

As for gold stocks, here’s the chart of G.TO – Goldcorp Inc. over the last two years (click on the chart to expand it):

Clearly the gold stocks have corrected more than gold itself, as is usually the case with leverage. The decisive break below the 200 DMA has already happened, but with the bounce on Friday the bottom could be in. Or not. My plan is to continue to wait. I will hold the stocks I own, and I will cover them (selling near term call options against what I own). I’ve sold February calls against all of my optionable gold and silver stocks, so if the market goes on a run in the next week I will be leaving money on the table. So be it, at this point I would rather protect against the downside.

I can’t ignore the negative news, so on the sidelines I will stay.

Enjoy the Super Bowl; I’ll see you next week.

Year to date the S&P 500 is down 3.7%, and the Dow is down 3.46%. Most worrisome is that the Dow has now closed six straight days under it’s 50 day moving average (click the chart for a larger view):

Looking back over the last year, the index was below it’s 50 DMA for 8 days in July, and 7 days in November, and that was it. So, if we don’t see a significant rally in the next day or two, the existence of at least a minor correction will be confirmed.

As for gold, it hasn’t fared much better:

Since peaking at over $1,200 at the start of December, it has now fallen to $1,081. That level doesn’t worry me, since the uptrend line remains intact, and it appears to be nothing more than a healthy correction. We are probably at a good support level now, but $1,025 and $975 could also be support levels. The picture on gold stocks looks even worse.

G.TO – Goldcorp Inc. is now trading at $36.24, well below it’s 200 DMA of $41.11; support may not arrive until $32.50, or even $20.

So what to do?

Gold stocks look like great buys at these levels, but a market crash will take them down with the general market, so a prudent hoard of cash seems logical to me. I am currently 61% in cash, which perhaps should be a bit higher given the potential for general market weakness ahead.

And yes, I read the happy talk headlines that U.S. fourth quarter GDP was up 5.7%, so everything is great. That’s what the market thought in the first hour or two, but then reality set it, which is what makes me nervous.

Of course the numbers are not as great as reported. Inventories were drawn down, and if you remove the inventory adjustment GDP was up 2.2%; good, but given the stimulus spending, certainly not great. With the trillions in stimulus spending, how is it possible that GDP was not up 10%, or 20%, or more? Presumably the answer is that we are in the middle of a massive credit collapse, and that will pinch off any possible recovery.

This week I got a letter from my credit card company advising me that the interest rate on cash advances was going up from 19% to 22%, due to “market conditions.” Given that interest rates are near zero, it’s obvious the market conditions they speak of are huge defaults; it has nothing to do with interest rates. (For the record, I’m not stupid. I don’t take cash advances from my credit card, and pay my balance in full every month). And let’s not forget that unemployment is still stubbornly high.

That sound you hear, my friends, is an eerie silence. President Obama’s State of The Union speech didn’t save the markets, because speeches don’t accomplish anything. High government spending, so far, has also accomplished nothing. Times are bleak, but the media is still giving us happy talk.

I will watch market action closely this week. Long term I know that gold, and gold stocks, will be higher, so I might put in some stink bids this week, since the time to buy is when others are selling. But it is also time to be cautious, so I won’t invest any money that I will actually need for the next year or two, because further market weakness could carry my stocks lower before they recover. Those are my thoughts, such as they are.

Other than that, we can sit back and listen to the silence.

Before we leave Dines, based on the comments I’ve received, both on-line and offline, it appears that most of you agree with my general impression that Dines may be good at spotting tends, but his lack of substantive fundamental analysis leaves him as nothing more than a “pump and dump” artist.

On the Buy High Sell Higher Forum, sidewinder had this to say in response to last week’s commentary about The Dines Letter:

JDH there is no way you were too harsh to this peddler of “Newsletters” in fact, you were quite fair in my estimation. I make no bones about my attitude towards him as you may well know.

As to the “original Rare Earth” bug business, someone brought this up a couple years ago I think on this forum. Michael Berry has been touting Rare Earth companies for some time and the same companies which Dines “suddenly” discovered, Berry has actually visited and posted photos in his morning reports long before. So the old Blowhard now is staking claim to being the “original Rare Earths bug”. Disgusting self promotion.

Unsophisticated, Inexperienced investors with money seek the knowledge and advice of experienced, sophisticated advisors. When it’s all said and done the one with the experience has the money and the one with money has experience.

Wow. I wouldn’t want to get on sidewinder’s bad side……

Now, on to the pressing matters at hand. Has the long awaited correction started?

Well, duh:

A 4% drop in a week, and over 2% on Friday alone, certainly looks like the start of a correction. The Dow is now down almost 2.5% on the year. Most troubling is the decisive drop below the 50 day moving average.

As the chart shows (click to enlarge), the 50 day moving average has provided support, particularly in October and November of 2009. As the circled section shows, we did break below the 50 day moving average for a period of time back in July, but the market recovered, so this may not be fatal. But who knows. A break of the 50 day moving average is never a good sign if you are a bull.

What about gold? Same story:

Gold is now more than $100 below the 50 day moving average, and depending on how you draw the uptrend line it can be argued that gold is now down to the uptrend line support established back in November and December of 2008.

What are my thoughts on gold?

Looks like a great buying opportunity. Gold has gone from just over $1,200, to just under $1,100. That’s a big discount, and since nothing fundamentally has changed, something that was a good buy at $1,200 is now an even better buy at $1,092. The RSI, which was up well over 80, is now down to a much safer level of 40, which is traditionally an excellent buy point. As well, while the general market got hammered again on Friday, the big cap gold stocks held up quite well.

We know from the past that when the market gets creamed, everything gets creamed. Investors sell their good stocks to cover their margin calls on their losers. If there is further weakness, I have no desire to jump in to quickly. (I was the guy who predicted the DOW would fall to 9,000 by March 31, 2010).

So, my plan this week is to place some stink bids to pick up some bargains, but I will remain largely in cash in anticipation of further weakness.

Thanks for reading; see you next week.

DISCLAIMER: I am not an employee of Dines, or Casey. I have never met either or them. Or talked to them. Or e-mailed with them. Or seen them in person. I have no financial relationship with either of them. I don’t get paid for writing this stuff. However, if Casey wants to advertise on this site, or pay me a lot of money, that would be great. Send me a message and we can talk. Until that happens, these are my thoughts, rambling and disjointed, but unbiased.

Doug Casey and Casey Research

Doug Casey is an interesting guy. Like Jim Dines, he appears to be single, and has a very big ego. (Having a big ego is not a criticism. Obviously I have a huge ego, or else I wouldn’t take the time to write my thoughts on this blog every week, in the expectation that someone actually cares to read them. But I digress).

He is the founder of Casey Research, which publishes half a dozen different investment newsletters, including:

• The Casey Report, the “big picture” on the markets, and life;
• Casey’s International Speculator, for speculative stock picks, mostly resource based;
• Casey’s Gold & Resource Report, formerly called Big Gold, focusing on large cap gold and resource stocks;
• Casey’s Energy Report, covering smaller cap, speculative oil, gas, uranium and energy related stocks;
• Casey’s Energy Opportunities, covering conservative energy investments (larger cap stocks, ETFs, etc);
• Casey’s Extraordinary Technology, covering, you guessed it, technology stocks, and the industry in general.

In addition to these traditional, once monthly newsletters, Casey Research also publishes two “alert” services, that are published sporadically, for traders wanting to make quick, speculative investments:

• Casey Investment Alert, highly speculative, small cap stocks, primarily resource based; and
• Casey’s Trend Trader, suggesting trades in the futures and options markets.

Casey Research also publishes two free daily publications:

• Casey’s Daily Dispatch, commenting on markets, and life, (you can subscribe here) and
• Ed Steer’s Gold & Silver Daily, covering, obviously, precious metals (you can read it here).

Finally, on a weekly basis they publish Conversations With Casey, also free (you can read it here).

So, compared to The Dines Letter that publishes 17 pages every three weeks (of which less than half the pages are original content), Casey Research publishes well over 200 pages of unique content every month (sometimes a lot more). Of course, to subscribe to all of these publications costs many hundreds of dollars a month, which is more than the $295 per year you pay for The Dines Letter. Dines also has an Interim Warning Bulletin service for $249 per year.

So, what’s the difference between Dines and Casey, if they both have huge egos?

The biggest difference is that Casey’s stock recommendations are always accompanied by actual analysis. They use what they call the “Eight P’s” to evaluate a stock:

• People (ie. management)
• Property (the property they are mining)
• Push (good things that will happen in the near future to push the stock higher)
• Promotion (good investor relations promoting the stock)
• Politics (is the company in a mine-friendly country, or a country run by a dictator)
• Paper & Phinancing (shares outstanding, debt on the balance sheet)
• Price (under valued or over valued)

It is not uncommon for a new stock recommendation to be accompanied by five or six pages of detailed analysis of the Eight P’s, including comments on management, the mine, the country, and other relevant factors. All recommendations carry specific buy prices. In fact, over the last few months, many of the buy prices have been stink bids, on the expectation that market weakness would provide good buying opportunities.

So there’s the difference between Dines and Casey: Dines says “buy this stock, just do it because I said so”; Casey gives you pages of analysis, written by an analyst (he has 40 people working for his company) who has actually visited the mine in Peru, or wherever, with detailed reasons for the buy recommendation.

Does this mean that Dines is simply a “pump and dump” sham artist, and Casey is some godlike creature, interested only in my well-being?

No.

Casey, for all I know, could be a pump and dumper too. It’s not inconceivable that he could be in cahoots with management, buy shares of a company cheap, and then write a glowing research report, with the Eight P’s, and lots of facts, and then start selling stock once the newsletter is published. Pump and dumpers can wear suits and talk pretty too.

(Casey would respond by telling you that all employees are required to give advance notice before they sell a recommended stock, so they only sell after they have given subscribers the chance to do so. Dines has no such policy).

Ultimately whether Dines or Casey are getting kick backs from management is not really the issue. The issue is: do their picks go up?

Here’s the chart of the yearly performance of Casey’s International Speculator:

• 2004: 26.2%
• 2005: 14.5%
• 2006: 34.1%
• 2007: 5.7%
• 2008: -45.2%
• 2009: 67.9%

From 2004 through 2009 that’s a 103% gain, or 188.5% compounded. Obviously that performance would have been much better were it not for the 45% loss in 2008. Oh well, that was a bad year for everyone, as I recall.

The Casey Report published it’s 2010 forecast in it’s January issue (a full 66 pages, so longer than the Dines effort). After a two page introduction, there was a 15 page article by Chief Economist Bud Conrad on the Direction for the Economy in 2010. Mr. Conrad’s predictions for 2009 were very accurate, and he foresees a not-great economy in 2010. The next 11 pages were a “How To Invest” feature, with stock recommendations, followed by 2 pages of charts.

Then it gets interesting. There was a three page “Obama Watch” article, followed by a 32 page “Special Report” on Expatriation. Yup, expatriation, ie. how to get yourself out of the U.S. and into a more safe environment.

Doug Casey wrote a book, The International Man, back in 1976, and his official bio states that he “has lived in 10 countries and visited over 175″. He is a big fan of having roots in many different places, so that if there’s trouble in one country, you have another place to go. The question, of course, is as a reader do you want to read 32 pages on how to leave the U.S.

His basic premise is that if the government does what it did in the 1930’s (making holding gold bullion illegal) and starts confiscating it, you are safer if you have some gold coins you can carry with you, and you have some bullion stashed in some safe foreign country. You should have investments, and a residence, in more than one country, so if things get bad here, you have a place to go.

Here’s the thing: this type of thinking impacts on your investment decisions. If you believe that Obama will curtail freedom, then you will be reluctant to invest in the U.S. That negative approach cost Mr. Casey’s subscribers the chance at big gains in 2009 as the market recovered. In 2009 Casey was largely on the side lines, with a model portfolio of 1/3 gold bullion/coins, 1/3 equities, and 1/3 cash. In hindsight the correct strategy for 2009 was 100% equities. (Of course his strategy may be entirely correct for 2010).

So what’s my take on this? I believe it’s important for investors to consider alternate viewpoints. I believe you should watch the government cheerleaders on MSNBC, and I believe you should also read the “sky is falling” commentators like Doug Casey. Ultimately one group will be proven correct, and the other incorrect. Only time will tell who is right.

I personally believe that government deficits will balloon out of control, and inevitably we will have higher interest rates and higher taxes. Higher taxes, almost by definition, leads to less personal freedom. It is quite possible that as the entrepreneurial spirit in the U.S. wanes, foreign countries may be more attractive.

But, does that mean I want to stash gold under my mattress, and build a house in Argentina? Unfortunately neither of those options are particularly practical.

(As a side note, Doug Casey is a big fan of Argentina. He has a real estate development there. I have a friend who is from Argentina, and still owns a farm there, and returns there each summer. He now lives in Canada, primarily because Argentina is not paradise. He tells me there are many places in Argentina where you don’t go without a gun, which doesn’t sound like paradise to me, but I’m Canadian, and I don’t know anyone who owns a hand gun, so perhaps I’m out of touch).

So should you subscribe to Casey publications? That’s up to you.

If you want lots of detail on the stocks you are going to buy, Casey is a good choice. If you want general economic commentary on interest rates, the economy, and precious metals, Casey is also good.

If you are offended by strong political views, even presented in the guise of helping to explain the world so you can make better investments, Casey is not for you.

Back in November, Doug Casey in Conversations with Casey expressed the radical view that charities are “not worth the cost of the gunpowder it would take to blow them to hell.” He believes the most productive use of wealth is to create more wealth; build companies, which creates jobs, which is the best way to help people. He believes that charities exist to make the giver feel good. “I gave to a charity, so I don’t need to do anything else” (my quote, not his). He believes that the overhead consumed by charities is a waste, and we would be better off without them.

I don’t disagree that there are charities that should not exist, but given the recent disaster in Haiti does Doug Casey believe we should simply let them all die? We should not help them? That seems like a very harsh view of the world. I hope Mr. Casey never finds himself, his friends, or his family ever in need of a helping hand.

On January 20, 2010 Doug Casey, in his Conversations with Casey weekly feature, announced his “gut feel” that the markets will crash in 2010. After this week he’s looking pretty good, but gut feels are probably not the most scientific method for making investment decisions.

Over the past two years I have invested in a number of private placements recommended by Casey, and while many of them have been busts, overall I have made a significant profit (as a general rule I don’t cover private placements in this blog, since they are generally open only to qualified investors). Many of his stock recommendations have also turned out well. So, overall, I am not dissatisfied with his recommendations.

There is overlap between Casey’s and Dines’ recommendations, particularly on the large cap gold stocks. (It doesn’t take a genius to determine that there are only a handful of large cap gold stocks, so it only takes about ten minutes of analysis to create that list, and then pick the strongest performers).

Again, I’m not getting paid to write this, but if you are looking for a different perspective, start with the Casey free publications to get a sense of their approach, and then decide for yourself if it’s worth the cash to start paying for his advice. At least, compared to Dines, you get to read some actual analysis, and that alone is probably worth the price of admission.

Why? Why I am commenting on a newsletter written by a man who many of my readers would say is out of touch with reality, given the beating his stocks took in the 2008 debacle, while all the while he insisted on holding on, an “iron hand on the tiller”?

Two reasons. First, if you look at the list of Most Popular Posts at the bottom of the right hand navigation menu of this page, you will see that the most popular post was my posting from January 15, 2008 entitled: The Dines Letter – Thoughts on Mr. Dines and the Annual Forecast Issue. (For you computer geeks out there, the list isn’t really accurate, because most readers either read the site by going to the home page, not a specific page on the site, or through an RSS Reader, which doesn’t count their views. However, for people who found this site by searching for a specific topic, it is the top ranked post of last year, presumably because a Google Search for The Dines Letter rates that post just behind The Dines Letter website itself). So, if that’s what you want, that’s what you get.

Second, I found the issue to be quite interesting.

But before I give my specific comments, allow me to provide some background.

I have subscribed to The Dines Letter since at least 1999. There were many years where his picks earned me a great deal of money. In fact, as my portfolio performance page indicates, the 52% profit I made in 2005, and the 94% profit I made in 2006, were due largely to Mr. Dines’ picks. I suppose you could make the point that those were great years for the markets in general, and anyone with a dart board made money in those years, so perhaps Mr. Dines was just lucky, but I am willing to give credit where credit is due. I followed his picks, and I made money.

Of course I lost 34% in 2007, and 45% in 2008, and many of the stocks I lost on were also his picks. I was only slightly better than break even in 2009, since I was in cash for most of the year.

The classic example, I believe, of a bad pick was what I described on July 28, 2008 in my post on Volatility, Dines and Pinetree:

I can’t pass up the opportunity to quote James Dines from yesterday’s The Dines Letter. He spends most of the letter explaining that markets go up and down, so even if markets go down for a few years that’s no reason to sell. Here’s the classic quote:

“Our recommendation of PNP.TO – Pinetree Capital Ltd. at 0.795 cents (Cdn) subsequently rose 1,931% to $16.15 (Cdn) nearly two-thousand percent in only 17 months, such that a $10,000 investment would have risen to $203,145.”

Unfortunately he didn’t finish the thought, which should have gone something like:

“Ever since that peak I have had a Buy recommendation on Pinetree. I even moved it from my speculative list to my “good grade, moderate risk” portfolio. As of today it is trading at $1.82 (Cdn), so if you had followed my advice and bought it at $16.15, you would have lost 89%, such that an investment of $200,000 at that time would be worth $22,538 today.”

Even better, there’s a letter to the editor in this edition from some guy who spends the first 20 lines of his letter praising Mr. Dines, but then asks why one would continue to hold a stock that adds no value to the companies it invests in (Pinetree is basically just a venture capital firm), has no technical indicators to recommend buying, and has no truly great assets.

Dines then spends half a page explaining that yes, some companies go down, but if their investments start paying off, it will go up. He ends with the classic “You have lost nothing if you own the stock and the price fluctuates.”

Yeah, I guess that’s true. But if you had sold a few dollars ago, the money could have been redeployed and earning you money. It’s called opportunity cost, and it is real.

For the record,
PNP.TO – Pinetree Capital Ltd. is currently trading in the $2.17 range, so holding the stock for another year and a half from the $1.82 it was trading at when I wrote those words in July, 2008 would still not have produced much of a gain.

So what do I think of Mr. Dines? What do I think having both made money and lost money based on his advice?

I am of the view that he is good at identifying big picture trends, like the bull market in gold, uranium, and perhaps rare earths. He is not good at identifying massive market crashes. He is good at identifying when to buy; he is not good at determining when to sell.

If Mr. Dines read that last paragraph, he would say that “it’s up to the reader to determine when to sell; sell small percentages all the way up, to get your original investment back”. That’s fine, and I don’t disagree. However, if a stock is listed as a “buy” or a “hold”, that does not mean “sell”, and a stock that fell 89% should have been sold long ago. If he won’t advise his readers to sell when a stock drops 89%, when will he ever advise a sale?

He doesn’t have a great track record over the last few years. In his 2008 Annual Forecast Issue he spent the first 15 pages talking about how great an investment uranium would be over the next year or two. He was exactly wrong, and anyone who bought what he was advocating in 2008 lost a lot of money.

(Peter Brimelow selected The Dines Letter as the newsletter of the year in 2006. The following years were disasters until 2009. But Brimelow is back, selecting TDL as newsletter of the year for 2009, presumably due to a recovery from the previous horrific results).

I also worry that he has close relationships with the managements of the companies he recommends, and is therefore profiting from promoting a stock in ways other than simply profiting when a stock goes up. For example, it is not inconceivable that he could take a position in a company, and perhaps get warrants or options as well, and then tout the stock. I have no proof that he does this. But it makes me queasy nonetheless.

Part of my queasiness is derived from the disclaimer at the end of every The Dines Letter:

The Dines Letter, James Dines & Co Inc, James Dines
and their respective entities, family, friends, employees, associates, and others may have positions in the securities mentioned, or discussed, in this publication. James Dines, The Dines Letter,
James Dines & Co Inc, and their respective officers, directors, shareholders, employees and affiliates will from time to time, buy or sell the securities (including options and derivatives of such
securities) mentioned herein, without notice and if this concerns you, then do not follow our recommendations. These positions may involve debt and/or equity positions of every conceivable
nature whatsoever, including, but not limited to, options to acquire positions at below market prices.

I have no objection to a newsletter writer buying shares in the companies he recommends. In fact, if he isn’t willing to put money in shares that he is recommending, why would I want to buy them? However, holding “options to acquire positions at below market prices” may be perfectly legitimate, or it may be where the newsletter writer is actually making his money.

My final criticism of his methods is that he very rarely explains the rational for buying a particular stock. He generally simply adds a stock to one of his lists, with no detailed explanation. Other newsletters, such as Casey’s, give very detailed explanations of management, the product, financing and so on to prove they have done some research, and to allow the reader to make their own decisions. Dines just says “buy this”, leaving us to wonder if he has done a detailed study of the charts, or whether he’s simply getting a commission for recommending a stock. More talk about details, and less talk about nebulous “high states” would make for a more informative letter.

The Dines Letter 2010 Annual Forecast Issue

Enough background, let’s talk about the 2010 Annual Forecast Issue.

WARNING: I know that I will get a bunch of posts on the Buy High Sell Higher Forum telling me that I should not be disclosing anything from his newsletter, since I am stealing information from paying subscribers. I agree. However, here’s the fine print, from the bottom of the last page of every The Dines Letter:

The Dines Letter may not be reproduced in whole or in part without explicit permission in writing from a
duly authorized officer of James Dines & Co Inc, except by established publications that wish to quote brief passages for purposes of review.

So don’t worry. I’m not going to talk about any of his stock recommendations (most of which have remained unchanged for the last few years anyway. In fact, of the 44 stocks that appeared on his supervised lists in the 2008 Annual Forecast Issue, 28 still appear on those lists today. Given the intervening stock market crash, that’s remarkable).

Here are my thoughts:

I found the first page to be absolutely remarkable. A review of the last ten years of his newsletters reveals a common writing style. He always refers to himself in the third person. In 2008 he used phrases like “TDL marches to it’s own drummer”, and “as we pondered” and “as we contemplated.” He likes to refer to himself as “your editor”.

What was most remarkable in this year’s issue was that he, for the first time ever, has used the first person. On page one he says they “laughed when I first dared to recommend gold”, they “were furious when I went to China”, “I refused to be stared down” and “I mystified many be declaring that I’d discovered a new Major bull market.” On page one he uses the first person “I” and “my” 18 times. For the last 50 years this guy has written in the third person, and now, after 50 years, he uses the first person 18 times on one page! What gives?

We know that Mr. Dines is a shameless self-promoter. In fact the first sentence of this issue is self-congratulatory:

It is not easy to accept that the first decade of this new
century has already hurtled past, but we are grateful that
our Goldbug! book was our glittering reward.

Yeah! Look at me! I wrote a book!

Throughout every The Dines Letter he has always referred to himself as the “Original Gold Bug”, and the “Original Silver Bug”, and the “Original Uranium Bug”, and the “Original Rare Earth Bug”, and whatever else he was the first to discover. (I think people have been investing in gold for over 5,000 years, but let’s not quibble on that one).

But this time it’s different. It’s not just patting himself on the back. He is not using the third person to tout his accomplishments. He is saying “I”. Why the change? I have some theories.

First, it could be that Mr. Dines didn’t actually write the lead article. I can’t find any reference on the internet to his age, other than Brimelow’s article referring to him as “well over 80.” I guess at “well over 80″ it might be time to hand over the reigns to someone else, and someone else would have a different writing style. However, by page six he has reverted back to his previous third person style, which is indeed curious. If someone else wrote the letter, would they not have written the entire letter? Or does the introduction get written last? Mr. Dines wrote the letter, and then someone else finished it off by writing the first six pages? I don’t know.

James Dines has always closely guarded his privacy. We don’t know how old he is. We don’t know if he is married or single. He did let slip on page one that leaving his Wall Street job “stunned a prospective father-in-law”, so at some point in the last sixty years we know he at least had a date. But that’s it. We know no other personal details.

Could his insistence on the chest-thumping use of the word “I” be his swan song, his final argument for immortality amongst newsletter writers? Is he giving us his resume, so we will remember him forever? Is he writing his own obituary?

I have no idea.

I do know that his arrogance remains intact. Only once in the 35 pages issue does he admit he was ever wrong, and then only in one sentence, buried on page 3:

Nonetheless, I’m lucky but certainly not infallible, as I
later did not take the huge profits built up in uraniums
because I didn’t see any connection between crashing real
estate and uranium mining.

He goes on to admit to the realization that in a general market crash, everything crashes; the good and the bad. Yes, that’s what a crash is, and you would think someone with 50 years experience would realize that.

Another interesting point: on page one is a box with the words “Double Issue”, and indeed it is; 35 pages as compared to the usual 17. Of course the 2008 issue was a triple issue at 54 pages, as was the 2009 issue at 51 pages, so I guess times are tight even in the newsletter business; annual forecast issues aren’t what they used to be.

As for the actual forecast in the issue, it was exactly as expected. If you have read any of his work, you will know the themes by heart:

• The government prints fiat money, which will inevitably lead to the collapse of the currency (which he has predicted for years);
• Gold will go up;
• Uranium will go up;
• Rare earths will go up.

I don’t disagree with any of those conclusions. He did have a brilliant description of government deficits:

Do you know how much money one-trillion dollars is? If
you spent one-million dollars every day, a million dollars
went through your hands every single day, back to the birth
of Jesus, you could not spend one-trillion dollars. And the
American Government’s deficit for the year 2009 alone was
1.4-trillion dollars.

Well put.

So, after this long winded post, what do I think?

I think spotting trends is great, but you can only profit from a trend if you know the time elements associated with a trend. Saying that we will have deflation, or inflation, at some point in the future is no actionable intelligence. Saying that uranium will go up is only valuable information if you say “uranium will go up next week, so buy this stock this week.” It’s great that he predicted currency devaluations back in 1980, but being 30 years early is of little help to me.

In fairness, we are in un-charted territory, and I don’t know of any guru who has a stellar track record over the last few years.

Clearly I have been completely wrong, missing the crash of 2008, and missing the recovery of 2009.

But then again, it doesn’t cost you a penny to read my ramblings, and I have never pretended to know anything. I’m just some guy who gets up early on Saturday morning to pound out my thoughts, entirely for my own benefit, to clarify my thinking and assist me in deciding how to invest. I have a big ego, but not so big that I think I’m brilliant.

So why do I still subscribe to The Dines Letter, even though I haven’t followed his advice for at least two years? I subscribe because I have always subscribed, out of force of habit more than anything else. And I read it because it’s important to get insights from numerous people. I agree that Mr. Dines is good at spotting trends, so his work is valuable for that purpose. I don’t believe his work is valuable for making sell decisions, so for that, you are on your own.

I am already on record with my predictions for 2010 (so whatever I predict, do the opposite). After reading Dines Forecast issue, I’m not really sure what he’s predicting, so we will only know when he tells us whether or not he was right.

I think a printed newsletter is now old technology. He should create a website, give subscribers a password, and post his thoughts there.

Am I too harsh on the old guy? Is it unfair for me, a non-expert, to criticize a guy who has had success over a 50 year period? Perhaps, but this is my blog, so I get to ramble as I see fit.

I’ve enabled the comments section below, and you can comment on the Dines section of the Forum, so feel free to disagree with me as you see fit. See you next week.

I know what you want, and I’m sorry, but I just can’t give it to you.

If you want happy thoughts, read the main stream media.

Read Newsweek, with their story about Why losing 84,000 jobs last month isn’t as bad as it seems. They will tell you that:

The recovery, frustratingly slow as it seems, looks better through the rearview mirror than through the windshield. Consider how far we’ve come in the past year. The U.S. economy, which shrunk at a 6.4 percent annual rate in the first quarter, grew at a 2.2 percent rate in the third quarter. That’s a turnaround of 8.6 percentage points in six months. Looking back, with the government having lifted many of its market guarantees, the price of the financial rescue was much smaller than originally thought—and it continues to shrink with every TARP repayment.

Huh?

The United States Department of Labor issued their non-farm payroll report on Friday morning, and, to quote their release:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent

Sounds good, right? According to the government, employment “edged” down, and “the unemployment rate was unchanged”, so everything is great, right?

Right?

Here’s the truth: The results were horrible.

Horrific.

For the last year governments around the world have spent trillions of dollars to pump up the economy, and to create jobs. The payroll survey, which is essentially a survey of large companies, showed a massive drop in employment, which is bad, since big businesses have better access to credit, and to global markets (so if the economy is slow in the U.S., they can compensate by selling internationally). The true picture of the American economy comes from the Household survey, which is biased towards smaller businesses that don’t have the same level of access to public equity markets, and foreign customers. That survey, if I am reading the numbers correctly, shows that employment fell by 589,000 in December (as compared to November), for a combined drop of around 3 million in the last half of last year.

Yes, I know, the weather was bad last month, and that cost some jobs. Somehow I don’t think it cost half a million jobs last month. Here’s a quote from the survey:

In December, both the number of unemployed persons, at 15.3 million, and the
unemployment rate, at 10.0 percent, were unchanged. At the start of the recession in December 2007, the number of unemployed persons was 7.7 million,
and the unemployment rate was 5.0 percent.

Again, I may be reading these tables incorrectly, but it appears that there were big job losses in construction, manufacturing, retail, wholesale, transportation and real estate, which is pretty much the entire economy. Except for health and education; that went up a little bit, so I guess we still have doctors working. And teachers.

Of course the number of “discouraged” workers is also up, and without that increase the unemployment rate would have been even higher.

The average duration of unemployment is now over 29 weeks, which is an all time high. That’s probably why workers are getting discouraged, and why the participation rate in the economy is at it’s lowest level since the mid 1980’s.

There are roughly the same number of people employed now as compared to ten years ago, but the population (of working age) is about 10 million bigger, so we have big unemployment. And the only way we won’t have big unemployment is if the economy creates a lot of jobs. So if we can create 20 million jobs in the next five years we will be back to even. But the economy has never, even in the boom times, created that many jobs in that period of time. So good luck on that one. (We need to create 100,000 jobs per month just to keep up with population growth, so losing jobs is very bad).

So what this means, I assume, is that the government will have to keep “stimulating”, and the Fed will have to keep interest rates low. And that’s why the stock market was up on Friday. Even though the economy is not recovering (it’s getting worse), investors are happy because things are so bad the government will have to save us, and that’s good for the stock market.

Huh?

Yes, in backwards world, things are bad, which is good.

So how will this play out? In one of two ways, I assume. Either the weak economy, with no-one working, will cause deflation, or the massive government spending will cause inflation. I’m betting on inflation. So I’m betting on gold.

My current portfolio is 58% cash, because I still expect further market weakness, and I want to be prepared. The rest is primarily gold and silver stocks. I have some blue chip gold stocks:

• AEM.TO – Agnico-Eagle Mines Ltd.
• CEF.A.TO – Central Fund of Canada
• K.TO – Kinross Gold Corp.
• G.TO – Goldcorp Inc.

And blue chip silver stocks:

• PAA.TO – Pan American Silver Corp.
• SLW.TO – Silver Wheaton Corp.
• SSO.TO – Silver Standard Resources, Inc.

And some speculative stocks (good juniors, with some resources, that will hopefully be take over targets in the future):

• ADM.V – Andina Minerals Inc.
• BBR.V – Brett Resources Inc.

(Note that I am a Canadian, so at the moment all of my holdings are on Canadian exchanges, because I don’t want to be exposed to any currency risk, given the precarious state of the U.S. dollar. If I was American I would presumably be holding the U.S. versions of some of these securities).

I plan to add more juniors to the mix on any weakness, but so far this year there hasn’t been much weakness, so my stink bids have yet to be filled. If there is a big run up this week I will probably do covered writes on my majors to lock in the gains in advance of options expiry after the close on Friday January 15. In fact, if there is strength on Monday and the premiums are decent, that’s exactly what I intend to do. (Note: they are changing the option symbols in Canada this weekend; the symbol will now also include the year, so no order entry will be available this weekend for options while they switch over their systems).

Beyond that, we sit, and we wait. I expect a 20% correction at some point this year, but I don’t know if it will be this week, this month, or six months from now, so buying puts, or RSW – Rydex Inverse 2X S&P ETF, is a pure gamble that I would prefer not to take. I’m up 3.2% in 2010 so far, which is about my performance for all of last year, so I have no objection to staying conservative and locking in profits.

Next week I’m planning a special feature on investment newsletters (Casey and Dines, primarily), so if nothing happens in the market this week, that will be rant for next week. Thanks for reading, and see you next week.