Poor Richard’s Report
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My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth while providing needful income is my primary goal in these unsettled times. I have been given the ability to evaluate, study, and interpret world and national events and their influence on the future of the financial markets. This gift allows me to meet the needs of individual and institution clients.
AS I SEE IT
O.K. Here is some straight talk about the economy and the stock market. The economy is bottoming out. Notice I said bottoming, not rebounding. Think of it this way: you own a swimming pool that has sprung a pretty good leak. By the time you have stopped the leak you have lost 5% of your water. The problem is you have been experiencing a dry spell and your reservoir (credit) is almost empty. You now have just a glass full of water to refill your pool, just one cup at a time, slowly.
Now, has our Congress come to the rescue just in time? They have redefined the credit card industry, which makes it a little harder for the companies to gouge us. They left the interest rates the same. Before 1974 it was called USURY. That was and should be a very bad word. Who do they think they are conning? We are not that dumb. Both parties are on the take. They use a once honored term- Lobbyist. Today that stands for bribery. Everyone in Washington feels they can just keep on printing money. If we were on some form of a gold standard, where excessive debt meant a weaker dollar and less trade, they would think twice about padding their own boudoir.
I am not a true economist and I must rely on sources that I know are competent. I have studied and learned from them for over 48 years.
One thing is very clear. When a US Treasury bill has a negative yield; we are in deep trouble. The last time that happened was 1932. This means big money is scared and they are paying the government to hold on to their money. Today, May 29, 2009 the 2 year Treasury note is yielding 0.97%. Buying bonds today is an instant loss.
When most bonds were issued, it was when business was booming and the revenues at that time supported the intended interest rate. Now with business at a snails pace the debt coverage of these bonds is in serious jeopardy. Debt coverage means how many times the liquid assets can cover the bond interest payments. The greater the coverage on the bond interest payments – the higher the rating. If a bond cannot pay it’s interest payment then the whole company is in default and they have to find some way to pay the bondholders. They have first crack at a corporation’s assets. What is left goes to the preferred shareholders and common stock holders get the crumbs. So buying a bond fund or any instrument that holds many bonds should be avoided. Even the managers are not sure which bond will go down next. You should only buy bonds, if you must, as individual issues. This makes insurance companies very suspect.
General Motor’s bondholders are getting a royal shafting by being made to accept common stock or “funny money”. This is, in theory, to protect the pension funds, which still own the preferred and common stock. Balderdash! I believe this will end up in the Supreme Court of the United States.
Don’t get me wrong; buying bonds at the appropriate time can reward an investor handsomely. Timing is everything.
Now here is the really bad part. Don’t fret because at the end of this letter I have the answer for you. The stock market has not bottomed in my opinion. In March I called the bottom, and we have had a fantastic rally, but now I have second thoughts. I know we will test the lows by October of this year. Whether they hold, nobody knows. One can only guess. Right now my guess is no.
Speculators and the media believe naively that we are ready to resume a rain-delayed ball game. Too bad we can’t refund our tickets.
The problem is that the mechanic’s of the market place have not been corrected.
You can see the speculators still playing the market – especially the big capitalization stocks – and are swimming in shark-infested waters. These sharks have no regard for ethics or laws or anyone’s skin but their own. At the present time the media is impressed by wealth, but not how it was earned. Financial morals are lower than the bottom of the ocean.
What we have to do is trash the conservatives and liberals at the same time and elect middle of the roaders that work with both sides of the isles. We need some hard nose politicians that are not afraid to speak plainly and openly. The problems of today are here because we had weak-kneed bureaucrats that were either paid off or lacked the intestinal fortitude to right a wrong. When you are around money, unless the laws are strictly enforced, slimy eels mess up your boat badly.
We now need global enforcement so that citizens of countries that do not comply are blackballed. The US was once known as the safest haven with the toughest laws in the whole wide world. Sadly, the keepers of the faith retired.
So until we have a global regulatory agency that will protect investors, the stock markets for the most part are a crapshoot, or like picking a single number on a roulette wheel.
Buying a bond is going to be an instant loss at best. We have to borrow trillions of dollars to finance this socialist experiment. Who wants to borrow the first trillion? China and Brazil want to trade in their own currency. When a central banker sells a government security he receives dollars. They then sell the dollar to pay for the gold. That is why you see gold go up when the dollar goes down.
The whole world is in debt.
My big fear is that in January Obama will try to get rid of Bernanke who is Chairman of the Federal Reserve. That is like changing horses in mid stream to borrow a quote from yesteryear. Right now the whole world is listening to him. He has made honest mistakes and corrected them quickly. In the past when a stock analyst made a mistake I would pay careful attention to him, because I knew he was trying very hard to make up for the previous mistake and had learned from his error. Then there were some that could turn a load of manure into gold bars. Caveat Emptor.
In my last letter I recommended buying Spider Gold Trust (NYSE GLD $96.16) and today I am adding Central Fund of Canada (NYSE CEF $12.56) which hold gold and silver bars in one of Canada’s largest bank vaults.
My reasoning is this: they keep increasing their benefits while decreasing ours and refuse to really fix the inequities. By going back on some form of the gold system this puts pressure on them to perform properly. If they spend too much it will weaken the dollar and send them out of office quicker than you can blink.
In 1950 we held 68.2% of the worlds’ gold at Fort Knox. Today it is less than 28%. The whole world is awash in debt and dollars and sooner or later something has to give. To protect yourself, your family, and your job or business you should consider buying some gold stocks that own gold.
If countries decide to go back on some form of the gold standard the price could increase two to tens times the current price or more. If the Government tries to confiscate it like they did in 1932 they went from $21 to $35. That is a pretty good percentage increase- so I would not worry about that now.
Remember when things get really bad, they can only get better.
Those needing income should look at preferred stock of sound companies selling below their call price. The sharks can not mess around with these with ease. Many are qualified preferred’s which means 85% is tax free. I prefer AMERCO $2.125 preferred list on the NYSE. The Symbol is AO-A. They own U-Haul Trailer Company. That is also traded on NASDAQ- UHAL-$36.85. A good way to keep track of the preferred is to watch for any sudden shift in UHAL.
There are also lots of values north of our borders in Canada. The Canadians did not monkey around with their banking system so many of their companies are in fairly stable condition versus the United States.
A word of caution; I was having my Saturday morning breakfast at the Woodstock Country Store when I met this gentleman who told me this amazing tale. In his business he has to buy nickel, about 400 pounds per year. This year he placed his order and found out the price had dropped 50%. I found out later that China had stopped buying.
This example is just another reason why we should be moving to some form of a gold standard. It puts a ball and chain on our politicians, who cannot get a real job, and gives a solid standard of living for us and for our grandchildren.
Buy some gold as a protection and a hedge. If you have any problems you can contact me personally at the numbers listed below.
Thank you and Cheerio!!!
Addendum
Chairman Bernanke’s plan if we ever had a depression again was to go into a helicopter and spread dollar bills all over the country in every town, village and farm. This is what he wrote his thesis on while getting his doctorate at M.I.T.
Nothing goes as planned. He has his depression, and he has the chance to implement his ideas, but there is always a catch. An election came and a populace president and his party were swept into office.
Now everyone wants on the ‘gravy train’, which is actually more like a giant lemming lumbering towards the seaside cliff. States are now knocking on the door like hobos of the past for a needed handout. Except this time there will be no thank you, instead they will simply rush to get in line again for more.
The mighty dollar is ready to be downgraded to compete with the Chinese Yuan and the Mexican Peso and the Italian Lira. Interest rates will catapult over night as computers change the price of our bonds in the twinkling of an eye.
The idea of the good Doctor Bernanke was to distribute funds into private hands that would create jobs where needed, which is certainly not in Washington D.C. Washington should be responsible for creating rules and umpires to make sure the game is played honestly.
The lesson we learned from the 1930’s was that our banks and credit system had to be sacrosanct. Once those standards were lowered the blood sucking vampires landed in Washington DC. They are called Lobbyists. What is your interest rate?
Richard C De Graff
256 Ashford Road
RER Eastford Ct 06242
860-522-7171 Main Office
800-821-6665 Watts
860-315-7413 Home/Office
rdegraff@coburnfinancial.com
This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.