06 December 2008

After the gold rush...

On Fri, Dec 5, 2008 at 9:45 AM, michael vanreusel wrote:
Did you see the employment report? Looks like we are entering great depression part 2.

Dear Michael,
Lets look at this in prospectis:

Base metals:
With the exception of Tin, which I believe is still in a bull market, the majority of base metals (zinc and lead particularly) are essentially at their 20th-century lows, inflation adjusted, of 1919 and 1930. So essentially any positive growth would be inflationary for these metals. In precious metals, the gold to silver ratio is extremely high, suggesting that if we end up in a highly inflationary environment, silver should out-perform. Rhodium was $11,000 and now is around $1000. This should do well long term if we get fair weather or stagflation.

Our stocks of wheat are at their lowest in decades yet the price (inflation adjusted) is at its lowest ever excepting the range from 1995-2005. Broad agriculture exposure to the physical commodities from ETNs like RJA or the DJAIG indexes is desirable. A small equity exposure to producers of fertilizer and genetically modified seed could be applied as a kicker.

Brazilian 10-year government bonds (at 17%) and 10-year TIPS (at a negative 1% yield) looks like bargains. A mixture of investment grade and junk bonds looks attractive, as the junk bonds are pricing in a 50% default rate (about a 20% yield) and investment quality corporates are yielding 7-9%. (The default rate on junk bonds was 30% at the height of the Depression) If you’re feeling a little footloose, Tata Motors just got permission to take deposits and has set up savings accounts in rupees paying 11%.

The thing with the most to gain (besides physically holding rhodium for a long, long time) is Paragon Shipping. [Nasdaq:PRGN] Paragon Shipping (with 12 dry goods ships in three different sizes) has a current liability to current asset ratio of 50%, and just announced share buybacks. Long term liabilities to assets are at 58%. Its trading at $3.85 and had earnings per share of ~$2.48 in the third quarter. Their earnings will obviously be terrible in Q4. It has mostly 1-2 year staggered time charters and a few ships on spot. The chart looks extremely good as long as the Baltic Dry index of spot shipping rates (which has plummeted 93%) doesn’t vanish from the face of the earth and the world economy collapse entirely. I would like to think that a majority of the pressures on the Baltic Dry are due to problems obtaining letters of credit. If so, this sector should lead any recovery in the markets overall. Furthermore, banks will forgo their traditional role as buglers for the bull recovery due to increased regulatory pressures. As such, shipping companies provide a unique transmission channel to gain exposure to a recovery in the commercial paper and asset-backed markets without exposure to toxic assets.

Mark Rothko is off 25% this year and he’s swell. I think late 1970s through early 1990s Sam Francis and David Hockney prints are exceptionally cheap right now. I’m trying to get Damien Hirst to make a pencil with a gold center for me.

I think artprice.com [Euronext:PRC] (down 75%) is a great “what the hell” kind of play. It revenues are growing every year (and profits falling) and it has virtually no analyst coverage in the US. I find the site extremely useful. Its trading at $5 dollars vs. its IPO two years ago around $20.

Equities (Macro):
Starting in the spring, with a super long term macro view, I would buy the stocks of companies in India, Brazil, and Finland.
One: because they all make beautiful music.
Two: because their women are incredibly attractive.
And three: because their educational rankings are good on average.

I also believe these three together, comprise a very balanced ex-US equity portfolio: Brazil and India are two emerging markets with two completely different economies. Brazil exports commodities and India imports them, exporting services instead. Finland is a highly developed economy with good social services (reducing cost to businesses) and a cultural memory of design and innovation.

I believe someone who desires additional equity exposure, could further diversify with a Pan-Sub-Saharan Africa ETF. After my recent visit to Buffalo, NY where people were not overly concerned about the economic collapse and where real estate just rose 3% year on year, I have become convinced that the optimism and trust engendered and inculcated by shared sacrifice is an essential component to equity portfolios in a time where most of the developed world is frozen in indecision fomented by distrust and fear.

Real Estate:
I would definitely buy a craftsman house in Vallejo, CA immediately. And real estate in New York within 18-36 months. Probably sooner for distressed bargains in the high-end market, and later for bargains in the middle and lower-end.

This is obviously a big story in the medium long term but its extreme price ranges over the last 40 years makes me totally unable to predict its path in the near term. That being said, it is at the same price as in its peaks in 1990 and 2000 (inflation adjusted). This should provide strong price resistance given the large amount of demand which came online in the past 20 years and the current production declines from existing oil fields. I would hedge oil exposure with stockpiles of kerosene and AK-47s in case of a true deflationary meltdown. I really like your black swan style-call option-bird flu-stockpile idea.

Finally, I've got 20 bucks riding on Manny Pacquiao in the Oscar de la Hoya fight, because of his trainer Freddie Roach and for the reasons listed in these two LA Times articles:


I'm gonna post this on my blog today, and try to upload some pictures of the charts in the next few days. Check it out next week.

Take care,
Matty Talty Colvard

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