Crash Opportunities, Part One
By Paul Lamont
September 3, 2008
The Printing Presses Are Broken
As we mentioned two months ago, a speculative commodity bust would fit with the onset of a deflationary collapse. During the month of July, commodities began this correction with the largest monthly decline in 28 years. They are still falling. Similarly, Lombard Street Research’s measure of M3 fell in July the most on record (since 1959). The chart of the percentage change in money growth is below.
The banking system is currently broken. Without credit, asset prices fall and money is hoarded. The risk is of a Great Deleveraging of the economy. We still recommend U.S. Treasury Bills for the preservation of one’s portfolio. That being said, in the first part of this series, we would like to mention other investments (even some commodities) that could appreciate during this deflationary period. In the second report, we reveal what investments could present a better buy at the bottom in 2010-2011.
The first opportunity is the Japanese Yen, which we mentioned last September. At that time, it was so unloved that Japanese homemakers were shorting it. To us, that was a signal to take the other side of the trade. As we stated, “we expect the Yen to appreciate for the long term.” But this wasn’t just a flippant remark. The Yen (chart below) has done nothing for the last 12 years. The homemakers waited until they had seen 12 years of a bear market, felt confident, and then they shorted it en masse. In contrast, price charts that trade sideways for more than a decade (especially in triangles!) are attractive to us. In our view, selling by retail investors was a signal that the bear market trend was over.
The chart below (flipped, because it is the USD versus the YEN) shows the longer view.
If the Yen were to fall back into the triangle, our forecast would be incorrect. For this speculative trade, we would advise waiting for the Yen to show a strong rally before establishing or increasing positions. The trend could last for a few years, so we are in no hurry to put money at risk. The longer one waits, the more information can be obtained.
The Yen, But Not The Euro
As we described in June;
“The central planners may try to ‘manage’ things, but contagions could result quickly from panics in Ireland, Spain, Germany, U.K, Iceland, and/or yes even Estonia. As the Telegraph states, ‘European banks have suffered worse losses on US property than American banks.’ We will see how fast players move when the European property markets turn down.”
Morgan Stanley is now warning Spain’s housing bust “could wipe out the capital base of weak lenders exposed to the property crash.” The Danish just rescued the Danske Bank, a 137 year old institution, to avert a “systemic financial crisis.” Looking at the housing price chart below, it is easy to see why banking troubles could be coming the European’s way. Investors hoping to protect themselves from a housing/banking bust by holding Euros should take a look at the chart below. And note poor Japan!
Cattle and Hogs
We also believe livestock could rise during the next few years.
The main costs in raising hogs and cattle; gasoline, corn feed, and labor are all falling. Due to recent financial innovation, there are ways to invest in these price trends without owning a farm or purchasing commodity futures. However the option available to U.S. investors, exchange traded notes (ETNs) offered by Barclays and UBS, have a major flaw. They are subject to credit risk, as they are little more than bets with the bank. So while you may be correct in the price rise, if the bank goes down or defaults, you will not receive your winnings. In 2005, Jim Rogers’ commodity funds at Refco (“wrongful” handling or not) were also similarly unavailable for redemption. In the current environment, these atypical risks become more probable. In our view, investing in companies that sell pork or beef is also unadvisable. The inability to pass a higher price along to the consumer could become an important problem. A companies’ debt woes could also be fatal. Instead, we prefer to take possession.
Inverse Stock Index Funds
Speculative investors may also want to consider inverse stock index funds. These funds rise in value as the market goes down. We offer a Bear Market Strategies Account in which the bulk of your funds are protected with U.S. Treasury Bills, the remainder positioned in speculative inverse index funds. This can possibly hedge business owners from a recession or attempt to provide a little better return for investors who are still saving for retirement. The suitability of this account depends on your risk tolerance. It is not for everyone. In an environment where institutions are failing, counterparty risk is also a major concern. Please contact us to further discuss the risks of these funds.
***For disclosure purposes: At the time of publication, Paul Lamont holds positions in UVPIX and RYUCX.***
Sixty Years Ago…Another Dark Hero
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***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.
Copyright ©2008 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama. Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm visit www.LTAdvisors.net, or to receive a copy of our disclosure form ADV, please email us at firstname.lastname@example.org, or call (256) 850-4161.