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6 Gold & Oil Stocks to Profit from Inflation

Wednesday, September 24, 2008 | Teeka Tiwari

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Editor's Note: Our weekly telephone call to answer your questions has been posted. Listen now to hear Teeka more reader questions, including ...

1. Can you explain the short-selling ban and, for better or for worse, does it present us with any opportunities we wouldn’t otherwise see?

2. Without predicting up or down, when do you think the market will at least get back to normal and we’ll stop having 300-point swings almost every day?

Go here now to listen >>
 

There’s a killer lurking in the shadows. A group of fiends so foul and devious that they brought the entire American banking system to its knees.

Its name?

The irresponsible borrower!
 
You can argue with me all day long, but at the end of the day it was the irresponsible, give-it-to-me-today-not-tomorrow borrowers that sunk Wall Street. Their inability to pay their bills and live within their means led to an 8-year debt orgy where many gorged themselves silly on the equity in their homes.

Sure, the banks were the pushers in this little drama, lending too much, taking too much risk and feeding the habit of more with easier and easier credit terms. But the ultimate responsibility lies with each borrower knowing what they can and can’t afford.

Many are asking themselves if we are experiencing the dark side of democracy. The quote below is attributed to Sir Alex Fraser Tyler (1747-1813) and appears eerily relevant to the situation we currently find ourselves in.
 
A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

Will Hank Paulson become our new supreme overlord?

This bailout will put more power into Paulson’s hands than any Treasury Secretary has any right to have. Remember, we didn't vote for Paulson, yet arguably he will have more power over our lives than any other elected government official.

But you know what?

The people I really feel badly for are the sensible souls that did the right thing and didn’t engage in this plunder on our nation’s wealth. But they will still have to pay just like everyone else. It's not right, and all of us that showed restraint are effectively being held accountable for other peoples' excesses. It's even worse in socialist countries, but this still stings a bit.

No good deed goes unpunished!

Printing all that lovely money is of course going to stir up inflation. Take a look at the gold stocks - Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM) - and you can see that they have been gunning higher over the past week.

Oil is waking back up again, but Monday’s $25 spike appears to be related to a massive short squeeze that took place. Speaking of oil, how illiquid has the oil market become when you can spike it $25 in a day? Seriously, that’s nuts, oil is a huge, I mean a huge market. I guess it didn’t help that Monday was expiration.

As I told Point and Profit members this week, I like oil and gold, but not here and not yet. On a decent pull back there looks to be some good buys to be had. Take a good long look at the oil service players, this is where I usually like to place my oil bets. Some stand out names in the sector include Transocean (RIG), Cameron (CAM), and Diamond Offshore Drilling (DO).

[Editor’s Note: Find out how to profit from the crisis on Wall Street. Go here now.]
 
Will this be the end of America?

Legitimate people (not just gold bug kooks) are actually beginning to ask that question. Let me be super clear here, IF America is to slide off into obscurity it won’t be over this issue. The aggregate earning power of the United States is STAGGERING. An extra trillion (or two?) will not push us over the edge into the has-been super power category.

But unless we see some serious - and I mean serious - house keeping take place, Paulson's $700 billion (and counting) excellent adventure could be the harbinger of far more dire times to come.
 
So what’s needed?

First off we need transparency, it is time to end the opaque derivatives market and to create a centralized open exchange where all financial derivatives are traded. We need maximum position sizes established to mitigate short sellers’ ability to drive up company credit default swap rates which in turn pressure the underlying common stock lower.

Investment bank leverage rules need to be reduced from their current 30-to-1 rates to something a bit more manageable. We need the return of the up-tick rule. Those guys in the 1930s knew what they were doing when they instituted it. The fundamental drivers of speculation - fear and greed - haven’t changed in 5,000 years of global commerce. Chris Cox of the SEC should have trusted the men and women that came before him and left the up-tick rule alone.

Ratings agencies S&P & Moody’s need a serious revamp in how they rate companies. Tying credit ratings to the price of the common stock is an invitation to all types of moral hazard. In fact, tying executive compensation to the performance of the common stock has proved to be disastrous. All it has done is bred a culture of quarter by quarter decision making and “creative” accounting. It's time this sacred cow was slaughtered.

I don’t know what the answer is to executive compensation, but the current approach just encourages too much fraud and short-term thinking.

I want to hear from you. We can lament all day about what is wrong but I want to hear solutions. What should Wall Street be doing differently going forward and why?

(Please let us know what you think about Teeka Tiwari's article.)
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“Let the Game Come to You.”

Teeka Tiwari
Chief Investment Officer
Point & Profit




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38 Comments

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  1. don (12 weeks ago) Is this Spam?

    Yes, the uptick should be retained. But,we also need investors in the markets and not shysters,day traders and such.maybe investors should be required to keep an investment a certain amount of time[24 hrs.]48 hrs.] [i week]to limit the volatility. Without oversight the small investor is being steamrolled

  2. Karan (14 weeks ago) Is this Spam?

    agree with you, Teeka, on most of the points raised in the article; however, I am not completely convinced that abolishing the uptick rule has made much of a difference; as I understand it, the price of a common stock could be indirectly affected by activity in the derivatives market (options, futures etc), which is exempt from the up tick rule. Based on this logic, the uptick rule could not have prevented the common stock of FIs/Banks getting hammered. I would appreciate a response to this if you know the answer...

  3. Sandy (14 weeks ago) Is this Spam?

    Are any of the people in washington seeking any advise from you guys?, or do thy just think you're the problem? It seems to me ,the way our national debt is, there's more than one group of people needing help financially.I think the more input on this situation the better. I surely wouldn't know where to start.

  4. Brian (14 weeks ago) Is this Spam?

    Great article Teeka. It's comforting to know that I'm not the only one who thinks like that.



    The fundamental problem has already been identified by other members ... the "Immediate Gratification" crowd and the "Entitlement" crowd. And yes, I blame the Democrats whose constituency is almost entirely composed of these groups.



    This policy ("minorities" and "the poor" (meaning Democrats since we all know that ALL Republicans are "rich") should be ENTITLED to own their own homes, even if they can't afford them, because, hey, it's only "fair") began with Bill Clinton for political gain in appealing to his "base". That the mere idea of that was preposterous on the surface didn't matter. It's a vote-getter and that's all that matters!



    And if you think he did it with good intentions, remember that "The road to Hell is paved with good intentions." How true!



    Yes, it was perpetuated by George Bush (probably to appeal to the same constituency - most of whom wouldn't vote for him anyway but what the heck ...) and it was aided and abetted by financial institutions. But had the original principle not been promoted, it wouldn't have been an issue in the first place. Once upon a time, NINJA was a term that referred to people like Bruce Lee. Today ...



    Socialism is a proven failed concept of idealism. "From each according to his ability; to each according to his need." Nonsense! Who determines your "ability"? Or your "need"? Who's going to stop me from having 10 kids I can't support on my own when that only increases my "need" and makes you responsible for my irresponsibility? ... or taking out a huge mortgage on a home I can't afford and passing on the "bill" to you when the foreclosure notice comes? And when it does come, aren't you feeling guilty that my "unfortunate family" is losing our home?



    The existence of police, firefighters, and the like is not socialism. Nor are expenditures on infrastructure (roads, bridges, etc.) They are costs that everyone agrees to pay for - even the most ardent capitalist - because they are commonly available to all. Whether you use them or not is not the question. It's that they're available if you need them.



    But home ownership is not a requirement. Rentals are available.



    And "fairness" has nothing to do with it. Al "I invented the internet" Gore, the Green Proponent with probably one of the largest "carbon footprints" in the world, flies around in a private jet. I don't have a private jet. That's not fair!! So? Maybe Citibank should lend me a few million at a low interest rate so I can get one. Huh? Ridiculous? No more ridiculous than the idea that someone without resources should be able to buy a home with no money down.



    In a phrase, socialism, the great mantra of the Democrats, is at the core of this problem. Everything else derives from that. Greed, avarice and all the rest exacerbated the issue ... but without the basic principle (everyone, regardless of circumstance, is entitled to a home) there would have been nothing to be greedy or avaricious about.



    "Free market systems without regulations don't work". What nonsense! There's no such thing as a free market system without regulations - at least not in the "Free World". You think the US stock markets operate without regulations? Try not filing your 10K report or submitting unaudited financial statements and see how "unregulated" it is.



    Moreover, if this chaos is proving nothing else, it's proving that the system DOES self-correct. That's exactly why we have the problem! We've allowed UNSUPERVISED entities to engage in questionable activities and now the system is correcting itself. Dramatically to be sure, but it is correcting the bad decisions of the past.



    Finally, it isn't a matter of "regulations" - it's a matter of "supervision". Regulations be damned ... Evil will always find a way. Supervision is what keeps "The Devil" out of "The Details". Fraud is nothing more than circumventing the "regulations" when there is no "supervision".



    And on that matter, the facts are clear. The entirety of the US citizenry can't all be morons. Someone had to have an inkling that this was coming. John McCain (R), for one, warned us about Fannie Mae and Freddie Mac years ago. But Chris Dodd (D) and Barney Frank (D) told us he was being irrational. Steps to "supervise" their operations of could have prevented this. So much for the "experience" of the members of the Banking Committee.

  5. Scott (14 weeks ago) Is this Spam?

    First word that comes to mind would be "WOW",talk

    about hitting the nail or, in this case, the American tax payer on the head. Thanks Big T.

  6. murphy (14 weeks ago) Is this Spam?

    finally, someone thinking ahead of a donkey instead of from behind. excellent process presented objectably....

  7. Jason (14 weeks ago) Is this Spam?

    I agree with you to the extent, that the majority of the consumers in the US are behaving like little children - instant gratification is the key word (“Forget tomorrow - I live today”). And that is exactly what is wanted in this US society and economy (at least, so we are told) – just look at all the instant gratification bullshit advertisement. Otherwise, the economy would stumble. REALLY?

    So that is one side of the coin.

    The other aspect is the greed of human society. And that one will never change. But it can be, and should be, regulated.

    And under this greed aspect falls the responsibility - or better irresponsibility - of the banks (and the mess, the US society will pay for for years to come, now that the FED has “bailed” the crooks out):

    1) providing these loans to people who had – from a financial perspective – no business to own a home in the first place. And where is it written anywhere, that one has a legal right or can make demands to own a home (or anything else for that matter) for which he is not working and making money for or having enough money to afford it. Where is it written, that everyone needs or should be or demands to be driving around in a Mercedes Benz, dressed in Ralph Lauren clothes, going on vacation in the Bahamas, eating out at Ruth’s Chris, etc.? The same goes for buying a housing and all other (not only financial aspects) aspects of life.

    2) providing bank management (and all other big corporations are in the same category) with compensation packages that are astronomical, uncalled for and have nothing to do with performance anymore

    3) providing bonus packages, that, based on sales results, profits, etc. will bring out all kinds of crookedness in order to get that money into their pockets

    What do people with power want: More Power.

    Next in line are the requirements for people working as realtors and mortgage brokers/loan officers. Where is the general standard that requires at least a high school diploma (proper reading and mathematical skills are a must) and 12 months of education, where not only the technical aspects of the business are being taught, but people being taught and tested for integrity, ethics, etc., etc.? Instead, these are one weekend classes – and, after passing the multiple choice state exam, it is everyone is on their own, and one can do as one pleases.

    And last but not least:

    The governments interference with the market. Instead, of using the available tax dollars to educate the children in school properly and teach them ethics and character, so that this country will have its standing between the countries in the free world where it should belong.

    The idea of a free operating market environment is a nice idea, and it will work, until a higher order (government) starts interfering with it and corrupting it, really not knowing what they are doing – whatever the motive may be. In the end it looks like a 4 year old screwed up a Rubik’s cube (and there again, not everyone should be playing with it – one should know ones limitations).





    1) people in public office (government) should have a proven track record in their resume, when applying for a position (especially wanting to be President)

    2) we absolutely need LESS governmental interference with daily lives and the economy - all these people that never have run a large (and I mean large) corporation themselves or even better, owned one and know what it is like to run one.

    2) cap salaries at a specific level, and hold these highly paid executives responsible for their decisions (after all, if a small employee screws up, he my find himself in the street the next day), with their personal assets (like with drug dealers).

    3) implement codes by which one can become a realtor, mortgage broker, loan officer, or in any other field where ethics play a role

    4) a reward system based on results – so eliminate affirmative action right away. A right to have a place in school based on color or race? Instead of accomplishments? What is wrong with this country? It would be like being paid a high salary for just showing up at work…..





    In the end, although I could puke, it is all just, and all is exactly the way it should be. As funny as it may sound.

    In the 1970s people were marching in the street, demonstrating against what they felt was wrong. Nothing like that today. Where does the public demand that an amendment is made in the Constitution to the extent that the general public will vote on topics that have an impact on them (like in some countries in Europe), rather then have the politicians cast their vote?

    The general public is numb. The important thing is that they can have their

    - tainted news (which only are regurgitated opinions of someone else)

    - an entertainment show on TV (which run from 9.00 a.m. until the evening hours on multiple channels) in which people publicly exhibit their stupidity (and it does not matter if it is Maury, Sally, Oprah, Jerry Springer, Dr. Phil – it all the same piece of crap covered under the umbrella of wanting to help others. Most important is that someone takes a crap on the rug on those shows, so that there is a topic for conversation (sorry, wrong word, that really does not exist in these categories), but for discussion or arguments sake.

    - and a bottle of beer in their hands while watching these shows



    And please: DO NOT USE YOUR GOD GIVEN BRAINCELLS TO COME UP WITH A THOUGHT OF YOUR OWN.





    Good night, and good luck, America!

  8. P (14 weeks ago) Is this Spam?

    If we have a Federal minimum wage, why couldn't we have a Federal maximum wage?



    That would eliminate the ridiculous executive pay.



    Also if exects get a 10% bonus, everybody working for the company gets a 10% bonus.



    P E H

  9. George (14 weeks ago) Is this Spam?

    Stirring the pot only delays the agony. If the market is to crash, let it crash. The immutable law of supply and demand will win eventually, why not let it map the way now. Losers are losers and winners are winners. Let nature reign and the strong will survive and the weak will perish. Too long this country has been supporting the weak and lazy who refuse to support themselves.

  10. Pieter (14 weeks ago) Is this Spam?

    Yes Teeka the up-tick rule must come back ASAP.

    The idiot that took away that rule needs to leave.

    Sorry but that is how I see it.

    Sales people who make a good honest sale should receive compensation/bonus money.

    Most if not all executives already have a great salary. Leave it at that and no extra's. By giving those extra's some strange things started to happen with all kinds of numbers in all of these companies books. They call it creative bookkeeping I call it steeling. It became one of the big reasons wy we are in this huge mess now. I hope that this will be something the hill will realize and that it needs to be stopped ASAP.

    I do fear however nothing will come of this.

    SAD and BAD

    Maybe it is time to let the american people vote for themselves about this, and more, instead of the politicians. The politicians we voted for to lead protect and guide us, who did little to nothing only now when it is (too) late.

    Johanna

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