6 Gold & Oil Stocks to Profit from Inflation
Wednesday, September 24, 2008 | Teeka Tiwari
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 >>
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?
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Teeka Tiwari
Chief Investment Officer
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