We're In A Panic, But Don't Give Up

I’ve delayed this letter a few days hoping things would calm down. I mentioned in Letter 31 that I haven’t lost any sleep over the financial crisis. That’s still true, but I’ve received calls from quite a few people who say they have. Some appear to be gripped by real fear. I have experienced that feeling during similar panics of the past. I pray that this letter will encourage all who read it.

It won’t be a surprise to you that September was another down month for my portfolio. It fell 4.53% in September, and for the year-to-date I am still up 3.18%. As I write this, I’m sure I am down year-to-date, but not a lot, and I am extremely thankful for that. The main reason I am not down a lot is that my portfolio is structured similar to the Permanent Portfolio Fund (PRPFX). In March, I made a major shift out of stocks into cash (see Letter 19). At the end of September my major allocations were: 16.5% stocks; 46.8% physicals; 35.5% cash; 1.1% Puts and calls (insurance). I made no new investments in September, and sold nothing except some of my insurance puts on which I booked a good profit. I have learned not to sell long term investments during a panic.

Permanent Portfolio Fund
Speaking of the Permanent Portfolio Fund, as I write this (October 8, 2008), it is down 8.4% year-to-date. In my opinion it has admirably fulfilled its role as a safe-haven during this difficult time, especially if we note that it returned more than 13% per year average over the five years preceding 2008. Most of my widows and lower income investors are invested 100% in the Permanent Portfolio Fund. That helps me sleep better at night. If you have new money to invest, this is a good time to invest in it (opinion) as it is selling below its lower trend channel line for the first time in several years.

I’m going to skip the updates of my individual investments this month. I just don’t have the time, and there are far more important matters to deal with. I will plan to do this later and for sure by year end. I’m still holding all the same investments I had a month ago. Everything went down in September except my gold and my oil and gas production interests which are increasing in value because of increased production income from new wells. I am blessed to have this investment which is now 17% of my total portfolio.

Where do we go from here?
As I’ve always told you, I try to follow the master investors with great track records. I know only a handful that I have high confidence in and from which I can get information. Ever since this market panic started a few weeks ago, I have listened intently to everything I can get from Jim Rogers and Richard Maybury. They are saying essentially the same thing and are confirming my conviction that my portfolio is structured as it should be. Both believe the commodity bull market is alive and well with another 7-10 years to run. All bull markets have major and minor corrections to re-balance sentiment and curb runaway speculation. We were in a very normal correction in the commodity bull when the credit crisis escalated into a panic. During a panic, all asset classes are sold in order to raise cash. Almost nothing escapes, at least during the peak of the panic (more on this below). I want you to study carefully the following chart which puts the commodity bull into a perspective which I should have shown you before now.

Back in 1998, I used to listen to Jim Rogers. He was on CNBC almost every day saying that a new secular bull market in commodities was beginning. At that time commodities were near 20 year lows, down on average 80% from their inflation adjusted highs. He explained that supplies were at multi-year lows and demand would be rising strongly over the years to come. He expected the bull market to last at least 20 years. He also forecast that during the same 20 years stocks would be flat to down. Few paid any attention to him, and most investment “experts” refuted his forecasts.

The Dow Jones Industrial Average topped at the end of 1999 at about 11,700, fell to 7,500 by October, 2002, rose to a high above 14,000 in September, 2007, and is selling today about 2,000 points below its 1999 high.

Commodities began to rise in 1999 and 2000, not dramatically at first. In 1999 I was managing investments for about 35 people. As I explained in Letter 3, I considered Rogers and Maybury an answer to prayer, and I started putting gold and silver and some of the investments listed above in everyone’s portfolio. By examining the chart you can see why our portfolios have enjoyed eight years of good returns (2000 through 2007). 2008 could be our first down year. If it is, since I don’t plan to sell at these lows, I expect my portfolio to recover the paper loss created by this correction and move to new highs during the next leg up in the commodity bull. Both Rogers and Maybury say this correction will end (timing unknown), and a new leg up in the commodity bull will follow, taking the bull to new highs creating good profits between now and the end of the commodity bull in a few years.

Notice how much these investments went up from the beginning of the bull in 1999 to the recent high (column 3). Next notice how much they are up today, even after the huge sell-off (column 5). This helps put the bull market in perspective at a time when almost everyone is focused on the big sell-off and gripped with fear. That brings me to the most important thing I want to discuss in the chart. Column 6 tells you what percent each investment has fallen since the high. Some of these numbers are hard to believe. Even blue chip companies like BHP, CHK, ECA and SU, with strong growth and profits have been knocked down 50% or 60%. Some incredible bargain opportunities have been created. Let me tell you what Jim Rogers is saying every few days in his interviews, and what Richard Maybury is saying in his newsletter.

In every interview, Rogers is asked what he is doing with his investments, and he’s always asked about his oil and other commodities. Whether oil is going up or down, is at its high or down from it as it is now, his answer is always the same: “I’m not selling my oil until 2017…but if the price goes low enough, I’ll buy more.” In that simple statement you have the essence of the strategy of the masters. They buy when most other investors are selling, and the price is a bargain (sometimes referred to as “hated assets”), then hold until they believe the bull market is over. They don’t attempt to trade in and out or time the major market swings, except on those rare occasions when panic sell-offs create exceptional bargains. One other thing, which I rarely hear mentioned…they always have a substantial cash reserve, so that they can move when the bargain appears. So how low is low enough for Rogers? I’ve never heard him quantify it. For a given investment it probably depends on many factors. I do know from hearing him disclose what he is buying at a given time 50% to 60% down from the high seems to get his attention. Has he recently mentioned which commodities he is buying? Yes, he said he was buying agricultural commodities (He uses his own Rogers Ag Index ETN, symbol RJA), and a few days ago, he mentioned for the first time, to my knowledge, that he is adding to his silver. This was an encouragement to me (see below on silver). He also said he was trying to buy gold, but it had not fallen enough.

If you’ve been reading Richard Maybury, you know that he keeps the majority of his investments in the Permanent Portfolio Fund, then buys speculations in his Variable Portfolio and sticks with them through thick and thin until his war model calls for different investments. The vast majority of his speculations are those which profit from war and the destruction of the dollar. Most of the investments in the chart above are in his core list of recommendations. Due to the panic sell-off, Maybury is saying that those who missed the big profits from his previous recommendations are being given another chance to get in at good prices.

Bottom Line
If you’re reasonably close to my allocations (at least 30% cash and no debt, under 20% stocks, and a good position in physical commodities, especially gold and silver), I suggest you stop worrying and do nothing. Here’s why. During this panic, all asset classes are going down against the dollar. In other words, the dollar is going up. But we’re not experiencing true deflation, just a temporary deflating of asset prices. We’re experiencing true inflation as hundreds of billions of dollars are being created out of thin air to bail out the failed financial institutions, fund our wars and other deficit spending. When the panic phase passes, the dollar will resume its six-year bear market and fall to new lows, and inflation will return to higher levels than ever, maybe the highest in our history. This is when our non-dollar strategy we’ve learned from Rogers and Maybury will really pay off. 

I’m feeling an urge to begin nibbling on some of the blue chip oil stocks (CHK, ECA, SU), blue chip mining share fund (USERX), or BHP (world’s largest producer of diversified commodities). I’ll let you know if I do.

What if your stock allocation is much higher?
I know that some of you have more than 20% in stocks. You probably don’t want to sell here at the bottom (I hope we’re near it), and I don’t blame you. You might consider switching dollar for dollar some of your non-commodity related stocks to some of those mentioned in the preceding paragraph. That way, you won’t be getting out of the market, but I believe you will get much stronger recoveries in these stocks than typical non-commodity stocks or mutual funds. Still others of you may have some blue chip non-commodity stocks (like GE, Microsoft, Walmart and many others). You may be willing to ride through the storm with them. Believe it or not, some of them will some day recover and be among the non-dollar investments investors are looking for. I expect the urgency to get out of the dollar will some day get intense enough that people will search for every alternative they can find. Obviously, productive land and other forms of real estate will go up as we reach high levels of inflation. I’m comfortable with my portfolio. For those allocated differently, I don’t have any perfect answers. I’m just trying to give you a few ideas.

Silver
It seems like I have something to say about silver in every letter. But that’s especially the case in this one. I was completely baffled by the collapse from 18 down to under 11 in less than a week, until I noticed that the cash market for silver dropped no where near that amount, and was in fact in shortage with demand rising strongly many places in the world. Ted Butler found the reason and wrote about it. He has proven there has been manipulation by some large traders in the futures market who shorted huge amounts of silver forcing the price down for their own personal gain. So now we have two different markets in silver, a “paper” market (futures) and a “physical, cash” market (metals dealers). Today, I can sell my silver coins for several dollars an ounce more than the quoted futures price. This cannot continue and is under investigation. The best explanation of this is Ted Butler’s latest article, An Exceptional Opportunity. I highly recommend you read it.

I am presently carrying my silver at the lower futures market price, but my faith that we will see silver sell at multiples of today’s price remains undimished. If Jim Rogers is buying silver, I’d bet my last dollar it’s a bargain.