Riske Business August 2007

For the past 18 months, we’ve been talking about the bull market in commodities.  During that time we’ve seen resource stocks exploding in a secular bull market that still has years left to run.
  
How do we know there are years left in this commodities bull market? Because the DOW is still getting all the headlines.  The bull market in commodities will be cresting when you see a headline like this:  “Gold, Tin, Oil and Cotton All Record a New Record High for the 7th Week in a Row.”   Another headline might say, “Canadian and Brazilian Currencies Jump to Another Record Against the U.S. Dollar. “
  
Will the U.S. dollar remain the world’s reserve currency?
  
The Founders of these great United States did their best to maintain the value of the U.S. dollar by backing it with gold and silver as mandated by Constitutional law.  Madison, Jefferson, et. al., knew that gold and silver specie would prevent lopsided trade balances and expensive protracted wars. Meanwhile, the average U.S. citizen could trust the value of the dollar enough to buy a 100-year bond at 3 percent and know that when it matured it would buy the same quantity of goods.  Since the formation of the so-called Federal Reserve Bank, however, the United States government has taken to borrowing and printing excessive amounts of money until today a one-scoop ice cream cone costs as much as $3 instead of a nickel.
   
How do we protect ourselves against this Federal  onslaught upon the value of our homeland’s currency? There are several ways, none of which are “investor friendly” to our own country.  And just like the patrician who refuses to shop at Wal-Mart until his house payment gets too big, we will all eventually decide to abandon the falling dollar in favor of investments that allow us to continue to meet our obligations.
  
Americans already sense that something is wrong.  They’ve embarked on what is coming to be known as a “crack-up boom,” the flogging of a very tired bull market in the DOW to grand new heights, in spite of the fact that there has not been more than a 10 percent correction for a very long time, and that dividend payouts are at record lows.  This is America running from a declining dollar value to an asset that produces something, not unlike what is happening in Zimbabwe, which has an inflation rate exceeding 1,000 percent.  In spite of this horribly mismanaged economy, Zimbabwe has a stock market that is surging in nominal value but is declining in relation to gold.  Same here, only our most recent inflation began in 2001 at the advent of the misnamed “War on Terror.”  Look at the graph called $CCI in this article to see just how inflation has raged in the United States.  If your vehicle has a 40-gallon tank, you spent $35.60 to fill it in 1999.  Today, that same tank costs $127.60 to fill.
  
If you have been invested in the DOW since the year 2000, you have lost 16 percent of your purchasing power even though the financial press is telling you the DOW has achieved new heights.  The once-mighty U.S. dollar has lost 32 percent of its purchasing power since 2000.  That’s how the inflation game works; no bureaucrat wants to give up his job for a balanced budget, no Congressman wants to come home without scoring significant dollars for his district, and no President wants to preside over a recession, so the spending, borrowing and inflating will go on.  In the meantime, Bernanke and Paulson will continue to assure you that they are containing inflation while they are the ones who are helping to create inflation.  This is the sorrowful game we are forced to play.
  
So what is a patriotic investor to do? For one who is concerned with the viability and vigor of his homeland’s economy, we must protect our nest egg so that when the inflationary onslaught subsides we have savings left with which to rebuild our country.  If we don’t -- and the Chinese safeguard their wealth while we don’t -- then the Chinese will be rebuilding our country’s economy.  So, let’s get into the specific investments that will protect our estate at a minimum and hopefully cause our estate to build over time in real wealth.  In the future, China will not want our Wal-Mart and Home Depot trinkets, they will want to be paid in Euros, renminbi or gold and silver.
  
First, the U.S. dollar-based bond market has entered a bear stage, so we must reluctantly sell our U.S. long-term bonds.  Money held in U.S. currency should be held briefly in U.S. T-bill accounts only and deployed to inflation-protected investments as soon as opportunities arise.  Dollar cost averaging will be the easiest way to make investments going forward.  In other words, commit yourself to regular investing, say monthly, until you are fully invested or as you gather surplus.  Natural resource mutual funds are available in pensions and 401k’s. Ours has FNARX and FSAGX, for example.
  
Currently, Asian markets are trouncing all other forms of investment.  There are several individual stocks I like, such as Fanuc, Kurita, China Medical Technology (CMED), SunTec Realty, China Life (LFC) and Aluminum Corporation of China (ACH).  Be careful though, the Asian markets have gotten very frothy on the graphs.  The bull market in Asian stocks may have a long way to go, but it might be prudent to wait for a correction.  Depends on how much volatility you can stand.
  
The base metal producers have been explosive.  The easiest to buy here in the U.S. are all listed on the New York Stock Exchange:  (RTP), (AAUK), (RIO), (PCU) and (BHP).  All of these very fine foreign-based companies’ stocks are held in all extraction industry mutual funds and ETFs.
  
Throughout history, the masses have relied on precious metals during times of inflation.  Free enterprise capitalism has brought us a way to hold physical gold and silver without actually taking possession, namely GLD and SLV.  To play the leverage of mining stocks with the possibility of getting a dividend at the same time, consider NEM, GG, RGLD, MNG, PAAS, KGC, AEM and ABX.  If you hold individual stocks, however, beware of the possibility of bad news or bad management.  EGO declined 25 percent in one day in mid-July because it was announced that Turkey had demanded they close their Turkey-based gold mine.  To protect yourself from individual stock vulnerability, choose an ETF holding all the great miners called GDX. 
  
Then there’s the energy sector.  The CanRoys have been paying their generous dividends without fail for years now.  Stocks such as PGH, PVX, CNE and HTE are all available on the New York Stock Exchange.  Oil has been surprisingly strong since February and it looks as though oil wants to go over $100 per barrel.  You can buy natural gas at UNG.  Or buy a collection of the top U.S. oil and gas companies at XLE.  If you’d like to invest in the last oil frontiers of Kazakhstan, Venezuela, Algeria, Peru, Oman, Azerbaijan, Ecuador, Nigeria and Chad, buy shares of Chinese oil company PTR.   PetroChina is a favorite Warren Buffet dividend play, paying twice a year at 2.6 percent with a P/E of 12.5.  Two other big Chinese oil companies are CEO and SNP, all listed on the NYSE.   SNP is an Asian refiner drilling wells off the coast of Cuba.
   
Some say oil plays off the price of gold.  If you’d like to track this phenomenon, go to www.stockcharts.com and enter $GOLD:$WTIC.  The 60-year mean is 15 barrels of oil buys one ounce of gold.  At today’s price of around $70 per barrel, that same mean would put gold at $1,050 per ounce.   Gold has been kicking cans around the $650 mark while it digests a sudden impulsive move last year into the $700s.   Gold is a bronco so watch the charts and average in.  Remember this from Richard Russell at dowtheoryletters.com:  “A bear market wants to bring everyone along while a bull market wants to shake everyone off.”
  
Finally, there are three closed end funds that invest in currencies other than the U.S. dollar.  They are FCO, GIM and FAX.  They’ve all been climbing versus the dollar, but be aware that beginning in the summer of 2006, gold began climbing in value versus all currencies.  People who are wise to The Wise Guys who wrote the U.S. Constitution know that all currencies are printed at will by governments. Countries like Japan, Vietnam and China are anxious to keep currency values low for export purposes.  Countries like the United States, Great Britain (which lost its world reserve currency status because of excessive debts from World War I) and Zimbabwe print money to fund wars, economic sanctions and trade imbalances.

Riske Business:   Last year’s defense budget for the United Kingdom was $57.8 billion, Israel $11.3 billion, Russia $24.9 billion, China $35.3 billion and the United States $560 billion.  If you think U.S. military expense will continue at this gargantuan pace, take a look at an ETF called PPA.
   
GDP growth of the Chinese economy for the first half of ‘07 came in at an explosive 11.9 percent. That latest gain puts China ahead of Germany’s $2.9 trillion GDP... and encroaching on Japan’s $4.4 trillion economy.  While still a far cry away from the USA’s $13.2 trillion, China is looking to be King of the Hill.

Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com