Monday, August 25: Week in Review
Stocks turned in a repeat, ho-hum performance last week; the Dow, up two days to gain 310 points and down three days to give all but 30 points back, closed at 11628. The S&P 500 wasn’t much different, nor the NASDAQ Composite. In fact, the stock market’s gain or loss is in almost a perfect inverse relationship with the price of oil.
Here are the worldwide stock market stats, and with the exception of London, which advanced about 1% last week, all worldwide stock markets were down.
click to enlarge images
Last week was more accommodating to precious metals. At least the day-after-day declines lightened up, with silver, gold and platinum all advancing, net, for the week.
This is an easy time for individual investors who seek to diversify their portfolios by owning physical silver or gold to lose focus of the longer term picture. The media will have us believe that the twin bogeymen of the economy, Oil and Financials, have been corralled, if not tamed. Don't be lulled in to a false sense of security.
For example, at the moment, oil prices are off 21% from peak prices in June, and getting softer. In financials, the US government is poised to bail out Fannie Mae (FNM) and Freddie Mac (FRE). Oil and Financials, problems solved.
Unfortunately, this is not the way it will come together. By the end of the year, and probably right after the election, expect the price of oil to resume its upward march. With regard to the government bailout, where is the risk in value to the US dollar?
The decline in the price of oil reflects the worldwide slowing of economic activity. Also, China has basically been on vacation with the Olympics, and gets back to business this week. Drawing down Strategic Petroleum Reserves in the US will help keep the price lower until after the election, but after that, look out.
Risk to the Dollar?
Here's the short version. Fannie Mae and Freddie Mac have $5.2 trillion in mortgages between them. In addition, according to Barclays Capital, Fannie and Freddie must raise a total of $225 billion over the next 5 weeks, mostly to meet maturing short term debt. This figure is more than the amount of post-credit crisis capital raised by all US investment banks this year. The government won't be able to print money fast enough.
The major negative impact will come in October, just before the election, in the form of adding $5.2 trillion in contingent liability to the $9 trillion national debt to cover Fannie's and Freddie's mortgage obligations. Since a government takeover would wipe out existing shareholders, this would make its shares worthless. Fannie Mae closed Friday at $5 /share; this compares with almost $60 a share a year ago, or a loss of value of more than 90%. Now that's risky.
Let's see whose mutual funds are affected, looking at shareholders of Fannie Mae alone: FMR, Fidelity (Manager of Magellan Funds) owns 60 million Fannie Mae shares, or 6% of total shares outstanding. Lord Abbett, another respectable mutual fund group, owns 63 million shares, or also 6% of total. Dodge & Cox, one of the most respected names in investment management, owns a whopping 11% of Fannie, owning 121 million shares.
Perhaps this is the time to utilize the automatic monthly investment plans that the mutual funds pioneered - except instead of investing $100 to $1,000 a month into a mutual fund, you'd be investing in a package of basket of precious metal coinage.
It is impossible to time the market price of anything. Anyone who says they can should be avoided. However, we can make longer term judgment calls, and a long term focus tells most prudent individual investors that (a) the mortgage debt financial crisis will worsen before it gets better; (b) the US dollar will resume its depreciation after the US elections; and, importantly, (c) reports on inflation are likely to be much higher with a new Administration.
Each of these developments contributes individually, and collectively, to rising prices for precious metals over the next six months, unfolding via greater market attention to them with each few months, as each development adds mounting pressure for a deteriorating dollar. We may not know when, exactly, but making monthly purchases of precious metals is one way to average out the cost of this financial commitment.
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