October 1

The Laurel Comment

“I think we agree, the past is over”
-George W. Bush
Markets

The August sub prime crisis that served to mortify bulls and please the “I told you so” bears largely subsided in September as the world’s central banks injected unseemly amounts of cash into the system, effectively solving a credit problem by expanding credit.

On the surface of things this unprecedented action brought both stability and strength to equity markets and some “funding” currencies such as the Euro and our own resource backed dollar. It also empowered US dollar based commodities, as both gold and oil rose to new (unadjusted for inflation) highs.

It is now, however, October and the beginning of the year’s final quarter, one that has begun trading with a continued upswing. As we write, Canadian markets have risen well above 14,000 and the dollar has exceeded par with its US neighbour. In America the weak currency has continued to help equity markets regain, and even surpass, their mid-July highs as foreigners convert their ever more worthless paper into the harder assets found within US companies.

The question before investors now is to decide whether the printing presses of the world’s banking system are solving the present problem or creating a far greater one. There are of course, differing opinions as to what the likely outcome may be, for as Mark Twain familiarly stated “that is what makes horse races”. The opinion of this writer for many months has been and continues to be guardedly pessimistic. It is possible that China may be capable of kiting America’s cheques through to the end of next summer’s Olympics, it may also be their wish to do so. But on balance we don’t believe that this can happen and that a severe market correction will soon occur.

There are any number of reasons both fundamental and technical for adopting either a bullish or bearish stance at this juncture, the most important of which resides in market momentum and the continuance of present trends. If you are determined to remain fully invested I extend my very best wishes but advise that you might do well to hedge your bank stocks with some gold positions. Try a Sprott fund or the Horizon ETF (symbol HGU). There is also a pure bullion play available through Central Gold Trust (symbol GTU.UN).

Special situations also exist among Oil and gas Royalty trusts as the merger and acquisition game continues. You might also wish to follow one of Canada’s more astute investors, Seymour Schulich, first by following him into Starfield (SRU) and Birchcliff (BIR) and secondly through reading his book “Get Smarter”.

You may also use this period to cover your gains with 100% or 150% national or Quebec based tax shelters.

Commentary

There are numbers and then there are numbers beneath the numbers, the ones that we can grasp.

The all time high for gold was reached in January of 1980 at $850 US dollars per ounce, a price this letter has projected for year’s end. But wait a minute folks, this is like comparing apples to oranges because the real price, you know the one you think your house is worth, would be better reflected in current dollars; and when adjusted for inflation that number would be in excess of $2000 dollars per ounce. Think of oil at 40 1980 dollars then apply the same 2.5 times multiple and think about how cheap gas actually is when that equivalent comes to one hundred bucks a barrel.

The flip side of these realities can be seen when you reduce the inflation factor to constant dollars and discover that the much followed S&P 500 has only appreciated from 139 at its 1982 August bottom to 270, not the inflated factor of 1555 which it reached this past July. As David Nichols points out in his Fractal Market Report this truer measure reflects a realistic growth factor of doubled wealth over 25 years.

So next time you are calculating your net worth think about that $60,000 cost home you own that is now selling for upwards of $400,000 and ask what it all means?...or on second thought maybe we shouldn’t bother.

Remarkably

A recent analysis of the Iraq War cost put the number at 720 million dollars per day, an amount that promises to continue to grow for some years into the future.

Last month we wrote of the need for an infrastructure rebuild in America that would dwarf the one required here in Canada, one that will take 5 years and a trillion dollars to begin to address. Strangely this is roughly the amount that has been frittered, no pissed away, in Iraq over that same period of time.

The question for the Democrats, should they be elected, is whether they will reverse this course by withdrawing from the former debacle and implementing the latter programs.

Long ago, Bill Copp, suggested that Iraq be divided into 3 federal or independent sectors whose transition would be temporarily guarded by United Nations forces made up of mostly Muslim nations, a position that has since been adopted by some Democrats. It is now later but it is not too late to begin the beginning. If you believe the foregoing then sell defence stocks and buy infrastructure for the coming 4 years.

Real numbers also tell a different story when the actual cost of oil is assessed. Details are available to anyone who wishes to do the research but suffice to say that 80 dollars per barrel does not include the 50 billion tax payers send to the Middle East each year nor does it include the subsidies given to the energy companies. Factor everything in and you come up with a number closer to $260 dollars a barrel. Don’t believe me? Then read it in a Senate report and discover what the true depth of lobbying can mean.

And finally, do the math once more on displaced Iraqis; 4 million of them are now refugees. That’s roughly 15% of the population, a number equivalent to greater Toronto.

What is there not to see? Maybe if New Yorkers had to pass through an Iraqi checkpoint as they travelled to and from work or day care, they might begin to understand what Bush’s America has wrought.


Geoff Ryan
October 1, 2007
GeoffreyRyan@hotmail.com
514-795-8450http://thelaurelcomment.blogspot.com/