Tuesday, September 27, 2011

September 27, 2011
An ideal allocation for a dismal Economy
by Scott Ryan

Nothing has changed with regard to the fundamental reasons for buying gold. The thesis remains 100% intact. Hedge funds in the past week have been selling off their positions, causing a temporary price decline. These are short term traders who commit billions of dollars of other people's money based upon formations on a chart - not sound reasoning. A “strong dollar” is a complete misnomer. Picture a teeter totter on the deck of the Titanic. One can be “up” versus the other; however, the problem with all fiat currencies is the same. Which is “up” versus which on any given day is irrelevant in the longer term. By “longer term” I’m talking months – not years.

The greatest risk ultimately is being long fiat paper backed by the utopian fantasies of prodigal governments.

You have to be long gold. The dollar has lost 96% of value versus gold and will eventually lose the other 4%.

To mitigate volatility, as a means of diversification, I like the utility ETF - Select Sector SPDR-Utilities (Symbol: XLU) yielding over 4%.

The treacherous policy of the Fed is creating a bubble in junk bonds as it appears the only option for seniors looking to replace the yields of their maturing CDs. I do not like the junk bonds or any bonds right now. I expect bonds and bond investors to get destroyed as the government is forced to “inflate their way out of the debt”. Millions of senior citizens will fall prey to brokers all too willing to sell them the junk bonds and leveraged funds. I think the equity offered in the utilities with the dividend yield is a better place to look for current income/yield than bonds. Sure, you could go out and buy one utility alone and get a higher yield –but- the ETF provides important regional diversification. This is important in this economic climate.

I also love Microsoft here. I have rarely been excited about MSFT but here at this level, selling at a mere $200 billion market cap – it is a fraction of its former high of $614 Billion, 9 times earnings and a solid 3% + dividend. As when I was recommending Ebay at around $12.00 (2/23/2009) – my thesis was that the sum of the parts were worth far more than the market was - temporarily - appraising the whole.  I concluded the rapidly growing PAYPAL which is owned by Ebay was worth more than the current price of Ebay; thus it was only a matter of time before the value was FORCED upward by the growing cash flow and EPS.

Source of ebay rec: http://boards.fool.com/mrarbitrage-on-dakt-long-27464408.aspx?sort=postdate

I say the same for Microsoft (MSFT) here at the $25 dollar per share/$209 billion market cap.  I can envision a future where their prudent acquisition of Skype may prove to be a Bonanza. Based on what I’m seeing from Skype, I believe that Skype has the potential to be worth $200 billion alone in a few years.

So, to recap.

You must own gold.  To help offset over-all volatility, value and cash flow can be found in the utility ETF (XLU) -and- Microsoft is a compelling valuation here with a built in floor of cash, cash flow, low p/e and attractive dividend.  Then keep up to 25% in cash for the short-term needs.

1 comment:

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