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02/21/12

European Finance Ministers met into the early morning hours in Brussels before hammering out an agreement to extend another $172 billion dollars to Greece.  European markets traded and closed lower on the session.  On the other hand, U.S. markets are trading higher, chasing a mythical goal of 13,000 on the DJI.

We passed through 13,000 briefly, then fell back.  We may charge higher again today, but what does it matter?  Europe is in a recession and just committed more money they don’t have to prop up a government that doesn’t believe the answer to deficit spending is to cut spending.

James Atlucher of Formula Capital put it best, “I feel like I’m in a Twilight Zone episode.  Is this 2010 or 2012, who cares?  We just kicked that can down the road.  The reality is that Greece has been supported by its neighbors since 20 BC.  We’ve anticipated this for 2000 years.  The country has already defaulted, this is worse than a default.”

All the details for the ‘agreement’ will come out in the next few days, and we predict everyone is not going to be happy.  Trade unions have called for more protests in Athens on Wednesday. Parliaments in Germany, Finland and the Netherlands must approve the deal for their governments to participate.  Greece had to accept “enhanced and permanent” EU monitoring of their government budget.

Greece needs ‘voluntary’ participation of the private bondholders to make the deal work.  Just to be sure, the Greek government promised to legislate a “Collective Action Clause” to force losses on debt holders that don’t ‘voluntarily’ participate.

This is a sweet trick!  Legislate “voluntary” compliance by passing a law after the contract has been signed.  Not too much different than what Obama did to bondholders of General Motors.  It’s all voluntary…if you want anything.

Watch the contortions the International Swaps and Derivatives Assn. (ISDA) goes through to label this all legal so the credit default swaps (SDS) on Greek debt won’t be triggered.  Owning a CDS is like insurance.  If the bond’s market price goes down, the CDS value goes up.  If the bond issuer defaults, the issuer of the CDS takes the bond and pays the holder of the CDS face value.

Why would anyone agree to take less than face value for their Greek bond if they owned a CDS?  The payment of a CDS contract is governed by the (ISDA).  If the ISDA says a default did not occur, then the CDS payment is not due.  Bondholders now own a bond that is worth less than what they paid for it, and a CDS that may or may not pay off.

CDS prices on Greek debt, gold and silver all increased in price this morning.

Warren Buffett is preparing his annual letter to shareholders of Berkshire Hathaway (BRK).  It will become available in March with the Annual Meeting Information package.  Fortune has an article by Buffett explaining his views on equities over alternatives including precious metals.

We respect Mr. Buffett, having read all we can about and by him and Benjamin Graham his mentor.  After reading his article, we have a couple of points that need to be considered.  We recommend precious metals in all of our premium services.  Some are held as investments and others for a trade.

We may hold a precious metals position as an investment, valuing it more than holding cash.  If we held cash we would be exposed to the depreciating effects of the Federal Reserve’s money printing.  Buffett points this out in his article with “the dollar has fallen a staggering 86% in value since 1965…It takes no less than $7 today to buy what $1 did at that time.”

Berkshire Hathaway is required to hold large amounts of cash or cash instruments for liquidity because of their concentration in the insurance sector.  The insurance claims resulting from a tidal wave in Japan or an earthquake in Singapore would not allow the selling of assets.  Cash is truly king in this business.

Can you imagine the turmoil in the gold market, if BRK had to convert $20 billion dollars in gold…tomorrow to pay insurance claims?  As small investors, we can move in and out of GLD or SLV without affecting the general market.

Remember what happened to precious metals in December when hedge funds were liquidating positions.  It wasn’t pretty.  Buffett makes the salient point in his article that gold pays no dividend nor does it produce any income…it just sits there.  In that light, gold and silver are like money, except the government can’t print more gold and silver.  And that is why they have value.

We think there is another reason that Warren Buffett doesn’t like gold.  Ben Graham didn’t like gold.  But then you have to remember something, it was illegal to own gold when Benjamin Graham was investing.  Owning precious metals rather than cash was not an option since FDR made it illegal to own gold during the depression.  Private ownership of gold wouldn’t be legal again until 1971 when Nixon ended the dollar’s backing by gold and silver.

Quote:
Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.---Shelby Cullom Davis as quoted by Warren Buffett

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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