The Bunds Have It
Research for Online Investors

by John Dalt

5/26/10

Germany sold seven billion euro in five year bunds (bonds) Wednesday.  They had a coverage ratio of 1.1  That is terrible, Germany had to retain 22% of the issue.  If not for the Bundesbank, it would have been a failed auction.  As the credit crisis in the eruozone built we discussed the problem for Germany.  By rescuing Greece (and any other country that cannot control spending) they have to guarantee their debt.  When Germany did this the interest rates for sovereign debt from Greece went down.

Now the interest rates for the German Bund have to go up and equalize with Greece and Spanish debt.  Why shouldn’t bond buyers buy the highest coupon bonds?  After all Germany, France and the IMF guarantee them all.  Ah, those darn unintended consequences!  The irony won’t be lost on the German public, Greece had a cold, now the Bunds have it.  Greece, Spain and Portugal sell debt with no problems, while Germany must buy their own bunds to avoid a failed auction!

We have missed on our prediction to pick up the SLV etf for less than $16 by the third week in May.  I think we will be lucky to pick it up under $17 now.  We featured our “Trade of the Year” article in last Saturday’s weekend roundup.  It may have given a few of you a chuckle when you read our price prediction.  That is the way it goes.  We did not anticipate the euro debt crisis blowing up as it did.  We knew of the problem, but minimized the effect.  Are we doing the same with the U.S. debt problem?  Me thinks, it might happen quicker than we all anticipate. 

Trading stocks, and making a gain rather than stopping out is a real rush.  I love investing, but trading stocks can really get your adrenaline pumping.  Market action like today is made for traders.

There is a great article in the Wall Street Journal analyzing Gold, and if it is trading into a bubble.  The author makes a great case that buying gold today is not going to be as profitable as if you had bought it a few years ago at $250 per ounce, but there might be a lot of room to “go vertical.”  We have talked about the mania phase for precious metals.  It’s not here yet.  The author comments that taxi drivers may be talking about gold, but they are not handing out tips on mining stocks!

This gives us two past bubbles to compare gold’s recent price action against.  Another point the author makes is that analysts are not uniformly bullish on precious metal mining stocks and the futures market only prices a few percent gain per year.

It looks like the market is going to erase all the gains from this morning and go into the tank.  An article in the Wall Street Journal caught your editor’s attention.  This has been a rough month for all of our holdings, and all of our subscribers.  I don’t care what you do; the market can absolutely punish you.  The title of this article is “Legendary Investor Is More Worried Than Ever.”  The article is about Seth Klarman, who manages $22 billion dollars and does not give interviews.  This article is a rare chance to gain the insights of a legend few of us have ever heard of.  Mr. Klarman’s private partnerships have returned an annual average of around 19% since 1983.  Those are results that accord rock star status.

We have written of the populist attacks the present administration makes against the “bankers”, “Wall Street, “Oil Companies”, and “the Minority Party.”  See Populism,  For the People to read our views.  From Alexander Hamilton in Letter #1 of the Federalist Papers:

“…the vigor of government is essential to the security of liberty; …their interest can never be separated; and that a dangerous ambition more often lurks behind the forbidding appearance of zeal for the rights of the people than under the forbidding appearance of zeal for the firmness and efficiency of government.  History will teach us that the former has been found a much more certain road to the introduction of despotism than the latter, and that of those men who have overturned the liberties of republics, the greatest number have begun their career by paying an obsequious court to the people; commencing demagogues, and ending tyrants.”

Just a casual observation by one of our founding fathers.  What would Hamilton think today?

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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