Last updated on October 30, 2008

IMPORTANT REMINDER: The major allocations (Stocks, Physicals and Cash) are the starting point for all portfolio transactions. They take precedence over everything else. They rule all actions. Every purchase and every sale is done within the limits set by them. I probably have failed to give this sufficient emphasis. I am adding the limits from now on, which should make them easier to understand. I haven’t changed the major allocations since last March, and have no plans to do so now. Also, new transactions and comments will follow each allocation. Let’s see if this doesn’t work better.
 

 
At the low made last week in the stock market, my stock allocation got as low as 8.8%, not because I sold anything, I didn’t, but because the market value fell that much. At those levels, the gold, silver and energy stocks were dirt cheap and approaching the “hated asset” category. I am now willing to begin committing some of my cash to add to these three categories. I believe these stocks will go up to multiples of their current prices over the next 2-3 years. Since I last reported to you I have added a little more to SSRI, and will probably add to VGZ at around $1. There are two great ETFs now available. GDX, which invests in the mining shares, two-thirds in the blue-chip companies, and the rest in the better smaller companies. Although I have not bought it yet, I do own calls on it, so I have an exposure to it.

I agree with Boone Pickens that the oil and gas companies were not overpriced at their highs a few months ago. They fell along with everything else because of the forced selling brought on by the credit crisis. They are absolutely incredible buys. The ideal ETF for owning them is XLE. I have taken an initial position (I switched my little bit of CHK into it).

For those who might be interested in Roger’s airline investment, I am listing my airline package. Three of these trade on our major stock exchanges, and the other two on NASDAQ, so they are all easy to buy. This is probably the most “hated asset” category on the planet. Rogers is adding now, and I plan to.

IMPORTANT: Do I believe the stock bear market is over? I honestly do not, the reason being that I have not seen real capitulation (a selling climax) which has occurred during past panic sell offs. I’ve lived through three of these during my lifetime. The major problem this time is not that stocks were grossly overvalued a year ago, but that the public was grossly over invested in stocks. Millions have lost half or more in their 401Ks or IRAs. Now they’re frightened of their economic future, and afraid to risk more of their retirement security. The Baby Boomers in particular face imminent, but now delayed retirement, and they shall be sellers on balance on each and every rally. It will be years before the public ventures back into the markets in size as buyers. 

I saw this happen in the 60s when the public was heavily invested in stock mutual funds. A bear market began in the late 60s and the public began liquidating their mutual funds. Almost all of the funds went out of business by the mid 70s, and it was 10 years before money began to flow back into them. You must avoid being invested with the “crowd” if you hope to succeed over the long term. Rogers made this clear in his 2004 book when he advised getting out of stocks and into commodities. He pointed out that there were 40,000 stock mutual funds and only 5 commodity mutual funds at the time. True, commodities have suffered in this panic sell-off, but their fundamentals have not been impaired, and they should rebound far more than stocks in my opinion. Therefore, what stocks I own will be those which produce commodities.

Therefore, I am slowly dollar cost averaging on sell-offs, and will try to make my last buys if I believe we have capitulation. I may raise my stock allocation maximum to 25%, or higher. I keep updated charts on all my stocks, and those I’m interested in acquiring. I think GDX and XLE are probably the two best ways to play the recovery. They are well diversified in most of the best stocks in their categories.

 
I have no new investments to report in this category. I am not losing heart on my silver investment. I still believe it has a brilliant future. I’ve discussed this a lot lately, so I won’t repeat it. For whatever reasons or forces at work, there is a vibrant and healthy cash market in silver all around the world. Demand for silver coins and smaller bars is high, but supply is very low. Last week, my local coin dealer was offering $13.50 per ounce for bags of pre-1965 silver coins at the very moment that silver was selling at $9.35 in the futures market and the silver ETF (SLV). I decided to test this and arbitrage the two markets. I sold a portion of my silver coins (getting $13.50 net to me), immediately turned around and invested the entire proceeds in the futures market at $9.12. I made a spread of over $4.00 an ounce. By reinvesting the entire proceeds of the sale, I increased the number of ounces of metal I own without putting out a single dollar. (I put a portion of the proceeds in gold at the futures price, which accounts for the slight shift in my allocations between silver and gold shown above).

Please be assured that your silver coins are worth $13-$15 per ounce today. Once the disparity between the cash and paper markets disappears, I plan to re-purchase my coins.

I’m also looking into a new way to buy physical gold and silver. Kitco has come out with a new Royal Canadian Mint pool account, in which you can buy gold or silver, and receive direct confirmation from the Mint of your ownership of the actual metal. Furthermore, at any time you request, you can have your metal minted into Canadian Maple Leaf (gold or silver) coins and shipped to you, or held in storage by the Mint. This has two desirable features: Storage of your metal out of the country, and no possibility of recall by the government since they are coins of a foreign government. I think this could be an excellent way of diversifying my precious metals. I plan to contact Kitco very soon. You can read about this at http://www.kitco.com/ind/GoldReport/oct242008A.html. 
 
 

You are now up to date. God bless……………………Jay