Thursday, March 19, 2009

China Syndrome

Top Line: Today was commodity day in a continuation of the recognition that the Fed signalled that inflation wasn't an issue that they were concerned about. This will be a theme for the rest of the year...that inflation is back. That's one of our reasons for concentrating on commodities.

The biggest move for the Update was the 15% rise in natural gas. We bought it still a little higher than this but 15% does take a lot of the sting out of it. We are concentrated in the precious metals, mining stocks in particular, as well as energy commodities, natural gas and coal as well as oil producers and natural gas producers. This made today a very strong day for us.

After reading more about yesterday's Fed news, we would like to spend a few minutes reviewing their decision. A few weeks ago, the Chinese made some public comments about the US and their responsibilities toward the US Treasury bonds. China owns a bunch of the US debt and they wanted to take their concerns to the public.

In like manner, the Fed took their announcement to the public telling all of us that they would buy a trillion dollars or so of debt, such as US T-bonds and some Mortgage Backed Securities (MBS). The first question is why do you make a public announcement? Why don't you just go Do It and don't bother with the announcement? Of course, you know why, they wanted to make a splash in the market. We don't think they got the reaction they were looking for exactly.

The announcement denied the possibility that these moves would create even a hint of inflation but the inflation sentries were standing tall and the dollar just got creamed. We think a cheaper dollar is responsible for the higher commodity prices, especially oil and gold, but a cheaper dollar will put a lift in stocks, too. The one thing it Should not do is boost Treasury bond prices. So, currently, the bonds are Overpriced and they will come down. So, if you want or need to refi your mortgage, do it Soon.

On the day of the birth of our first son, we went to see the China Syndrome. If you recall, this movie's title represents the idea that a nuclear meltdown with its extreme heat would basically melt everything below it and therefore go through the earth to China. We think the economic meltdown could actually make it through the earth to China as described above...therefore our title this evening.

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