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Hoisington 4th Q 2009


Parsad
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Hoisington's 4th Q Letter is terrific and a must read for investors.  I continue to agree that deflation is a far bigger threat than inflation.  With the price of gold these days, and the number of value managers buying gold for their portfolios, and commercials I see on television, I think any investment in gold is a poor speculative bet.  I just saw an ad today for Money Mart, where they are now buying scrap gold...not just cashing checks anymore...but actually buying gold from the general public.  Nuts!  Cheers!

 

http://www.hoisingtonmgt.com/pdf/HIM2009Q4NP.pdf

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Hugh Hendry is another hedge fund manager who says the same thing. His November 2009 commentary is available here. I highly recommend reading it.

 

When you think about it, what the likes of Hendry and Hoisington are suggesting is incredible. Treasury markets are already at generational lows, but yet these guys have come along and suggested that they're going to go even lower.

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IMO, these guys are now entrenched in a belief and will not change their thesis no matter what. Long term treasuries have suffered huge loses in 2009 and it could continue in 2010. I have read strong opinions from both the deflationary and inflationary camps and I cannot say for sure who will win. I prefer to be more flexible.

 

Regarding inflation, here is a fact:

 

http://in.reuters.com/article/economicNews/idINIndia-45428620100115

 

The CPI is up 2.7% from a year ago while 5 year treasuries are yielding 2.41% and anything with less than 1 year duration is close to 0%. So you need close to a 10 year bond yielding 3.67% or a 10 year committment to ensure "some" real return above inflation. If these numbers don't indicate huge fear already priced in for deflation then I don't know what is.

 

So to me it is terrible to recommend people buying long term treasuries when you can go out currently and buy very high quality companies at 11-13 times earnings and with dividend yields alone already at or above long term treasuries. I am not talking about cyclicals here, but things like: KFT, JNJ, AMGN.

 

Cardboard

 

 

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Guest Broxburnboy

Hoisington's 4th Q Letter is terrific and a must read for investors.  I continue to agree that deflation is a far bigger threat than inflation.  With the price of gold these days, and the number of value managers buying gold for their portfolios, and commercials I see on television, I think any investment in gold is a poor speculative bet.  I just saw an ad today for Money Mart, where they are now buying scrap gold...not just cashing checks anymore...but actually buying gold from the general public.  Nuts!  Cheers!

 

http://www.hoisingtonmgt.com/pdf/HIM2009Q4NP.pdf

 

I see the fly in the ointment of Hoisington's argument being the likelihood that US governments will raise taxes and borrow more. Governments have lost the ability to raise taxes and the American people and businesses long ago decided that no matter what, more taxes are not an option. Consequently the US federal government will hit a wall (like California and many municipalities) where they can no longer borrow and dare not inflate.....the only option is to cut spending and fuel the depressionary unemployment spiral until some kind of equilibrium is reached... once the bottom is found, the industriousness of a harder working, more frugal people will start a new growth cycle.

 

As far as pawn shops buying gold, start worrying about a gold bubble when they are selling it!

 

Cheers BBB

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With the price of gold these days, and the number of value managers buying gold for their portfolios, and commercials I see on television, I think any investment in gold is a poor speculative bet.  I just saw an ad today for Money Mart, where they are now buying scrap gold...not just cashing checks anymore...but actually buying gold from the general public.  Nuts!  Cheers!

 

The Daily Show had a funny piece on Glenn Beck and his golden investment advice. http://www.thedailyshow.com/watch/thu-december-10-2009/beck---not-so-mellow-gold

 

 

 

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The comments about gold are interesting.I sold all my gold and silver coins 2 weeks ago.I asked the people that bought them if they get them melted and make the money on the small % less than bullion price that they paid me.They said that they were going to hold them because they felt gold was going to double from here.The silver ones they sent to be melted.I had taken the collection to 3 different appraisers and they all called me back at least 2 times upping their offers.It was like they all had gold fever.In saying that now that I sold gold probably will double.The other interesting thing is the silver coins were all collected at face value and were sold at 9 times face value other than the rare coins that I got more for.The gold coins were sold for 3 times what I had paid.At the time the gold coins were bought you could still get silver coins at just a little above face value.In the end I would have been better to have taken the money I used to buy the gold coins and bought silver coins.The collection wasn't done as an investment it was a family hobby.With all the hoopla now about gold its funny that in my experience it was silver that was the better of the 2.Cheers

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I have been selling junk silver coins for my father on ebay and its crazy what im getting for them.  AFTER fees and shipping i have been getting 12 to 13 times face value.  So i am basically getting the spot silver price or a bit more on ebay..this eliminates the coin shop guy from getting his piece. 

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I believe it.The one place I took the collection it took 3 hours to evaluate it.I watched at least 20 people come in and dump boxes oy jewellery out and walk out with a check.It brings up a question,with all this gold being recycled and put back into the market place will this have an effect on price as there is lots of supply and less demand,or does all this recycling of gold have little impact in the big picture? Cheers

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Funny ad on top of this post...

Doubleclick placed a lead (in Hebrew) for some gold trading company.

The Hebrew reads:

 

"Online Gold Trading"

"$200 Bonus"

"Will Gold trade up?"

"No" (red button)

"Yes" (Green button)

 

http://i45.tinypic.com/1zps715.jpg

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The issue I see is that we all know real rates are going to go up with more borrowing, so, the only way that bond prices go up is if deflation more than offsets the rise in real rates.  I don't think we are going to have very much inflation as the highest cost portion of most value chains are not increasing in price but I do think real rates will increase interest rates.

 

Packer

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"where they can no longer borrow and dare not inflate"

 

The history subsequent to WWII suggests the American people will take a tax increase via inflation than a more disastrous depression, basically, they will go for the higher tax option but only if it is spread out relatively mildly over many years. Whether it will be different this time remains to be seen.

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As far as pawn shops buying gold, start worrying about a gold bubble when they are selling it!

 

Money Mart is a check cashing financial institution in Canada, not a pawn shop.  They cash all sorts of checks, but their bread & butter is payroll checks.  They also issue Mastercard cash cards, etc.  So, they've just entered the scrap gold business completely out of the blue.  I'm not sure if all their locations now accept scrap gold, but it's really bizarre that they've entered the business. 

 

I bought troy ounces of gold about five-six years ago at the bottom that I kept in my safety deposit box.  Over the last couple of years I've sold them off with, the last block I sold last month.  I didn't buy it to hedge my portfolio or anything.  I just started buying them when all the reserve banks went off the gold standard and gold companies were hedging that the price would go lower.  Now, I'm completely on the opposite side of the bet.  I don't short, but I would say that the short bet on gold is a far better choice than the long position on gold today.  Cheers! 

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I bought troy ounces of gold about five-six years ago at the bottom that I kept in my safety deposit box.  Over the last couple of years I've sold them off with, the last block I sold last month.

 

I'm curious who you would use to sell your physical gold too for the best price/fees.

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IMO, these guys are now entrenched in a belief and will not change their thesis no matter what. Long term treasuries have suffered huge loses in 2009 and it could continue in 2010. I have read strong opinions from both the deflationary and inflationary camps and I cannot say for sure who will win. I prefer to be more flexible.

 

Regarding inflation, here is a fact:

 

http://in.reuters.com/article/economicNews/idINIndia-45428620100115

 

The CPI is up 2.7% from a year ago while 5 year treasuries are yielding 2.41% and anything with less than 1 year duration is close to 0%. So you need close to a 10 year bond yielding 3.67% or a 10 year committment to ensure "some" real return above inflation. If these numbers don't indicate huge fear already priced in for deflation then I don't know what is.

 

So to me it is terrible to recommend people buying long term treasuries when you can go out currently and buy very high quality companies at 11-13 times earnings and with dividend yields alone already at or above long term treasuries. I am not talking about cyclicals here, but things like: KFT, JNJ, AMGN.

 

Cardboard

 

 

 

 

My guess is that the 2.7% figure slightly overstates the inflation experience of the average household. For example, a large portion of the increase resulted from the gasoline index, yet household energy prices fell with natural gas and electricity. Vehicle sales also contributed to inflation, but new vehicle sales include transfer payments from the government, while used vehicle prices probably benefited from consumers who would have purchased a new car.

 

I also have trouble believing that shelter costs remained flat. Apartment vacancies in major cities are about 8%. I live in Los Angeles, and I received a $660 per month concession plus a free month in February of '09. I just renegotiated the rent and will only pay $190 more per month. The apartments in my area have not been able to sustain price increases.

 

 

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Funny ad on top of this post...

Doubleclick placed a lead (in Hebrew) for some gold trading company.

The Hebrew reads:

 

"Online Gold Trading"

"$200 Bonus"

"Will Gold trade up?"

"No" (red button)

"Yes" (Green button)

 

http://i45.tinypic.com/1zps715.jpg

 

 

You may have a cookie on your computer or cloud that pegs you as someone who reads Hebrew.  Your visiting this site pegs you as a person who might respond to a gold offer.

 

In our business, we get double or triple response when we contact customers in their ethnically affiliated language than always using English, but we have to be careful because some customers may be offended if they view themselves as fully assimilated or native born.

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An excerpt from a mutual fund report:

 

"A popular ‘speculation’ today is gold. The metal’s present price does not seem to reflect economic reality.

 

For one, its cost to extract and deliver in a purified state is well less than U$400 per ounce. That is to say, after all costs (exploration, expropriation, refining, delivery and all the associated expenses) gold is worth about U$400. Anything more and capital (i.e. shareholders) earn a return – which invariably will not be paid out to them, making it of little use.

 

Secondly, the supply of gold is outstripping its demand. Approximately 4,100 tonnes was supplied to market in 2009. Demand for the metal was around 3,500 tonnes of which about 1,680 was for jewellery and 1,820 tonnes was for ‘investment’. That leaves at least 600 tonnes without a home. 2008’s imbalance was little different and yet the price of gold has continued skyward. It makes me giggle to think of what the CEO of a successful mining business said to me over dinner not long ago: “Buy gold? Why, I have only ever made money selling gold.”

 

Gold is just one example of the stampede of speculative savings into all things extractive: Oil, grains, coffee, copper; the list goes on. If you can farm it or find it, it has value. It’s a return to the good old days of hunting and gathering. Tomorrow, however, is another story. Imbalances correct, bust typically follows boom and speculators’ savings magically transform into promoter bonuses, for the good of their Porsche dealer, of course."

 

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Secondly, the supply of gold is outstripping its demand. Approximately 4,100 tonnes was supplied to market in 2009. Demand for the metal was around 3,500 tonnes of which about 1,680 was for jewellery and 1,820 tonnes was for ‘investment’. That leaves at least 600 tonnes without a home.

 

I would be very interested in where these figures come from.

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Fairfax has followed and invested in Hoisington management directly in the past. Hoisington has been more right than anyone else I have seen over the last 8 years in the Treasury market...Fairfax has made a lot money buying, selling and collecting coupon payments from long dated US Treasuries over this time. I would be very surprised if they have not been buying significant amounts of long bonds at these levels on the same theory that hoisington explains.

 

As for Gold.....John Embury from Sprott swears that it costs $1000 bucks an ounce to pull gold out of the ground right now!

I do not have a clue about gold other than it is entertaining to see the cheerleading from the sideline!

 

Dazel

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Guest Broxburnboy

An excerpt from a mutual fund report:

 

Secondly, the supply of gold is outstripping its demand.

 

 

Why then is the price of gold continually rising?

Why are central banks (like India's) paying more and accumulating more of this

worthless relic?

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