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VOLATILITY IS OUR FRIEND

VOLATILITY IS OUR FRIEND

VOLATILITY IS OUR FRIEND

WHY DO WE ENJOY VOLATILITY?

We do not like or dislike volatility, we are neutral to fluctuations. We do, however, like opportunity, and volatility often creates opportunity. In fact, I would go so far as to say volatility usually creates opportunity.

How does this happen? Human nature is driven by greed and fear, among many other motivating influences. However, the insecurities that lead to greed and fear are more urgent in many people, and greed and fear motivate more personal behavioral volatility.

If the markets are volatile, you can be certain that some people are losing money. Those who are losing money often decide to sell down to the sleeping level at a time when the price is low and a buyer with cash and moxie can do very well. Many huge fortunes have been built on this principle.

Due to certain mutual fund tax rules and because of year end tax planning, many mutual funds and individuals like to sell their losers or take profits in their winners in September and October of every year. Consequently, we like to buy what others are throwing away, as long as there is a strong fundamental logic for our purchase.

For these reasons, and for other reasons too numerous to mention, the markets in September and the first few day of October often create great opportunities to buy valuable assets at a low price.

A FEW POINTS

1. Historically, gold often bottoms in September or late August.
2. In the last few decades, stock markets often experience a violent sell off in September and the first few days of October. Although October itself is often an up month for the stock market, stock prices often bottom in mid October and rally substantially in the later part of the month.
3. Our strategy for 2006 is to use the current and expected decline in gold, energy stocks, good growth and value companies to buy.
4. We expect some emotional and irrational selling in the next few weeks. Our conservative growth accounts are holding cash and waiting patiently to buy when the panic sets in.
5. Our aggressive accounts are partially hedged by selling stock and commodity indexes of various types against our long positions.
6. We continue to believe that precious metals, energy and fast growing foreign markets hold a lot of opportunity. U.S., Europe, and other developed markets may also be attractive after a decline.

THE U.S. CURRENT ACCOUNT DEFICIT

To cure a country’s current account deficit problem, there are three alternatives that economists often reference.
1. Raise taxes
2. Raise interest rates
3. Lower the value of your currency

1. Will the U.S. raise taxes?
This is a political year in the U.S. and there is a major election in 2008. In the current environment, I see it as very unlikely that the Congress and Administration will raise taxes in 2006. If the Democrats get control of Congress, they may selectively raise taxes in 2007 but not enough to solve the U.S. current account deficit problem.

2. Will the U.S. raise interest rates?
Not until after the election. If the economy weakens due to the weakness in real estate prices, they may even be forced to lower rates after the Nov 2006 election.

3. Will the U.S. lower the value of their currency?
What other option do they have? Politically it is unwise to anger the voters when your party is already losing voter support. The Republicans have decided that the easiest way to deal with the problems of the current account deficit is to lower the value of the dollar.

UK Pound vs. the U.S. Dollar