The casino economy, the oil spill and investment risk
It’s time investors got some real protection against the big guys, says a U.S. advisory whose hedge position includes two Canadian stocks.
Overall market risk is low, but short-term risk is very high. Yet the greatest risk of all may be gambling risk.
We’re trapped in a “casino economy” and it’s time we took steps to get out of it.
That is the opinion of an American observer whose point of view does not match that of a lot of his fellow newsletter editors.
Mr. William John Kuhn is not happy about the way corporations and big financial institutions seem to be able to avoid responsibility for the worst consequences of some of their actions.
Unlike the majority of his fellow editors, he is not wary of more government regulation. In fact, he would welcome it.
Mr. Kuhn publishes Risk Factor Method of Investing in Bend, Oregon, which lies in the shadow of the Cascade Mountains. His portfolio is heavily invested in alternative energy and ecological stocks.
If a company makes a mess of the environment, he reckons, it should stand up and do the right thing. The vast oil spill in the Gulf is an obvious case in point.
Before we take on the twin problems of the casino economy and the disaster in the Gulf, we will review the hedge portion of this advisory’s portfolio, which holds several Canadian precious metals stocks.
High short-term risk
This advisory has four measurements for stock market risk — Overall, Long Term, Intermediate and Short Term risk.
Right now, Mr. Kuhn says, Overall Market Risk is rather low (he advises conservative investors to have about 35 per cent in cash — the number was 40 per cent a month ago).
Short Term Risk, however, is more than four times greater than normal. And it is 14 times higher than it was in “the depths of despair” just over a year ago.
This editor believes investors should make gold and silver at least 8 percent of their portfolios as a hedge.
The two Canadian stocks he hedges with are gold producer Agnico-Eagles Mines (TSX/NYSE-AEM) and Silver Wheaton Corp. (TSX/NYSE-SLW). This company doesn’t mine any silver, but purchases silver “streams” from mines around the world and sells them on to the market.
A month ago, Agnico-Eagle traded at $61.16. Today it is at $65.56 and yields 0.3 per cent on its $0.18 dividend.
Silver Wheaton was at $17.76 and now stands at $21.46. It pays no dividend.
The third stock is giant producer Newmont Mining (NYSE-NEM), whose price rose from $53.85 to $59.57 during the month, and is now at $57.23. It yields 0.7 per cent on a dividend of $0.40.
The last two hedge positions are ETFs. SPDR Gold Trust Gold Shares (NYSE: GLD) trades at $120.35 (up $7 in four weeks) and Silver iShares ETF (NYSE-SLV), trades at $18.94 (slightly up over a month).
Despite the pounding gold prices took late last week, each of these investments has advanced in the past month.
Break up the banks
When we checked in with this advisory a month ago, Mr. Kuhn was taking a stand on the status of corporations (see Daily Buy-Sell Adviser, April 12). An 1886 Supreme Court decision identified them as persons, with all the rights that implies.
This is not right, in Mr. Kuhn’s opinion. It gives corporations the means to wriggle out of tight corners.
One tight corner that they should not be able to wriggle out of is the one on Wall Street. It is this editor’s hope that real financial reform will result from the deliberations going on in Congress.
Over the past 30 years, he states, derivatives have turned this into “a casino economy.” It is time to either “break up the banks that are currently too big to fail,” or, as an alternative, have those institutions “contribute to a fund large enough to deal with their break-up when they do fail.”
We cannot afford to force Main Street to bail out Wall Street again, the author insists.
The Exxon Valdez
Before the events triggered by a fire on a BP oil rig in the Gulf of Mexico on April 21, the biggest oil spill in North American history goes back to a Good Friday.
On March 24, 1989, the Exxon Valdez oil tanker ran aground and dumped 10.8 million gallons of unrefined crude oil into Prince William Sound in Alaska.
21 years later, few of the local marine industries have rebounded, and those few are left with only a fraction of their former business, Mr. Kuhn reports.
For two decades, Exxon Mobil fought “tooth and nail” to keep its liability to a minimum, the editor says. Shareholders sued to force the company to delay. Jury awards for fixed amounts of money were appealed through the courts.
By delaying, Exxon was able to make money as the market went up in the 1990s.
“Exxon relied on maritime law going back two centuries to limit its liability to a miniscule portion of what it actually cost to those most affected,” the editor states.
BP has said it will take full responsibility for cleaning up and paying the bill for its disastrous spill, which has been spreading through the Gulf for almost a month now.
It will be interesting to see if the company is truly willing to pay for this “tragedy,” Mr. Kuhn says in a less than optimistic tone.
The debate goes on about whether or not big corporations should be reigned in. It will not end anytime soon. But through it all, the risk for individual investors is not shrinking any faster than the oil slick in the Gulf.
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