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94% of Your Portfolio Success Is Based On…

Chuck Butler (May 4, 2009)

Monday, May 4, 2009

Also In Today’s Letter…

By Chuck Butler I’m back! Once again, the traveling troubadour returns to the saddle.

This time, I’m here for two weeks, and then I’m gone again. First I’m going to Las Vegas for the Money show, and then I have a nice reprieve before heading to Vancouver in July. Plus, there’s a day game at Busch Stadium this Thursday, and I’m already making plans to go…so I’m getting ready for that!

The currencies rallied for most of the week, after the Swine Flu scare filtered through the markets. On Friday, the majority of foreign currencies were range bound, as it was May Day across the globe and many countries were on holiday.

So we start this week with the news that Citigroup may need US$10 billion to keep afloat, and news that Federal regulators shut down Silverton Bank in Atlanta, along with another smaller bank in New Jersey.

That brings the total count of banks closed in the U.S. this year to 31! The FDIC estimated that the cost to the insurance fund would be US$1.3 Billion…Ouch.

The Silverton Bank was supposedly a key cog in the Southeast, according to the Wall Street Journal. Bankers in Georgia are saying that Silverton’s collapse could take down at least eight to 12 other banks with ties to Silverton.

“Domino dancing… (All day, all day) Watch them all fall down (All day, all day) Domino dancing (All day, all day) Watch them all fall down (All day, all day, domino dancing)…”

I’m not being flippant about this folks… I’m trying to point out that the rot on the vine is deeper than the media and our country’s leaders would have you believe.

Oh, and did you hear that the Boston Globe is shutting down? And one more item… Those “stress tests?” Well, wouldn’t you know it: The results are being delayed, due to the banks debating the test’s findings.

Well, they have that right to do so… Maybe, the regulators didn’t understand something in their accounting methods. But unfortunately, I believe the banks’ debating will be like arguing with an umpire over balls and strikes!

Hopefully the BOC Won’t End Up with Egg on Their Face

Okay, enough doom and gloom! Let’s talk about some good things… Like last week when the Bank of Canada (BOC) decided to do a Nancy Reagan, and just say “no” to Quantitative Easing.

Let’s hope they don’t end up with an egg on their collective faces should they need to implement Quantitative Easing at some point in the future. But I’m sure they have weighed all the facts to this point. Canada’s Banks are in tip-top shape, compared to their neighbors to the south.

For those of you new to the class, I’ll explain this about the Canadian dollar / loonie once more… When oil returns to higher levels, the loonie will follow. This currency is so juiced by energy prices, and oil is the Big Kahuna when it comes to the loonie’s pricing.

Why China’s Stimulus Works When Ours Doesn’t

And remember what you heard here first, last month, and that is that China would be the first to come out of the economic doldrums? Someone asked me last week at the Total Wealth Symposium, why I thought China’s stimulus worked better than anyone else’s…

It’s simple. With China being a Communist Country, they can dictate not only to whom the stimulus goes to, but HOW the stimulus is used.

Imagine if you will the initial US$150 Billion that was sent out last spring. If the government placed stipulations on how it was spent, then maybe you’d have something, or better yet, the initial US$700 Billion in TARP funds. But they handed out money with no strings attached, so the banks used those funds as they saw fit. For instance, they didn’t lend the funds out, as “requested by the Treasury,” but they threw it in the nearly empty treasure chest and sat on it.

See the difference in the two methods?

It appears that the so-called “decoupling” is back on the table, as China and India seem to be coming out of the economic doldrums long before the U.S., Europe, and Japan will. Hmmmm…

Meanwhile, the Chinese renminbi has begun to move higher again, just when everyone thought the Chinese would batten down the hatches on currency appreciation. This is only happening because the Chinese economy is beginning to show signs of improvement.

China’s signs of improvement are doing wonders for the Aussie dollar. Don’t look now, but the Aussie dollar has climbed past 73-cents!

Aussie’s kissin’ cousin across the Tasman, New Zealand, is not seeing the same kind of love as the Aussie. The Reserve Bank of New Zealand (RBNZ) left the door open to further rate cuts last week, while the Reserve Bank of Australia (RBA) is giving signals that the rate cuts may be nearing an end.

Gold: Anything Below $900 Is STILL A Bargain!

A long-time reader sent me a link to a story on Morningstar regarding our fave shiny metal, gold.

Here’s a snippet…

“Jon Nadler, a senior analyst at Kitco Bullion Dealers, points out that all of the world’s above-ground gold amounts to around 0.6% of total global wealth, so even if gold were at US$10,000 per ounce, the metal would only amount to 6% of total global wealth.”

Here’s another snippet from someone else… “Singapore, Norway, Saudi Arabia and other member nations of the Organization of the Petroleum Exporting Countries are likely already increasing their allocations of gold, or likely to do so in the coming months. They would be somewhat ignorant and financially and economically illiterate not to do so.”

Everyone at the Total Wealth Symposium in Bermuda last week was talking about gold. I see that it has slipped back below the US$900 level, which I have taken as the line in the sand for buying opportunities.

Could gold go lower from here? Of course it could, but that wouldn’t change my mind. I would still say anything below US$900 is a buying opportunity, considering where most people believe gold is headed.

Did you see that China announced last week that they had increased their holdings of Gold by 76% in the past six years? Hmmm… No wonder the last six years have been so kind to holders of the shiny metal, eh?

94% of Your Portfolio Success Is Based On…

How about this for some good news… Ford outsold Toyota in April! Now, that’s something you don’t see every day! Well, maybe when Ford was selling their pick-em-up trucks like funnel cakes at a state fair. But not often, at least not to my recollection.

Bad news for my little river town this past week, as Chrysler closed down the plant that had been operating in St. Louis since the ’60′s. Good thing we decided back in the late ’90′s to diversify our income stream in the city!

I was an alderman then, and this was my greatest fear at the time. I was concerned that the city depended on one corporate entity so much. We made great strides to diversify the city’s portfolio of income streams so that today, when the bad news hits, it doesn’t hit as hard as it would have if no diversification had taken place.

You see… The overall risk to the portfolio was reduced!

Well, what does that lesson teach us? It should teach us the diversification is the most important financial idea anyone should be thinking about! Diversification so that the asset classes in your portfolio have a low correlation to one another, and have different pricing mechanisms.

Currencies and metals represent the best diversifying assets to your already existing portfolio of stocks, bonds, mutual funds, and land. It is a proven fact that by adding currencies and metals to a portfolio, you will reduce the over risk in the portfolio!

Remember… 94% of a portfolio’s return is based on asset class selection.

That’s it for today… A very good road trip for yours truly last week, and my beloved Cardinals! My little granddaughter, Delaney Grace, came by to see me on Saturday. She sings songs now… She tips her head from side to side while singing! She is so darn cute!

Here’s Wishing you a Marvelous Monday!
Chuck Butler

EDITOR’S NOTE: Looking for the ultimate diversification tool? Every single month, Chuck and his co-editor, Ashish Advani introduce the most wide-reaching, easy-to-buy currency plays in Currency Capitalist, so you can add a few currency plays to your regular stock and bond portfolio.

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