“The art of getting rich consists not in industry, much less in saving, but in a better order, in timeliness, in being at the right spot.”

Ralph Waldo Emerson


And so we wait for the right spot and the right time….I see more evidence each day that people are being bullied by our policy makers into taking undue risks with their hard earned money. Zero interest rates until at least 2014. What message does that send to the beleaguered, retiree who lives off the interest income on her savings accounts?

ZIRP is forcing people to take risks that they normally wouldn’t dream of. It has been said that “John Bull can stand many things, but he can’t stand  zero percent.”. I read somewhere that a record number of new shares have been created for the US High Yield ETF, hot money is pouring into this sector in a reach for yield. The perception is that this credit spread is now relatively safe because companies have so much cash on the balance sheet and default rates are very low. Emerging Market Bonds are back on the radar for their “better balance sheets” and higher yields. This trade may have a little more juice left in it but when the retail investor is getting involved in things they almost certainly don’t understand, I think alarm bells should be ringing.

For January, the FTSE All Share increased 2.6% and the Hedge Fund Index rose 1.5%, Kelpie Capital increased 1.9% in what felt like a tortuous month. Being too defensive throughout January was wrong, but I would argue that’s only the case in hindsight.  Outcome-bias and backwards rationalization means decisions are assessed not by the soundness of the process that generates them, but by the actual result. I believe my approach is prudent and reticent of the facts. Markets are currently “awash with liquidity” thanks to the LTRO operations and the aforementioned promise of low rates to infinity and beyond. I believe that the most attractive opportunities are presented when markets are devoid of liquidity. When you can be rewarded by the market for being the provider of liquidity as the purchaser of assets from distressed sellers – that is when you want to be “balls to the wall” bullish; not when after three years we still can’t claim this to be anything other than the worst “recovery” since the Depression.

I commented last month that I was selling Cisco and Western Digital because I expected them have a weak Q1 because much of their sales would be brought forward into Q4. I also said I liked them and would like to own them again. Naively, I overlooked that they would report Q4 in Q1! The stocks are up very strongly since I exited. The same applies with Gigaset De sold two months ago. This is very annoying and I will perhaps have to endeavour to not let my trigger finger get quite so itchy if I own cheap stocks that I like.

I am pleased with the operational and market performance of my 3 largest longs, Energold, Microsoft and Yukon Nevada. The first two had very strong months up 15% and 13% whilst Yukon has delivered operationally and is starting to get recognition for that, up 9% today as I write on positive news flow.

From a broader market perspective I still think need to focus on two data points. The Shiller P/E is sitting at 21.8x which is a whisker short of the most expensive quintile in 130 years of data. In the context of this historically rich valuations we are still facing macro data that suggests a strong likelihood of a global recession.  To quote John Hussman…

“While we typically discourage drawing inferences from any single indicator, it’s at least worth noting that with the release of Q4 GDP figures, the year-over-year growth rate of real U.S. GDP remains below 1.6% (denoted by the red line below). A decline in GDP growth to this level has always been associated with recession, usually coincident with that decline, though with a two-quarter lag in two instances (1956 and 2007), and with one post-recession dip in growth during the first quarter of 2003. As it happens, the GDP growth rate dropped below 1.6% in the third quarter of 2011.”

Other measures are also flashing caution, Corporate Profits to GDP are at extremely elevated levels relative to the last 70 years of data.

Meanwhile Average Joe is getting squeezed like never before. Wages/GDP have been grinding lower for 40 years but have accelerated their decline of late. When you think about the ramifications of this it becomes quite confusing. How can you be bullish on corporate profits or GDP when consumer spending, which is 70% of GDP, is fuelled only by household earnings from wages which are at a 40 year low relative to the economic pie? The other drivers of consumer spending – interest income, home equity withdrawals and credit cards are being crushed by central banks, negative equity and private sector deleveraging. I must be missing something.


It feels like we have gone up in a straight line since mid December with the S&P failing to post a single 1% decline day in that time. The VIX has dropped to 18, a level which frequently precedes sharp market declines. Investors are starting to think this is a “can’t lose market”. Maybe the blockbuster Facebook IPO frenzy will mark a top – if so then I will “like” Mr Zuckerberg.




Dart Group


African Barrick Gold


Yukon Nevada Gold