Well, front and center this morning is a rally in the currencies that began yesterday mid-morning, and has carried through the Asian and European markets. I’d tell you why the euro is 2.5 figures above yesterday morning’s level, but you’d laugh at me… No wait! That’s what you’re supposed to do, Chuck, tell the people what’s going on! HA! Seriously though… I don’t think you’d laugh at me, maybe the dolts that run trading floors around the world, or the pundits that write stories about the markets, but not me!

Here’s the skinny… Yesterday, I told you about how the markets were convinced the European Central Bank (ECB) was going to follow the Fed and reduce interest rates this week on Thursday. I also told you that I DID NOT believe the ECB would cut rates, right? OK… Well, yesterday, and I don’t believe for one minute that these guys read the Pfennig and said, “Hey, that Chuck Butler says the ECB won’t cut rates, we had better change gears”… But, yesterday, the thought that the ECB would lag the Fed with interest rate cuts began a whispering campaign, and before you know, there’s a headline story on the Bloomberg, say just that!

Fickle dudes, eh? One day they think this, the next day they think that. To think it is one thing but to spew it all out for everyone to read, is another! I know, I know, I change my mind sometimes, and I’m always reminded of the saying by John Maynard Keynes…”When the facts change, I change my mind. What do you do, sir?”

So… Anyway, back at the ranch, the euro is rising again, and the Aussie dollar is trading above 72-cents for the first time in three months! I’ve explained why this is going on, but in case you missed class that day… The Obama bounce, is giving a warm and fuzzy to the risk takers, and when risk comes back on board, the high yielders get a huge boost… Aussie, kiwi, reals, rands, they, even though their interest rates have been cut off at the knees, are still considered “high yielders”, and therefore, get all the love and attention, when the risk takers come on board…

U.S. stimulus spending is all the rage in the high yielders and the emerging markets, who have been beaten about the head and shoulders for far too long now! Yes, stimulus spending could be the key master to all that ails the world’s economic engine here in the U.S…. But at what cost?

I know, I know, you don’t want me getting on my soapbox and carrying on about the rising debt in the U.S. and our national debt going into the stratosphere, so I won’t… Not today…

There’s been a particular pattern going on in Gold that I think is worthy of mention. You see, yesterday a saw a story about Gold, and I decided to run a graph on what I thought had been happening, and the chart confirmed my thoughts… You see, Gold has been in a pattern of rising to fresh highs, and then falling back, but the falling back sees the lows at higher levels each time… A stair step if you will… Here’s a look at what I’m talking about…

In the past 3 months… Gold hit a low of $712.30 on Nov. 12, and rose to $821 to Nov 25
Then fell to $$756 on Dec 5, and rose to $852 on Dec 18.
Then fell to $846 on Dec 25, and rose to $882 on Dec 31.
The fell to $859 on Jan 5…

Where will it rise to this time? $900? Difficult to call, but this type of pattern usually indicates that each fall back in price (but to a higher low) creates a new base from which an asset can move higher. So, with that in mind, the outlook for a higher price in Gold in this pattern is possible.

Of course, $900, is a far cry from those that believe that Gold will get to $2500. But, I like small steps in assets, that way, it allows investors to still jump in without the asset getting away from them and then they chase the price higher and higher. Again, though, I shiver at $2500 Gold, because, if Gold is $2500, I can’t imagine the condition of the U.S. economy and the dollar…

The data yesterday in the U.S. was a mixed bag of bad stuff for the economy… The most important print was the ISM (non-manufacturing) Index. Recall yesterday I told you that the most important component of this report is the Employment component, which is my “secret” indicator of the National Jobs report (Jobs Jamboree). So… A quick look at the employment component indicates that the Jobs Jamboree, on Friday, will be close to negative -500K… This is what the “experts” are forecasting right now, and for once in a Blue Moon, I agree with them… Although, to me, I want to see the color of the November revision, which I explained all about the other day… Will it be -600K?

Factory Orders printed worse than expected yesterday… Factory Orders for November, collapsed 4.6% (remember the “experts” forecast -2.3%), and the prior was revised lower from -5.1% to -6.0%. I think that the back to back decline represents the biggest since data began in 1992.

The mixed bag part came in the form of the ISM (non-manufacturing) Index which measures the pulse of the Services industry, and for the first time in 4 months it did not contract. The index rose to 40.6… However, this is the 3rd month of below 45, which I’ve explained in the manufacturing side of this report indicates recession…

The Labor picture in Germany took a hit this morning, as the unemployment rate ticked up to 7.6% in December. You see, the Germans don’t have the Bureau of Labor Statistics (BLS) to help them out each month with “cooked books”… If the U.S. unemployment rate was accurately calculated it would be much higher than the 6.7% the BLS gives us, and wants us to believe…

Anyway… I didn’t mean to have that turn into a discussion about the BLS, I wanted to point out that even with a sour report like that in Germany this morning, the euro is rallying…

Speaking of unemployment… Did you see that ALCOA announced that they would cut its work force by about 15,000, or roughly 14.5% of its current employees and contractors. It also plans salary and hiring freezes, more plant closures and production cuts, and a 50% cut in capital expenditures? I did, and if that right there doesn’t illustrate the dark clouds over the global economic picture, nothing does!

One currency in Europe that rallied like there was no tomorrow, yesterday was the British pound… Before I knew it, the pound was taking names and pushing higher. This has to be a “cross thing”, because there’s nothing, nada, zero, zilch, in the way of good news from the U.K. economic and financial problems… So, when I talk about a “cross thing” I’m simply talking about how the currency “pairs” get crossed against other currencies, and in the end, a particular currency, which is a part of a lot of “pairs” gets marked up… Or down… It can go both ways… But in the pound’s circle, it got marked up yesterday… But, I just don’t think the pound can hold these gains… The Bank of England (BOE) WILL cut rates tomorrow, and before you know it… Voila! A weaker pound once again.

Here lately, it seems that I’ve highlighted a “Currency of the day”… I don’t want to keep going with that, because it could become a real pain to come up with a “currency of the day”… For now, I’m highlighting currencies that have BIG moves in a day… If I carried on with a “Currency of the day” I could be stuck highlighting a currency that moved .1%! UGH! So, I’ll steer clear of that one…

So, the latest on the Madoff scandal as reported by the Wall Street Journal… “Ten days before his arrest, Bernard Madoff received $250 million from a man who helped give him his start on Wall Street, a move that shows how the investment manager tried to raise cash to stave off his firm’s collapse.”

Geez Louise, how’d you like to be the guy that gave Madoff $250 Million and watch it go away, and the guy get carted off to jail? (well not yet) I guess if you have $250 Million to “give away” there’s more where that came from, eh?

Currencies today 1/7/08: A$ .7210, kiwi .5965, C$ .8455, euro 1.3630, sterling 1.4955, Swiss .9090, rand 9.40, krone 6.9350, SEK 7.7975, forint 195.50, zloty 2.9120, koruna 19.25, yen 93.20, sing 1.4715, HKD 7.7525, INR 48.76, China 6.8335, pesos 13.35, BRL 2.2070, dollar index 82.29, Oil $48.29, Silver $11.38, and Gold… $864.25

Source: A Trading Pattern For Gold

Keynes managed Cambridge’s King’s College Chest Fund. The Fund averaged 12% per year from 1927-1946, which was remarkable given that the period seemed to be all about gray skies and storm clouds – it included the Great Depression and World War II. The U.K. stock market fell 15% during this stretch. And to top it off, the Chest Fund’s returns included only capital appreciation, as the college spent the income earned in the portfolio, which was considerable. I think it must be one of the most remarkable track records in the annals of finance.

Keynes also made himself a personal fortune as an investor. When he died, he left an estate worth some $30 million in present-day dollars, which surprised his contemporaries. How he did it is the subject of this essay. A new book by Justyn Walsh, Keynes and the Market, is our chief guide on the subject.

As Walsh points out, Keynes spent his last six years as an unpaid Treasury adviser. He outlived his parents, who left him no inheritance. And Keynes was a great patron of the arts, financing many ventures out of his own pocket. To finish with such a grand sum sent London society abuzz. “Some surprise has been expressed about the large fortune left by Lord Keynes,” reflected the Financial Times. “Yet Lord Keynes was one of the few economists with the practical ability to make money.”

It wasn’t easy for Keynes, as these things seldom are for anyone. Keynes began as a run-of-mill speculator and trader, trying to anticipate trends and forecast cycles. The Great Crash of 1929 sent him back to the drawing board.

Keynes was, in fact, nearly wiped out in the Great Crash. His personal net worth fell by more than 80%. He then had a great conversion. Trading the market demanded “abnormal foresight” and “phenomenal skill” to work, he concluded. “I am clear,” the new Keynes wrote in a memorandum, “that the idea of wholesale shifts [in and out of the market at different stages of the business cycle] is for various reasons impracticable and undesirable.”

After the crash, he became an investor, rather than a speculator. His new ideas on investing began to presage those of value investing icons Ben Graham and Warren Buffett. Interestingly, the crash hurt Graham too and motivated him also to think deeply about the process of investing. The two great money minds came to nearly the same place in their thinking.

Keynes now focused less on forecasting the market. Instead, he cast his keen mind on individual securities, trying to figure out their “ultimate values,” as he called them. He summed up his new philosophy in a note to a colleague: “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these.”

He also became more patient. Paraphrasing from his own analogy, Keynes described how it was easier and safer in the long run to buy a 75-cent dollar and wait, rather than buy a 75-cent dollar and sell it because it became a 50-cent dollar – and hope to buy it back as a 40-cent dollar. Keynes learned to trust more in his own research and opinions, and not let market prices put him off a good deal. When the market fell, Keynes remarked: “I do not draw from this conclusion that a responsible investing body should every week cast panic glances over its list of securities to find one more victim to fling to the bears.”

Keynes also developed a fierce contrarian streak. One of his greatest personal coups came in 1933. The Great Depression was on. Franklin Delano Roosevelt’s speeches gushed with anti-corporate rhetoric. The market sank. America’s utilities were, Keynes noticed, extremely cheap in “what is for the time being an irrationally unfashionable market.” He bought the depressed preferred stocks. In the next year, his personal net worth would nearly triple.

Keynes was an adviser to an insurance company, as well as manager of the Chest Fund. In a note, Keynes laid out his understanding of the quirky, contrarian nature of investing. It is “the one sphere of life and activity where victory, security and success is always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the board of my insurance company to buy a share, that, I am learning from experience, is the right moment for selling it.”

He also learned to hold onto his stocks “through thick and thin,” he said, to let the magic of compounding do its thing. (In a tax-free fashion, too, by avoiding capital gains taxes.) “‘Be quiet’” is our best motto,” he wrote, by which he meant to ignore the short-term noise and let the longer-term forces assert themselves. It also meant limiting his activities to buying only when he found intrinsic values far above stock prices.

Keynes also came to the conclusion that you could own too many stocks. Better to own fewer stocks and more of your very best ideas than spread yourself too thin. Committees and others repeatedly criticized Keynes for making big bets on a smaller number of companies. In a typically witty reply, Keynes defended his views. In this case, his critics accused him of making too large a bet on Elder Dempster: “Sorry to have gone too large on Elder Dempster. I was suffering from my chronic delusion that one good share is safer than 10 bad ones.”

He rejected the idea, as Buffett and other great investors have, that you dilute your best bets by holding a long list of stocks. At times during Keynes’ career, half of his portfolio might be in only a handful of names, though he liked to mix up the risks he took. So though five names might make up half of his portfolio, they wouldn’t be all gold stocks, for instance. “For his faith in portfolio concentration,” Walsh writes, “Keynes was rewarded with an investment performance far superior – albeit more volatile – than that of the broader market.”

In the depth of the Depression, Keynes lost a friend, Sidney Russell Cooke, who took his own life after suffering severe losses in the market. Keynes, perhaps reflecting on this experience, wrote that investors need to take losses with “as much equanimity and patience” as possible. Investors must accept that stock prices can swing wide of underlying values for extended stretches of time.

Keynes’ investment performance improved markedly after adopting these ideas. Whereas in the 1920s, he generally trailed the market, he was a great performer after the crash. Walsh dates Keynes’ adoption of what we’d think of as a Warren Buffett sort of approach as beginning in 1931. From that time to 1945, the Chest Fund rose 10-fold in value in 15 years, versus no return for the overall market. That is a truly awesome performance in an awfully tough environment.

As investors wonder whether we face a 1930s-style market or not, I found a review of Keynes’ investing career useful and inspirational. The more I study investing, the more this same handful of ideas and principles seems to recur…among successful investors, that is.

Source: Anti-Depression Remedies, Part II

This from Investment U:

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” ~John Maynard Keynes, 1936

When it comes to the best strategy to use during a treacherous bear market, I turn to advice from my favorite guru. The British economist, John Maynard Keynes (1883-1946), made a ton of money during the Great Depression.

It was he who turned the world upside down in the late 1930s when he advocated that the government should counter the Depression by deliberately cutting interest rates, inflating the money supply, and run huge deficits. And during this year’s financial panic, Keynes (his name rhymes with “brains”) is back in vogue.

Today, both Republicans (George Bush) and Democrats (Barack Obama) are joining the Keynesian bandwagon in favor of bailouts, injecting liquidity in the markets, and cutting interest rates. Not surprisingly, this year the Nobel Prize in economics went to Paul Krugman, an outspoken “big government” Keynesian.

As a free-market economist, I am not a big fan of Keynesian prescriptions of inflation and progressive taxation as a cure for depression. I prefer tax cuts, privatization and a stable monetary policy.

While the Keynesian policies of reinflation and deficit spending may avert another Great Depression, it threatens to reignite price inflation and another dollar crisis down the road.

Making Money With John Maynard Keynes

But when it comes to making money, nobody can beat John Maynard Keynes. In 1927, he was appointed manager of the “Chest Fund” at King’s College in Cambridge. As the chart shows below, he was extremely successful as a money manager during a time of unprecedented deflation, depression, bear markets and world war. His fund was up an average annualized return of 9.1% compared to -1% of UK stocks.

Chest Fund Performance 1927 to 1946

John Maynard Keynes’s investment strategy is, in many respects, similar to Warren Buffett’s investment strategy. And even he is impressed. In his 1991 shareholder’s report, Buffett has acknowledged Keynes’s influence on him. Keynes was a man “whose brilliance as a practicing investor matched his brilliance in thought.”

John Maynard Keynes’s Contrarian Investment Strategy

How did John Maynard Keynes achieve such a remarkable success? Years later, he revealed his technique: “My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”

In 1933, at the depth of the Great Depression, Keynes took a contrarian position by acquiring the preferred shares of big-utility holding companies in the United States. “They are now hopelessly out of favor with American investors and deeply depressed below their real value,” he said.

He bought, amongst others, National Power & Light Preferred, which he noted yielded 15%, was awash with cash and whose earnings were rising again. He even bought these and other high dividend-paying stocks on margin.

His bet proved to be highly profitable, as his preferred stocks doubled and tripled in value over the next few years. But, I should also emphasize that Keynes was no trader. He bought and held these stocks through thick and thin. He even held good-quality stocks during the 1929-33 bear market, and he was almost wiped out.

Thus, Keynes, like most of us, lost big money during the 1929 crash and subsequent bear market. But surprisingly he didn’t see this as a weakness. He took a positive attitude about bear markets:

“I feel no shame at being found still owning a share when the bottom of the market comes… I would go much further than that. I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. Any other policy is anti-social, destructive of confidence and incompatible with the working of the economic system. An investor… should be aiming primarily at long-period results, and should be solely judged by these.”

John Maynard Keynes’s Strategy Still Works Today

I recommend John Maynard Keynes’s strategy today: Buy quality companies that are paying consistently high dividends, and hold through thick and thin during the coming years.

If you want to follow Keynes’s idea of buying preferred stocks, consider buying the John Hancock Preferred Income Fund (NYSE:HPI), a closed-end fund that uses a value-oriented approach to invest in preferred stocks and other fixed-income securities rated “investment grade” by Moody’s or S&P.

Currently it pays a monthly income of 15.5 cents a share, for a current yield of 17.5%. It’s selling for an 11.6% discount from its Net Asset Value ($11.86). You could make a substantial capital gain plus the 17.5% dividend yield – almost 30%.

As the economy recovers, and I expect it will in 2009, undervalued companies with strong yields are one of the best ways to land big gains.

Source: John Maynard Keynes: How to Make 30% From an 80-Year-Old Investment Strategy