Dear Reader,

I have some questions for you today regarding the financial sector’s activities in Europe: “Why Greece? Why not Serbia? Why have the European banks put so much money into buying Greek bonds and not some other country’s bonds?” After all, there are plenty of other risky countries where the banks could have planted their funds. What’s the difference between Greece and any other shaky country?

In my opinion, there are two big risks to consider while investing anywhere. The first thing to consider is the fiscal and political situation. If the country starts regulating the market to death and spending like crazy, clearly that’s a problem. The second big risk is the central bank. If the currency goes out of control, those bonds won’t be worth much.

But with a European monetary union, investors didn’t have to worry about Greece’s central bank. As a result, one major risk was completely off the table. Furthermore, the banks understood that being a part of the eurozone meant an implied bailout and assistance for the country. Of course, they were correct. On top of that, the currency was shared, reducing the need for currency hedges. As a result, the European banks loaded up on Greek debt.

While many European leaders pretend that this crisis isn’t directly related to the eurozone, it isn’t so – these factors all encouraged investment into dodgy, weaker nations. If Greece was independent of the eurozone’s implied bailouts, had its own central bank, and its own currency, European banks would never have put that much money into the country. Sure, they would have invested some, but not to the level where default could mean a worldwide financial crisis. There are plenty of countries with horrible finances around the globe. It’s no accident that we’re discussing the debts of Portugal and Greece rather than Ghana or Serbia.

Next up, Jeff Clark will discuss the state of mining stocks and gold.

Is It Time to Load Up on Gold Stocks?

By Jeff Clark

By almost any measure, gold stocks are undervalued. Should we load up?

After completing my research on this question, I’m convinced that as gold stock investors, we’re in the right place. See if you agree…

Let’s first get a handle on the degree of undervaluation. The more undervalued, the lower the buying risk. A fairly valued stock, on the other hand, requires added caution.

Gold accelerated higher in August and September, peaking around $1,900/ounce, while gold stocks lagged. Here’s a chart of the HUI-to-gold ratio (HGR). In a rising gold environment, a climbing HGR indicates that gold stocks are outperforming the metal; a falling HGR means they’re trailing gold.

(Click on image to enlarge)

Today’s 0.32 HGR means gold stocks as a group have not been this cheap, relative to their underlying metal, since January 2010. And a lower ratio hasn’t been seen since February 2009, when it was recovering from the 2008 global meltdown.

I think there’s a more compelling situation that demonstrates the undervalued nature of gold stocks. It’s hard to read a mining company’s quarterly report these days without hearing about “growing margins.” The gold price has risen faster than operating costs across our industry, which has lifted profit margins of the better-run producers.

Higher margins are key to increasing earnings and cash flow, which in turn lead to rising stock prices. Have gold mining equities kept pace with ever-increasing margins?

(Click on image to enlarge)

Gold mining companies are earning record margins, averaging a whopping $1,268 per ounce last quarter. In both nominal dollars and percentage above costs, margins have never been this high for gold producers. Stock prices, however, have not responded in similar fashion.

This is a potentially significant point, because margins of this magnitude will be ignored only so long. When the broader investing community begins to take notice, investors will snap up these highly profitable stocks and push prices higher. The “catch-up” in gold stocks could be tremendous.

The conclusions from these data seem clear: Gold stocks, as a group, are undervalued. The incredible profit margins generated by our sector will attract investors – sooner or later. We also have data that indicate that picking the better stocks – like most of those in BIG GOLD – is more profitable than buying a gold stock fund.

We’re in the right place.

The question, of course, is timing. We don’t know when gold stocks will begin to catch up. And the data don’t suggest that they must rise right now nor that they’ve hit bottom. We’re convinced they’ll someday hit lofty levels, but for now we maintain the same refrain: keep one-third of assets in cash. This reduces risk and gives us a nice pile of funds to deploy during selloffs.

In the big picture, gold has ratcheted steadily higher throughout the rallies and corrections, a trend we’re confident will continue for some time. As the price sets new highs and margins remain robust, our sector will attract more attention. We must patiently stay the course until those new realities begin to set in.

Make sure you have exposure to gold stocks, but it’s not yet time to jump in yelling “Geronimo!”

[As fiat currencies accelerate their inevitable paths to eventual destruction, gold will ascend. How far and how fast remain to be seen, but you can get insights and actionable advice on gold and gold stocks – and much, much more – from the recently held Casey Research/Sprott Summit, When Money Dies. You can learn what legendary investors like Rick Rule and Doug Casey are doing and recommending… get invaluable insights from analysts including Adam Fergusson and Lew Rockwell… from audio recordings of the entire event that are available now.]

Additional Links and Reads

Short Sales Rise the Most Since 2006 (Bloomberg)

The number of shorts is rising to alarming levels. This article details some of the favorite targets, such as Alcoa, currently the most-shorted stock on the DJIA. Also, Pfizer and GE have seen the biggest increases in shorts from last month. Furthermore, investors are finding various shorts around the globe. One manager mentioned in the article is shorting Chinese cement stocks… an interesting idea.

Herman Cain to Occupy Wall Street Protesters: If You’re Not Rich, “Blame Yourself” (New York Daily News)

Initially, I thought that Herman Cain was at least better than Perry or Romney, but after his recent comments on the Occupy Wall Street movement, I’m not so sure. Here’s the most important part of his statement:

“Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself. It is not someone’s fault if they succeeded; it is someone’s fault if they failed,” the ex-Godfather’s Pizza CEO declared.

This statement makes me wonder if Cain has talked to a single unemployed American. What amazes me about this recession is not unemployment numbers, it’s the unemployment stories of really smart people. Recently, I met a young man looking for a job. He was finishing a master’s degree from Baylor in applied mathematics. He had a few years experience working at a major energy company. On top of that, he was publishing academic papers on energy prices with his professors. Don’t take him for some sort of introverted nerd; the guy could communicate very well too… yet he hasn’t been able to find a job for months.

Can Herman Cain honestly tell me that this is his fault? I guess he’s just not trying. There are plenty of similar stories. I know person after person who can’t find work after six months of searching. Many of them are smart, hard-working, and did everything “right,” but in this economy, that doesn’t matter.

In my opinion, Cain’s statement reflects a 2006 world-view of unemployment. In today’s economy, his words are completely out of touch. As a side note to Mr. Cain, those protestors aren’t out on the streets because the banks succeeded, but rather because they failed. The former CEO of Godfather’s Pizza needs a slice of reality.

Update: Since I wrote this piece last night, Cain has made a retraction saying his comments only apply to Occupy Wall Street protestors but not the rest of the unemployed. I’m failing to see the logic in this lame retraction. How can one group of people be blamed while another cannot?

Let me get this straight. If I’m an unemployed Wall Street protestor, I should blame myself for being unemployed. If I’m an unemployed worker in Iowa watching the Republican debates, I should not blame myself for being unemployed. I guess all those Wall Street protestors can get jobs; they just don’t want them or something.

Furthermore, what’s Cain’s message with these statements? Stop protesting and then you won’t have to blame yourself?! I’m really trying to understand how this works… maybe Cain can design a witty 999 plan to help me get it.

In my opinion, Cain was caught saying something really stupid and then dug the hole even deeper with a pitiful and illogical attempt at a retraction.

Lavish trips, Louis Vuitton and Government Assistance (Baltimore Crime Beat)

I have to issue a warning regarding this story – for anyone on blood pressure medication, it’s probably not a good idea to read it, as it will definitely get the blood boiling.

According to the Baltimore Sun, the wife of a Baltimore heroin kingpin led a lavish life, including a $760,000 house in the suburbs, $130,000 in Louis Vuitton and Gucci accessories, and vacations to the Bahamas, the Dominican Republic, and Vegas. However, the Sun notes that apparently this money wasn’t enough:

And yet, Edison had also applied for government assistance, stating that she earned $13 an hour working at a communications business and was enrolled in school. “Representing that she resided on West Lexington Street and misrepresenting her financial condition, Edison was granted the requested public assistance,” authorities wrote in court papers.

My face is turning red with anger just re-reading the story. Thankfully, this extreme case is rare, but the same thing often happens with petty drug dealers across the country. If one has his rent paid, a little extra welfare, and some food stamps, it doesn’t take much unreported income to be living a lower middle class lifestyle.

That’s it for today. Thank you for reading Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor