Stocks on Sale at Zero

Sunday, 05 August 2012
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Published in From The CEO

What in heaven’s name is happening to America’s most cherished stocks?  Who’d have thought that Ford Motor Company – once a Wall Street darling – would now be trading between $9.12 and $9.19 per share?  And Citigroup at $28.03 per share on the New York Stock Exchange? C’mon – this is supposed to be a financial company – number 20 on The Fortune 500!

  You’ve spent more than that when you took the family out to your local Friendly’s Restaurant.  

There was a time – or at least you thought there was a time – when you owned stocks like Ford Motor Company or Citigroup, you owned a stake in America’s wealth.  And now? The corporate equity that once made you feel secure and even a bit affluent is making you feel very uncomfortable.  With stocks of Fortune 500 companies in the double and maybe even single digits, it’s occurred to you that the value of some of your own stocks could slide down to zero.  Is that possible?

Well – yes.  The words we’ve been dancing around here but haven’t yet mentioned are “bankruptcy” and “liquidation.”  For those among you who are either skeptics or who have short memories, let me ever-so gently remind you of Enron Corporation. Voted six years in a row as America’s “most innovative company,” this high flying $100 billion energy company came tumbling down in a real-life drama of fraud and corruption back in 2001.  Enron had become mired in debt, and through accounting legerdemain, hid that debt from shareholders.

But make no mistake.  A company can be worth billions on paper.  But if you’re a stockholder, you will recoup only pennies on the dollar once that company goes bust, no matter how “innovative” the company is or pretends to be.

I bring this up because of the most recent monthly newsletter published by Bill Gross, the head of the world’s largest money manager, Pacific Investment Management Company (PIMCO).  Gross, a multi-billionaire announces that “the cult of equity may be dying, but the cult of inflation may only have just begun.  His overall point is that the high flying days of making big money on the stock market are pretty much done.  The return of long-term Treasury bonds for the past 10, 20 and 30 years have yielded higher return from stocks than a diversified portfolio of equities.  No longer is higher risk “rewarded with excess return.”

While there are those who vigorously disagree with Gross, I’ll bet that the eager beavers who jumped the gun for the facebook IPO in May, now down more than 9% on their money, wish that they had listened to him.

The point is if the dollar amount of an investor’s portfolio now invested in stocks makes him uncomfortable, he might want to consider hedging his paper bets with gold.  A judicious investor might find it safe and profitable with a stock that troubles him to sell that stock on a rally and to move into a physical gold position.  Physical gold does not hide its worth through fancy accounting antics.  It does not lie before congress and regulatory committees.  It does not disguise debt from its stockholders.  In fact, gold has no debt. It is not subject to bankruptcy.  And the last time we checked, Gold cannot slide to zero.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

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