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Safehaven Report


Issue #364 8/6/2004


How gold investments boost your purchasing power!
Here's some chilling news for all Americans who don't own gold: The
IRS just announced that the real income of Americans -- income
minus
inflation -- plunged 9.2% during the past two years -- the
first such
drop since WWII.

That means Americans lost a ton of purchasing power just at the wrong
time ... just when gas prices soared over 60% ... when the stock
market lost half its value ... and when inflation rocketed anew.

But those who have been following our recommendations to own gold and
related investments the past few years are experiencing a relative
gain of purchasing power or real income. Consider these facts:

In 2000, the nationwide average price for a gallon of gasoline was
about $1.25 per gallon, while gold was trading around $250 per ounce.
That means, back then, you could buy about 200 gallons of gas with
that $250.

In contrast, now the average price of a gallon of gas is close to
$2.00 per gallon. That means it takes approximately $400 to buy that
same 200 gallons of gas. But since gold is trading near $400 an
ounce, you can still cash in that same ounce of gold to buy your 200
gallons of gas! And with your gold shares, you could buy much, much
more.

Looking ahead, I agree 100% with Larry's views, expressed in this
column in recent years, that gold is in a bull market, giving you the
opportunity to continue to protect yourself against inflation, boost
your purchasing power, and make substantial profits.
Portfolio Update
Goldcorp (GG): This is also one of my favorite mining companies
because it never hedges its gold production. That means it cashes in
on gold's entire price advance without leaving profits on the table.
But it gets even better: The company says it has stockpiled 32% of
its gold holdings for sale at higher prices later on. Now that's a
bullish outlook from experts in the know who expect higher gold
prices! Hold this pure gold mining play.

Newmont Mining (NEM): This blue chip mining company is a must hold in
my view.

It has not only gone straight up since its earnings announcement on
July 28, but President Pierre Lassonde recently told analysts that
Newmont is sitting on big oil reserves, too -- an estimated 544
million barrels on Newmont's property in the sands of Alberta in
Canada. Lassonde says Newmont will invest in more exploratory
drilling for the "black gold" of Alberta.

With crude oil at another record high of $44 per barrel, I expect oil
profits to boost Newmont's bottom line in the future! Plus, my own
seasonal analysis dovetails nicely with Larry's analysis: Mining
shares are now in one of the two low-point zones for the year and
should move up nicely from here. Hold.

Kinross Gold (KGC): Although Kinross just announced improved earnings
($6.6 million) and cash flow ($25.7 million), the real kicker is that
it says its earnings would have been $12.1 million last quarter if it
hadn't hedged gold. But the good news is that it also says it's now
completely unhedged and ready to cash in on gold's future price
advances! Hold tight.

Agnico Eagle Mining (AEM): This stock is basing for a big move up,
and it's paid a cash dividend for 24 consecutive years. It's
completely unhedged, too. AEM's owns Canada's largest gold deposit at
its LaRonde Mine in Quebec. Hold.

Cambior (CBJ): This virtual penny stock sports a chart pattern as
powerful as that of mining giant Newmont ... yet at $2.95 per share,
it's only just begun its long-term advance! Plus, Cambior has 3.8
million ounces of proven reserves. Hold.

AngloGold (AU): This underperformer has reached support at $28 a
share. So I don't expect it to underperform any longer. The weakening
South African rand should give it the kick start it needs. Hold.

USGI World Precious Minerals Fund (UNPWX): Hold.

http://smcurl.com/kq8Pr (Ike's note: This is a password site, and may
not work)


Issue #364 8/6/2004


Tsakos Energy: Grab 39% Gains NOW!
Last month, we felt it was not yet the time to take profits on Tsakos
Energy Navigation (TNP). Now it is. On the Monday after we
recommended it, it closed at $24.80, and the last we checked, it's
trading at $34.55, up 39%. The actual price you get may differ for
better or for worse. But if you act promptly, you should have a very
nice profit indeed.

Why our change of heart? We still like the company -- nothing has
changed in that regard. However, right now, many hedge funds are
leveraged to the hilt, and we have good reason to believe that some
of them may be holding this company, too. When they head for the
exits along with other investors, they could drive its price down.

Indeed, during the past 11 years, the number of hedge funds operating
in the U.S. has soared 1500%, from 500 to an estimated 8,000. Hedge
funds are now responsible for 25% of the NYSE's total trading volume,
and a large portion of each day's program trading -- the
computerized
execution of large baskets of stocks. And for the first time in
history, program trading now makes up more than half of NYSE volume.
That means hedge funds are an important force in today's trading
environment.

As stocks moved mostly sideways this year, many fund managers grew
impatient with the stock market's low returns. So, they used a high-
leverage strategy to load up their positions enough to amplify their
profits. It worked! Hedge funds made as much as 6% in June, while the
S&P fell 1%. But now the market has fallen to new lows for the year,
and these fund managers are getting nervous. Here's what I recommend:

First, call your broker and sell all your shares of Tsakos at the
market.

Second, if you haven't done so already, buy 200 shares of Rydex
Arktos (RYAIX). This fund is a great way for you to profit when tech
stocks decline because it rises in value when the tech-heavy Nasdaq
100 declines.

Third, add to your LEAPS put option position. You currently own the
S&P 500 Reduced Value LEAPS put options with a strike price of 100
expiring December 2004 (LSZ XT). I recommend you add 3 S&P 500
Reduced Value LEAPS put options with a strike price of 105 expiring
in December 2005, symbol LSY XA at the market. At press time, they
were trading at $6.30 per contract. That's about $630 per option.

As always, however, invest strictly the funds you can afford to risk.
Portfolio Review
Rydex Ursa (RYURX): This fund works much like Rydex Arktos, but it's
designed to rise in price when the S&P 500 declines. If you don't
already own it, buy 400 shares now at the market.

Wal-Mart LEAPS put options with a strike price of $55 expiring
January 2005 (WMT MK): You're in the money now that Wal-Mart stock
has fallen below your strike price of $55. I expect these options to
begin to move almost tick for tick with Wal-Mart stock. Hold.

Rydex Juno (RYJUX) is designed to increase in value as long-term
interest rates rise. Hold.

Plum Creek Timber (PCL): Timber makes a good portfolio diversifier
because it is not correlated with the movement of the equity markets.
Plus, you're getting a 4.5% dividend yield while you wait. Hold.

Don't forget to carefully plan how these investments fit with your
own investment goals. To help you determine how to allocate your
dollars, we recommend you take our risk tolerance test. This will
help you determine how these investments might fit into your overall
portfolio.

If you are still unsure after you take the test, we suggest 75% of
your money in the Mr. Conservative portfolio (including gold
recommendations) and 25% in the Mr. Speculator portfolio.

Within the Mr. Speculator portfolio, we recommend allocating
approximately three-fourths of your money equally among the Rydex
funds, with the balance divided evenly among the other investments.


Ride Interest Rates and Inflation Higher With This Portfolio Mix
With the energy price explosion helping drive inflation and interest
rates higher, I've been recommending you hold 24% of your
conservative portfolio in gold-related investments, and 10% in
natural resource funds and energy stocks.

Long term, I've made the case these investments should protect your
wealth from inflation's ravenous appetite and soaring gas prices. And
sure enough, at over $44 per barrel, crude oil just reached yet
another record high.

Meanwhile, with interest rates moving up, the short-term Treasury
bills I've recommended will help you boost your yield.

It is important to keep your maturities very short term -- 3-month
Treasury bills or equivalent money market funds only. With the
Federal Reserve Board set to raise rates as many as three more times
this year, you'll want your T-bills to mature frequently so you can
rush out and lock in those new, higher rates when they become
available.

I know it's tempting to grab that 5.37% long bond yield, but it's not
time yet to lock in long-term rates. As rates rise, your principal
investment in long-term bonds falls in value, and you can lose money
if you sell before maturity. But in 3-month Treasury bills or
equivalent, you can wait the short time for the investment to mature
and roll it over promptly to earn the better yields as they become
available.
Portfolio Review
Treasury bills or equivalent money market funds (51%). This
represents over half of your conservative portfolio, which I've
designed to protect you from falling stock prices, inflation, and
rising interest rates. Each time your Treasury bills mature,
immediately reinvest the proceeds. Or, if you're in a Treasury-only
money market fund, just hold -- its yield should go up
automatically
as rates rise.

Buy your T-bills directly from the Treasury Department (Treasury
Direct, 800-722-2678) or through a Treasury-only money fund such as:
American Century Capital Preservation Fund (CPFXX; 800-345-2021)
Dreyfus 100% U.S. Treasury Fund (DUSXX; 800-645-6561)
Fidelity Spartan U.S. Treasury Fund (FDLXX; 800-544-8888)
USGI U.S. Treasury Securities Cash Fund (USTXX; 800-873-8637)
Vanguard Treasury MMF (VMPXX; 800-662-7447)
Prudent Global Income Fund (PSAFX), representing 5% of your
portfolio. Overseas investors are temporarily pushing up the dollar
while they fish for higher yielding investments in the U.S. now that
the Fed is raising rates. But the dollar rally is temporary. Our
nation's enormous trillion-dollar twin budget and current account
deficits will continue to weigh down on the dollar in the future.
Hold.

3-month Australian CD (10%): If you followed my recommendation to buy
this Australian CD last month, you're earning a 4.50% yield.
Meanwhile, I expect any Australian dollar weakness to be temporary.
Hold. To buy Australian-dollar CDs, contact Everbank at 800-926-4922
or www.everbank.com. Enerplus (ERF), representing 5% of this
portfolio. Hold this excellent oil and gas royalty trust while energy
prices soar! Enerplus is up, too -- now at a 3-month high. If you
don't own it yet, buy on any dips to $28 or lower.

U.S. Global Natural Resources Fund (PSPFX), representing 5% of this
portfolio. With crude oil at yet another all-time high, China
importing 47% more oil in June than it did last year, and the Middle
East a powder keg waiting to explode into chaos, I expect PSPFX to
take off. Hold. If not yet on board, buy at the market.

Gold-related investments: Keep your allocation at 24% of your
portfolio. See page 6.

Two massive, sweeping trends in the making:
Software slump signals deeper tech woes
Powerful forces drive energy sector higher
I started watching the stock market nearly four decades ago, and in
all these years I have never before seen such large, all-encompassing
sectors follow such divergent paths. Right now ...

* The broad technology sector -- the massive complex of computer-
and
communication-related companies that spearheaded the entire boom of
the 1990s -- is vulnerable to another steep decline. At the same
time ...

* The energy sector, which pervades almost every nook and cranny of
the consumer and corporate worlds, is prepped for another rise.

Understanding why, how, and when will be critical to your investment
success in the months ahead. So I dedicate this issue to both.
Part I
Why Technology Is So Vulnerable
I love high technology.

I started using mainframe computers long before personal computers
existed. My company's first personal computer was an Imsai 8080, the
same model that was later used in the 1983 MGM/United Artists
movie "War Games." And we were among the first in our industry to use
the Internet, a decade before the advent of the World Wide Web.

But my interest in high technology is one thing; my view of today's
high-tech stocks is another entirely. The chart of the tech-heavy
Nasdaq Composite Index tells the story in a nutshell, clearly
illustrating the following facts:




* The so-called "great rally" of 2003 barely made a dent in the
massive losses that preceded it. From bull market peak to bear market
trough, the total value of the Nasdaq fell $5.1 trillion. Since then,
it has recouped only $1.6 trillion, still leaving a net loss of $3.5
trillion.

* This $3.5 trillion loss remains despite massive government efforts
to stimulate the economy, including the greatest money pumping,
interest rate cuts, and tax cuts in recent memory.

* The rally has now run out of steam. After over six months of false
rally attempts, the Nasdaq is down 5.7% for the year and off 12.3%
from its 2004 highs made in January.

What's happening? The business is unraveling in two phases --
first
the decline in software sales which we are already witnessing ... and
next the fall in computer hardware, which is now on its way.
The Fall in Software Sales
In every boom and bust cycle of the tech sector that I can recall,
business software sales have always been the first to fall, and this
was certainly the case back in 2000.

On June 12, 2000, Citrix Systems confessed that it had to revise its
profit estimates from 21 cents per share to 9 or 11 cents per share
due to slow software sales in some of its divisions. The stock
plunged. Then, in July, one software company after another followed a
similar script in rapid-fire succession: Computer Associates on July
3 ... BMC Software on July 5 ... PeopleSoft and Veritas Software on
July 7 ... Siebel Systems on July 8 ... and many more. The Nasdaq
plunged uncontrollably.

Now, four years later, it's happening again! Look at the raft of
software companies that have warned their profits will fall short of
profit targets:

* Computer Associates has admitted that it will miss its second-
quarter sales targets by 3% to 5%, bringing in sales of $830 to $850
million instead of its previous guidance of $865 million to $885
million.

* Veritas Software has warned that its second quarter will also be
lower than expected because of weak sales to business customers,
dropping its profit forecast by as much as 19%.

* Seibel Systems has warned that it would miss expectations by a
country mile -- $301 million instead of the $353 million that Wall
Street was expecting.

* StorageTek has also blamed its second quarter shortfall on an
unexpected drop in orders.

* BMC Software has warned that it will make 11 to 14 cents of profit
instead of the 12 to 16 cents it previously promised.

* PeopleSoft will earn only 13 cents to 15 cents a share on revenue
of $655 million to $665 million, far below the 21 cents on $691
million of sales which had been expected earlier.

* Even the mighty Microsoft has missed its second quarter earnings
goals. Worse, for next year, Microsoft now expects to make only $1.24
a share, far short of the $1.34 Wall Street was counting on.

The stock plunged on the news. And that was just two days after
Microsoft gave its investors an early Christmas gift of over $75
billion -- a special one-time $3 per share dividend (worth $32
billion), a doubling of the regular dividend to 32 cents a share, and
a $30 billion spending spree for stock buybacks, the largest in stock
market history.

Which news announcement did investors respond to more? Well,
Microsoft shares were up only 54 cents on the day it announced the
giant dividend ... but they lost almost $1 on the day it admitted
weaker than expected earnings. That alone goes to show you how
vulnerable tech stocks have become in this market of overblown
expectations.
The Coming Decline In Hardware Sales
As you saw, back in 2000, the profit warnings from software companies
started to hit the newswires in June and July. Then, almost like
clockwork, the slowdown struck the hardware companies a few months
later.

On September 29, 2000, Apple Computer saw its stock sliced nearly in
half when it warned that its third quarter sales would
be "substantially below expectations." Dell Computer, Ericsson,
Hewlett-Packard and others followed with shocking news soon
thereafter.

Expect a similar pattern this time.
More Evidence
In the heady growth days of years past, Bill Gates would never have
dreamed of giving away a piece of Microsoft's cash hoard. Instead, he
would have pounced on the next hot new technology, thrown cash at it
in abundant quantities, and sought to dominate the sector.

Now, though, he has apparently recognized that the pickings are slim
in the high-tech industry.

So rather than embark on a series of acquisitions, he actually
prefers to hand the cash back to investors. Bottom line: If he can't
get excited about the industry, why should you?

Wall Street hasn't connected the dots yet. But they will very soon.
When they do, here's what I expect they'll be talking about ...

IBM: In the last five years, IBM was only able to grow its top line
by $800 million or less than 1%. That gives IBM a pathetic sales
growth rate of less than two tenths of a percent per year. Cost
cutting and financial engineering will only get them so far. Without
sales growth, IBM's stock is a ship waiting to sink.

Intel: One of the earliest signs of trouble at any company is a
sudden rise in inventory. It means that instead of flying out the
door, products are sitting on the shelves. So on July 14, when Intel
reported a 15% surge in inventories from the prior quarter, it was a
bad sign. Watch out below.

Applied Materials: Usually, companies at the bottom of the food chain
are among the last to get hit when business slows down. But when
their corporate customers start issuing warnings, you know the day of
reckoning is near.

Case in point: Applied Materials sells big-ticket semiconductor
equipment to companies like Chartered Semiconductor, the third-
largest chipmaker in the world and one of Applied Materials' biggest
customers. But Chartered has just warned that it expects its third
quarter sales to be flat because of weak demand, a bad omen for
Applied Materials.

Micron Technology: In 1996, The company pulled in $3.6 billion of
sales. In 2003, it had $3.1 in sales. So in seven years -- during
the
biggest tech boom in the history of mankind -- its business
actually
shrunk. Plus, it managed to lose $2.8 billion in the last three
years. And Wall Street thinks this company is worth $7.9 billion?
Give me a break!

Cisco: Why do you think Cisco, a company that continues to horde cash
and refuses to pay dividends, is one of the loudest protesters
against the proposal to charge options as an expense? I suspect it's
because they want to mask the massive dilution from issuing millions
of stock option to their overpaid executives. In 2003, Cisco bought
back 424 million shares for an average price of $14 a share. But at
the same time, it had 45 million options exercised at $7 and granted
another 199 million options exercisable at an average price of $12.

Bottom line: These companies still don't get it. They need to focus
on doing what's best for shareholders -- not necessarily what's
best
for insiders. They need to focus on boosting sales in a sustainable
manner -- not providing just a one-time shot in the arm for
investors.
Part 2
How The Supply/Demand Imbalance Is Driving The Energy Sector Higher
Again, the price of crude oil is hitting all-time highs. And again,
the pundits are trying to pooh-pooh it as a "one-time event."

Before, they blamed it on terrorist threats. Now, they're blaming it
on the Russian government's actions against Yukos Oil ... or strikes
by oil rig workers in Norway. Next time, they'll probably attribute
it to some other "unusual set of circumstances."

These outside factors directly impact the market, of course. But none
of them would have had a lasting impact on oil markets without a
fundamental, long-term imbalance between supply and demand in the
world today.

Here's the key: Unlike the oil shortage in the 1970's, the reasons
for the rise in prices today are not political. They are driven by a
worldwide shortage and an insatiable, growing demand.

Over the last six years, America's daily usage of oil grew by 1.4
million barrels a day. Going forward, the Energy Information
Administration predicts that U.S. demand for oil is expected to grow
by 1.6% a year for the rest of this decade in the U.S.

Meanwhile, China is soaking up nearly 40% of whatever extra oil the
world is able to produce and is now consuming 5.14 million barrels of
oil a day.

All told, the global demand is forecast to increase to grow from 81.4
million barrels a day in 2004 to 83.2 million in 2005. That growing
demand is culprit #1 behind the oil price increases. And no, we can't
pump our way out of this mess. OPEC is already pumping at more than
95% of capacity -- the highest for a quarter of a century.

Meanwhile, a powerful factor behind rising gas prices in the U.S. is
a critical shortage of refining capacity. There hasn't been a new
refinery built in the United States in 28 years, while more than 200
facilities have been shut down.

In 1981, the U.S. had 324 operating refineries. Today there are only
149. Worse, a refinery in California is scheduled to shut down in the
fall and two refineries in Texas have been for sale for the last
three years.

In years to come, new regulations -- such as requirements for
ethanol --
will reduce the amount of gasoline refiners can make. A new refinery
would cost more than $3 billion to build, not to mention the years it
would take to go through the approval process.

So can we buy gasoline from abroad? Not easily. Most foreign
refineries are unable to make gasoline that is suitable for sale in
the United States.

Bottom line: We are bumping along that precarious point at which
demand chronically exceeds supply. The real surprise isn't that oil
is trading at an all-time high of over $44 a barrel -- it's that
oil
prices aren't already a lot higher.

There are bound to be setbacks in-between. But this is another,
powerful trend that is just in its infancy.
What To Do
If you've been holding on to your tech stocks in the hope they're on
their way to their old glory, now's the time to face reality. It's
not going to happen.

Washington and Wall Street made a valiant effort to get things going
again, and they did lift the Nasdaq out of its deep hole for a while.
But now some of the same the dark clouds of the tech wreck are
returning, and the market is sinking again.

Meanwhile, many energy stocks continue to move up, especially those
that profit directly from more volume of shipping and/or higher
prices for crude.

Here are the steps to follow:

1. Exit virtually all tech stocks you may be holding. Be thankful
your tech stocks have come back this far.

2. Build a war chest of cash. Safety should be your #1 priority.

3. Position yourself to profit from rising oil and energy prices.

4. When you have a good profit, grab it, and move on to the next
opportunity. Although this could be a long-term uptrend for energy, I
believe a buy-and-hold strategy is not appropriate in today's topsy-
turvy world.

5. Diversify your portfolio with natural resources, precious metals,
and contrarian funds that are designed to profit from long-term
trends. (See Mr. Conservative and Mr. Speculator).


<< Index / Next Article >>



Questions from our Readers
Q. I agree the stock market is going to go south -- but not before
the
election! You seem to think it could happen sooner. Why?

A. The Fed is already raising interest rates despite the election.
And, the impact of the government's economic stimulus is already
wearing off, regardless of politics. This shows that the election
alone is really not a significant factor.

Q. What would be the impact on the economy of a Bush victory? What
about a Kerry victory?

A. You've got it backwards. It's the economy that drives presidents
to react in certain ways -- not vice-versa. When things are going
well, they give lip service to fiscal prudence. When things are going
downhill, they respond with all-out spending and stimulus. I don't
see much difference between either candidate in that regard.

Q. Suppose the warnings are true and there's a large-scale terrorist
attack on American soil before November 2. What would that do to the
stock market?

A. Just before 9/11, all our indicators were telling us the stock
market was overdue for a sharp, bear-market rally, to be followed by
another, steeper decline. Instead, 9/11 drove the market into a
convulsive decline, and then our scenario finally unfolded. My
interpretation: Although unexpected disasters can temporary drive the
market off course, sooner or later it will tend to resume its
original trajectory.

Q. I've been contacted by an insurance company regarding ROP (return
of premium) term life. Is this a good product?

A. The idea of getting back 100% of your money sounds good, ROP term
life product is an expensive marketing gimmick. Insurance companies
typically price the premiums so high that they're able to earn enough
on your money over the years to pay you back. The result is that
these are very expensive term life insurance policies. You can save a
lot of money with traditional, no-frills term insurance.

Click here for a list of the 20 strongest life insurance companies,
according to Weiss Ratings.

Q. I don't get it. Why does everyone worry about foreign investors
dumping their Treasuries? No matter what, there is always going to be
someone who'll be buying them, right?

A. Sure, but at what price? Think about any item -- a piece of
real
estate, a commodity, anything. What happens when the seller is
anxious to sell but the buyer is reluctant to buy? The market price
tumbles, right?

Q. I know you told us to sell Diamond Offshore and Tidewater a few
months back. But I'm still holding on. What should I do?

A. Exit your positions in both of these stocks. Concentrate on our
recommendations in the current portfolio.