first majestic silver

Wall Street & Gold

March 27, 2000

EXTREME MARKET VOLATILITY SOMETHING IS TERRIBLY WRONG! Has the fed created a classic moral hazard?

The volatility of the markets continues to border on the extreme. There is a growing awareness, even among main stream stock players that something is terribly wrong with stock valuations. Regular subscribers to my service are aware of my views that most of the rise in stock valuations is nothing more than the result of stock market inflation resulting from a fiat currency system run amok.

From a fundamental viewpoint, stocks values as measured by the S&P 500 remain highly overvalued. The S&P 500 earnings yield at the end of last week stood at 3.16% compared to ten year AAA Corporate rates of 6.47%. This disparity between equity and high quality debt returns remains at historical highs.

STEPHEN S. ROACH "The Fed has Created a Classic Moral Hazard."

There were some very interesting comments by Stephen S. Roach, chief economist and director of global economics at Morgan Stanley Dean Witter. On page 46 of this week's Barron's he said what I have been saying, namely that the Fed has created a classic moral hazard. Investors know the Fed is scared to death of the political consequences of a nasty downturn in the markets, so it continually provides sufficient liquidity to keep the market from crashing. Over time, the public has become highly confident that the Fed will always bail them out, so they have lost all fear of risk in the stock market. So they continually buy the dips knowing they can't lose. Or at least they think they can't lose.

What the Fed will ultimately have to teach the public, or nature will do the job for the Fed, is that stocks are highly risky investments. Roach suggests the best way to ring out excesses from the high tech sector of the market, where clearly the greatest excesses in fact exist would be to increase the margin requirements on borrowings by individual investors. He points out that there has been an acceleration of margin borrowing. In fact, borrowings from brokers to buy stocks is up an astounding 87% over the past year. Having lost all fear of losing money in stocks investors are getting carried away. We in fact are experiencing the early stages of hyper inflation in the stock market!

Roach concludes his remarks by saying "its time for a new approach to try to bring stock prices under control before it is too late".

With that I whole heartily concur. As we have been saying for quite some time, this stock market bubble will burst whether the Fed or Bill Clinton likes it or not. If the Fed addresses the excesses sooner rather than later the ultimate pain will be less severe than if it continues to postpone the day of reckoning. But yes I did forget! It's an election year, and Bill Clinton's legacy must be protected right? Lets postpone the day of reckoning for the next President. Right?


Given the extreme excesses that have taken place now in this bull market that started in 1982, the punishment is likely to brutal, perhaps as great or greater than during the Great Depression. So we continue with our model for Year 2000, namely, "Enjoy the Party and Get Home Safely". So far so good. With just 28% of our portfolio in risky assets, 50% in one year U.S. Treasury bonds, 17% in precious metals and 5% in David Tice's Prudent Bear Fund, we should be in good shape when masses of Americans begin a "wailing and gnashing of teeth" process. With our "moon shot" stocks up 61.51% since January, our portfolio year to date has gained 19.73%. That compares favorably with a 3.96% gain for the S&P 500.


With respect to gold, I have long ago given up trying to figure out that market. I think it is highly likely the markets are being managed by the powers that be for reasons we have discussed frequently in the past. Gold will in fact shine, when the interventionists have lost control of the system. At that time, gold could quickly, "in the twinkling of an eye", explode to thousands of dollars per ounce, given the huge amount of money printed by those in charge of our legalized counterfeit monetary system. When that day arrives, the big question is "what will happen to our democratic form of government". But then how democratic is our current process?


CANARC RESOURCE CORP (T-CCM - $0.21) - This is a company with some modest gold production from a placer river in Venezuela and it has a number of highly prospective gold deposits, at least one of which has world class potential. This past week the company announced that Minera Aztec Silver Corporation, its subsidiary company had commenced reverse circulation drilling on its Lobo 14 property in the State of San Luis Potosi in Mexico. This is a highly prospective silver target and the company's joint venture partner, Far West Mining Ltd. is funding this work as part of its requirement to earn a 50% interest. (604) 685-9700.

EAGLECREST EXPLORATIONS LD. (CDNX - EEL - $0.22) - The markets responded with a "ho-hum" reaction to some eye-bulging assays from the first 22 tones of its current bulk sampling program at the San Simon project in Bolivia. The big objection to this project from investors has been the lack of certainty with respect to drill core assays due to the nugget effect of the mineralization that takes place on this property. In any event, the average grade of this 22 tonne sample was 3.03-oz gold per tonne. This compared with a bulk sample average taken during 1999 of 1.61 oz. gold/ton. The lack of interest in this splendid report tells much about the lack of interest in gold by investors in this current environment. The company is in fact talking to senior mining firms about a possible joint venture arrangement. Stay tuned to our weekly hotline messages for any significant news that may take place regarding this company. (604) 684-9384.

PACIFIC NORTH WEST CAPITAL ( CDNX - PFN-$1.22) - One of the few exciting metals these days are the Platinum Group Metals. At the close of last week, the price of platinum was $479.90 and the price of palladium was $608.10. Imagine what these kinds of prices would do for our gold stocks! So it should not be surprising to see that the two companies on our list that have significant PGM exposure have performed very well. PFN has started a drill program on some of its highly prospective claims. This stock is up 276% this year and 353% since we first recommended it last September. Investors can never be faulted for taking some money off the table in a speculative stock like this. You could sell considerably less than 1/2 of your initial purchase to ensure your capital is returned. But this company's shares could have much further to run in the near term depending on drill results from a 13 hole, 2,000 meter drill program. Results are expected to be released over the next three weeks. Call the company for more information at 1-800-667-1870.

RICHMONT MINES INC (TORONTO - RIC - $1.30) Management announced it has purchased 292,011 shares of its owns stock at an average price of Canadian $1.97. It did so given its view that the company's were undervalued.

Gold is using for heat dissipation in some cars.
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