Graceland Updates 4am-7am

Nov 24, 2009

1. I spoke extensively with one of Jim Sinclair’s securities lawyers yesterday. He has set up hedge funds for 25 years. Equally importantly, he is an expert at helping investors and funds segregate their assets bank and brokerage assets while keeping them there. A custodial expert. I then spoke with of one his friends who is a chartered accountant who handles accounting for funds. In the case of a meltdown, it is comforting to know your assets are legally segregated from the bank’s and brokerage’s assets.

2. Of course, according to Joe Golf Ball Advisor, there can’t be any meltdown. The recovery is on, the widows and orphans are missing out, so they should get loans and buy junk bond funds immediately “at the market” so they don’t miss out on any more of these big yields. All yields should be reinvested in more leveraged junk bonds to maximize the free money with zero risk.

3. The Gman has certain rules set up (a billion of them) that govern funds. Apparently, because I’m mentioning the possibility of a fund in the newsletter, there needs to be a quiet period if I actually go ahead with the fund and when I can mention it to those with whom I have an existing relationship/. Those who have corresponded with me about a fund fall into that category.

4. I asked the lawyer if I could have a mark to model quiet period, like the banksters did with a thousand trillion dollars of otcds with investor money. While he didn’t think was possible, I’m certainly allowed to buy a rack of otc derivatives with your money and mark that to model. That’s AOK. What’s the fund value today, Stewart?” – you. “Well, let’s see now, heads you made 200% today, and tails it’s up 300%.” – me. What happened to common sense? My thinking is that a fund of quality needs to have all participants understanding all the steps as it’s built, where the funds are held, and daily report of what happened in the fund. Isn’t that a common sense approach? So I get input on what those of you are interested so accommodate what you think is important. Rather than say, ‘here’s the fund, it’s my way or the highway, now gimme your money and if you’re lucky I send you a marked to model quarterly update while I take a real performance fee via my marked to lies accounting. That’s not a fund. It’s highway robbery. No wonder Jim Sinclair wants these managers arrested. Anyone who takes a fee off a marked to model accounting IS a robber in my opinion. What’s the problem, what’s the big issue, with making what the fund did each day accessible for the investors in the fund? It’s just common sense. If you are trading in exchange items like gold and gold stock, certain trades occurred. Why not let the investors see what happened, why the secrecy? A quick email of the day’s action sounds reasonable to me. Last time I checked my name is Stewart Thomson. Not James Bond.

5. What I’m going to do is put together a survey about starting a fund. I’m 100% committed to idea this should revolve around what you think is important. Those who have further interest, we can correspond individually by email and I’ll find out from the lawyer about setting up a fund website. I’ll put you on the phone with the securities lawyer so there are no surprises. And the accountant. I’m obsessed with privacy, but also with transparency and communication when it comes to handling money. I want those involved to appreciate the value I bring to the table, and I want to show you I appreciate the value you bring by having you fully comfortable with the entire set-up in advance. With no input ahead of time, I could make errors. Business owners have a sort of 6^th sense about whether something is solid or not. Getting your input and approval for the set-up, trading, accounting, etc, is something I feel is critically important so you can write a check in comfort and then go back to your business. Ideally, this will lead to funds in other asset classes.

6. I don’t really talk much about gold TRADING here in the letter. I operate my own stuff on the same pyramids I talk about in the letter. On rare occasions, I’ll tweak things, like when the Dow fell to 9600 and my bank trader friend told me, via his prime broker connection, that the funds were 97% short. So I booked profit aggressively on my Dow shorts and resumed the systematic order entry again when price rose towards 10,300.

7. If technical indicators rise to high levels on gold, I’ll generally increase the size of my sell orders, but i rarely sell more than 5% of my gold on a $100 upside move. I generally book 1-2% in profits each month from my various broker accounts to my bank accounts. In a case like the current one, which features high levels on the daily and weekly bullion indicators, but a huge head and shoulders play, I’m still selling all bullion and stock strength with my trading positions, but I’m actually adding to my core in separate accounts. I don’t keep my core positions in the same account as my trading positions, even if it is the same stock. I like segregation of action. Physical segregation. Temptation is a man who wears many disguises. I like a physical barrier to keep Mr. Temptation where he belongs: AWAY FROM ME.

8. I am in touch all the time with gold traders, although I don’t mention it in the letter. This is important: You see many amateur traders in the gold community. The professional is a very rare breed. A trader is somebody who doesn’t care about the direction of gold, really. It could be up or down. The number of traders that make money consistently is microscopic. The number that make money consistently and do it with low drawdowns is even rarer.

9. Many investors make some winning trades for a year or two and then believe they are professionals. What I look for in a professional is a multi-year track record of thousands of trades, low drawdowns, and a measurable improvement over time in their total package. They should be very quiet about what they do. If somebody is really good, they will likely downplay that skill.

10. I’m a firm believer that while a top trader could add huge value to a fund, the reality is that the pgen lives on if I die, if you die, if the broker dies, a trader dies. The banksters buy and sell pgen style while selling their super algorithms to thousands of fundsters and traders. It’s ironic that firms like JP Morgan and Goldman, despite having the greatest economists, mathematicians and traders in the world, base the vast majority of their own “safe money” trading on the pgen method of pyramiding in and out of positions. Responding to price.

11. I AM in contact with some very good traders. I would use the term: Spectacular. Not one hit wonders. My own view is that a maximum of 5% of any pgen fund assets should be allocated to the timing of gold and gold stock trades, but I’m not sure how others feel. Another idea is a separate fund. For example, most of you lost money in 2008. A trader that has made money consistently in the gold market for years with small Tudor-type drawdowns, including making large money in 2008 when the gold community was murdered, is not to be taken lightly. But there are other issues to consider. The emotional state of the trader is very important. Damage to their emotional state is a serious matter. You can’t damage the Pgen’s emotional state, because there is no mental state to damage. Any kind of pressure to perform can cause problems, even on people like Paulson and Soros. Tudor closed his fund to new investors almost immediately after opening it. He has a close-knit group. As an investor you may want to make a lot of money with a trader, but I’m adamant that any funds in the hands of a trader must be all-out gambling money that you absolutely could lose without breaking a drop of sweat. THAT is the ONLY way to be 100% sure that the trader is under no pressure. Storming into a trader’s office and demanding returns is slitting your own throat. I guarantee you that they will do even worse after being read the riot act. The only solution is to build a situation that is by definition, FUN. Slowly, it can be built into a large money situation, but all need to be in a positive state all the time, or reasonably so. Most traders who are really good do not promote themselves. But I think those of you reading this who are aware of the larger goal to start a series of banks now realize I’m not joking around. The gold community IS going to make an attempt to become a player in the global community and this is the only realistic road to doing that. Those involved can make thundercash while building something very very large.

12. Going into something this big can jingle the nerves of all of us, but nobody more than a trader. Better to jingle the nerves now, get everyone knowing each other up front, get to a level of total comfort and uniform agreement on procedure, throw out baskets of ideas, than leap into the pool in the dark that we all “knew” was full of water, only to find out the drain broke, and all the water poured out in the early evening after it got dark, and now we’re all dead after knowing nothing could go wrong.

13. I’m a risk management freak. I love reward too, obviously. Part of this is because I absolutely believe that risk management actions actually produce the largest rewards. Some of you are people of extreme wealth, some worth hundreds of millions. Your WISDOM is appreciated, the smallest advice on how to proceed would be kept anonymous to all but myself, all names withheld, but your name-withheld input I’ll bring forward for discussion with all involved. I’ll be getting out to each of you individually just for your input, advice, ideas.

14. I’m 99.9999% sure I’ve made the right choice using Jim Sinclair’s lawyer. He helped get one substantial fund out of Bear Stearns.

15. As one of you said to me last night, “Stewart, the whales would die without the plankton”. Every one of you brings a unique wisdom to the gold community that none else has. I don’t write anyone off, and often somebody who is struggling, can suddenly be in a situation where a lot of your wisdom and knowledge from past experiences can suddenly gel, and incredible success pours in. MANY of you are in that situation. Right on the edge of pulling something really big together.

16. One thing I’d like most of you to understand is that I don’t spend any more time with a sub with $50 million than I do with one who has $25,000. The reason is twofold: a. In the market, the errors made by large and small investors are generally quite similar. I mention market winners in the letter. But rich business owners don’t do any better in the market than poor people. That’s a fact. The mistakes made are the same. The banksters built what they have by consistently buying weakness and selling strength, all the way to zero. Yes, they’ve run a zillion scumbag schemes too, the but the basics of their market actions always are the pgen pyramid actions. If you can come to grips with that, you are in an infinitely stronger position than somebody who has more money, but can’t handle that reality. I’m trying to bring together a powerful force to compete with the banksters that pays those who are involved in real money, not “you’re a stakeholder!” nonsense, whether you are involved intensely or on a peripheral level. I have no interest in taking any bankster, to court. I believe the buyers of the otc derivatives, cities that put taxpayer funds into that garbage, are 100% responsible for their actions. Not the bankster salesmen. I’m simply interested in competing with the banksters.

17. Once the fund/funds is/are set-up and rolling, the next step is take those funds to institutions and gather assets there. I know what is involved to succeed, and the wrong set up out of the gate means it won’t happen. The right set-up is one that lets the funds leverage what we’re doing. The bigtime hedgefunds are looking for funds that have solid performance with low drawdowns and will ENDURE. The pgen is unique in that regard. They then borrow money from the banksters and leverage an investment in that fund. THAT, in a nutshell is the very simple road to a multi-billion dollar fund. From there, the door is wide open to a bank, and obviously the fund investors would have the opportunity to participate. Again, a substantial process would be undertaken to ensure all stakeholders are fully comfortable with what is being undertaken before any action occurs.

18. Goldflower has been chomping at the bit to get going with the backtester. Unlike technical oscillators, a price-based response system presents a realistic backtested scenario. It can’t be manipulated. If you buy gold every $10 down, there’s no way to fund what happened with the system.

19. I’ll leave it to the other writers to scream at the banksters. It’s showtime now and it’s time to take names. My bottom line is this: “Stewart, did you score today, yes or no?”

20. The answer is: I may not have scored yet with this fund, but I’m on the ice and I’ve got the puck on a breakaway. And one more thing: there’s no goalie in the net.

21. The lawyer told me that I could start a clone fund for smaller investors. It wouldn’t be able to do all that a bigger fund could, since there is simply less money involved. But I believe it would give smaller investors significantly more power of scale than exists now. Allocating $10,000 to zero on a $50 stock just isn’t workable, unless the buy sell increments are huge. Smaller investors, alone, have to decide between allocating more risk capital (generally not smart) and cutting some corners. (or the madness of a single price plop which is right “over the edge of sanity”)

22. I’d also like to hold some sort of juniors pow wow. To really get a top 10 or top 20 must-own juniors list. Some of you have done a mindblowing amount of work in this regard. One of you just got back from a week-long visit of a mining project in Mexico. I don’t really trust a lot of the writers out there on the juniors, I’m more interested when I see YOU filtering their juniors ideas to the ones that seem solid.

23. So now we enter the “quiet period” for the fund. I don’t see any specific benefit for you from halting information flow, but I also think I’ve covered all that needs to be said in the letter itself on the fund issue. I think the survey, which I’ll send to you by email, is probably helpful in a general way for other funds you may already be invested in or could come across in the future. You’ll have some guidelines and know how others feel on the same issues. At the top of the list: Marking a fund’s performance to Model is probably not a screaming buy signal. If somebody starting marking my fund to model, I would want out immediately. Redemption locks are another thing I don’t understand. That’s a signal to me that the fund is on big leverage AND in big trouble or bought something that has no market. A triple bombing of the investor. I remember an investor who got major cancer and the fund manager wouldn’t give him his money. I’m not sure what I would have done if I was the investor, but I don’t think I want to mention it in writing here…

24. Markets. Many are talking of the head and shoulders on the gold stocks. I don’t see it that way. It’s a big stretch to say what appears in the gdx and individual stocks is like the bullion h&s. That doesn’t mean the gold stocks are any less bullish. It just means that isn’t the same kind of “head and shoulders play” that exists on the bullion. The CHART is very bullish. But no super h&s continuation pattern exists.

25. Bloomberg reports this morning that BEAR MARKET funds were, quote, “INNUNDATED” with retail investors all thru 2009. If YOU need a reason to cool it on the SIZE of your shortside bets, you just got it. That’s who your partners in crime were all the way up from Dow 6500: The public. The average bear fund is down 33%.

26. So the public party has gone like this: Sell out of bonds in the mid 1990s. “Who needs this 7% govt bond garbage? I’m gonna make me some beeg mowney in the market!” – Joe Public, 1995. Then they dumped half in 2000-2003 and bought income trusts and real estate with that carcass. Another big chunk was dumped into Dow 6500 last year. The real estate clown act is now flame boiled. And a big whack now has gone into SHORTING THE DOW. And already THAT is a minus 30% mess. Another big whack went into junk bonds. How will that end? Obviously in total disaster. Joe Public can certainly put on an exciting show, I’ll give him that. I’ll pay to watch his next performance, it could be as exciting as all the others COMBINED. As he takes his act to…..THE BREAD LINE ?

27. I’ve started posting the daily update on the website before emailing. This will stop me from forgetting. There’s a lot going on now…

Cheers,

Stewart Thomson

Graceland Updates