Fitzwilson:  “A Tale Of Two Cities is a book written by Charles Dickens set before and during the French Revolution.  It is a book that ranks in the top of all literary achievements.  It depicts the plight of the French peasantry prior to the Revolution and the retribution inflicted upon the aristocracy by the peasants once the Revolution took hold.

To some extent, we saw an extraordinary ‘tale of two cities’ last week in the United States.  The first event took place in Detroit when the inevitable bankruptcy of the once great city became a reality.  Despite challenges to the filing, it appears that there is no other option.  Creditors, retirees and bond holders will be among the many who will be severely impacted.....

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The other city was Menlo Park, California.  Menlo Park is the corporate headquarters of Facebook.  Facebook posted an extraordinary quarterly report in which almost every metric was impressively exceeded.  The founder and CEO of Facebook, Mark Zuckerberg, reportedly increased his net worth by $4 billion for a job well done by his team.  In the aggregate, billions of new wealth were created for hundreds, if not thousands of investors and employees of the Company.

As devastated as Detroit has become, dozens of companies like Facebook and the geographic area of Silicon Valley/San Francisco as a whole are experiencing an absolute boom in economic activity and wealth creation.  It is not just traditional high-tech, but the diversity of success and the monetization of that success which is at a level we have never seen before.

What is evolving is a reprise of the haves and have nots, as the world saw during the period of Dickens novel.  When we talk about the deteriorating macro-economic situation, people living in this area of the West Coast would be incredulous.  Atherton, California is a very wealthy enclave housing many of these newly wealthy individuals.  A recent look at the area boggles the mind. 

What used to be the country is now being converted into astonishingly enormous residential compounds.  In the Silicon Valley/San Francisco corridor, roads are packed and so are the restaurants.  Whether one wants to buy or rent, the stories of fierce competition are rampant.  Similar stories were reported this week about The Hamptons in New York.

The investment markets remain edgy.  Yesterday was a great example.  After a very rough start overnight in the Japanese equity markets, the U.S. equity indexes tumbled at the open and so did precious metals.  The Dow Jones managed to eke out a gain by the close as did gold.  There is a very uneasy tone to the action on a day-to-day basis.  It feels as if we are on an ocean-going vessel in rough seas, hearing the groaning of the bolts in the iron plates holding the ship together.  We wonder when and whether something catastrophic will occur, yet the ship keeps sailing.

It is a very confusing and conflicted investing environment for anyone trying to absorb the news, statistics and opinions.  We know that what we have now is an extremely opaque, historically dangerous financial system.  It should be confusing for individuals and professionals alike.  It is intellectually and emotionally tempting to divine how events will unfold, but that is impossible.  It will be resolved at some point, but the manner and the timing is unknowable.

It is important to remember that there are some very ominous trends at work, but also to acknowledge that a great number of companies and individuals are prospering through these tough times.  As the Facebook and other announcements have shown, investors do have profitable opportunities in almost any environment.

We continue to believe that the precious metals and the quality miners are core holdings.  Several of the miners have staged substantial rallies from the lows already.  As we survey the investment landscape, the only remaining investment sector where explosive upside potential can be found is in precious metals mining companies.  The returns should be many multiples over the underlying price of the metals for patient investors, if analysis and history can be our guides.

However, investors should also consider other businesses as well.  It is a stock pickers investment world now.  Model-based asset allocation cannot work in a manipulated set of markets and statistics.  For those willing to invest time and effort, you will find a number of companies in various industries that are growing rapidly and generating significant cash flow.  Rapid growth in cash flow even with constant payout ratios will generate substantial income for investors over time.  It makes sense to round out portfolios in this manner while we await the global financial resolution.” 

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Eric King

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