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Week 18 Portfolio Update: Still Cautious but Getting More Optimistic

Last week I posted how I was of two minds; that while I still saw significant risks over the medium and certainly the long term, that I could also imagine a scenario where the market rallied in the short run.

I still think that is a likely scenario.  Especially after having watched Greece peacefully resolve not throw itself and the rest of Europe into utter chaos.  Yet I ended the week with more cash on hand then I began the week with.  Its just a tough market to hold any conviction with.

I am, however, a little more confident about the prospects of Europe than I was a week ago.  Why?  Well this weekend I spent my spare time looking  at Italy.  Last week I wrote a pretty negative piece about Italy. Having re-read those comments tonight, I think that I need to retract them in degree.  I had perhaps  read too many articles slanted with a negative spin on the Italian debt situation.  In truth, I think the situation there is somewhat more balanced than the WSJ, FT, and my other sources have given credit.

I plan to put out a post later this week describing what I have learned about Italy (as well as Japan, but more on that in a minute), but I’ll briefly summarize the main conclusions here.

Without a doubt, Italy has its problems; they have a lot of debt outstanding (120% of GDP), they have a dysfunctional political system that seems to readily make promises but not able to follow through on them, and they have an economy that almost certainly will be in a recession for months to come.

Still, Italian debt is not at the level yet that threatens the ability of government revenues to service it.  And that is really the bottom line.  While the path that Italy is on is not one of prosperity, it is going to take a lengthy recession and a move to even higher interest rates (8-9% at least), to really put the country’s ability to service its debt in jeopardy.

None of this is to say I have turned wildly bullish.  Greece, Portugal, and Ireland all look to be in a whole lot of trouble.  Its really just a matter of time.

What’s more, the real point of my research this weekend was to investigate Japan, and what I found there was frightening.  More on that later this week.

Anyways, back to the portfolio.  I actually lightened up a little on my gold stock holdings on Friday.  This is not an indication of any wavering of my thesis on gold.  It was simply prudent portfolio management.  The gold stocks I own have had a heck of a run over the last couple weeks.  Jaguar Mining has moved over 50% in the last two weeks.  Aurizon had a one day move alone of 10%.  Newmont has moved 15%, as has Barrick.  Gold stocks are finicky and they could just as easily fall back next week as they could break out.

A break out is possible however, and many of these stocks are back to that breakout level that they tested and then subsequently failed at in September.  This week should tell the tale.

On the oil side of the ledger, Coastal Energy is supposed to be releasing results of the A-09 well, which tested between the Bua Ban North A and B fields.  A hit in this area would prove up even more reserves for the company.  I continue to hold Coastal in hopes that with any market turn upward it will begin to be valued to reflect these recent discoveries.  Equal Energy continued to move higher last week.  In a normal market, without the overhang of Europe, I would be significantly more long Equal than I am right now.  Sandridge announced results last week and they showed better than expected production from its Mississippian wells so far.  Its just a matter of time before Equal begins to drill their Mississippian land and gets revalued upwards for it.  Equal remains cheap (look at my oil and gas comparison spreadsheet posted Friday for an idea of just how cheap).  As for Arcan, I await news both on the production front, and hopefully someday, on the takeover front.

I still have a bid in for Gramercy Capital at $2.75.  One of these days the market will have a crippling sell-off and that order will be filled.

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