Interesting - Run on guns & ammo in short supply?? According to some of the pundits ammo is going to be worth more than gold.
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The Rude Awakening
Baltimore, Maryland
Tuesday, April 7, 2009
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Joel Bowman, reporting from well within North Korean missile range...

Most of us are far too young to remember World War II. In fact, 93% of today's population was not yet born when Emperor Hirohito announced the surrender of his country on Japanese national radio. Go back a little further, to the Great Depression, and still fewer people can recall the hardship the global economy endured during those years.

Owing to a fortunate lottery of birth, most people in today's developed world undertake their daily duties with a vastly limited appreciation of what real economic struggle means. We, your tenderfoot editor included, simply go about our business of buying iGadgets, drinking $5 café lattes and complaining about the weather. What will we do when it really starts to rain? We've barely had to operate an umbrella in our life, much less abandon our cell phones and coffees to head for the hills.

Everything eventually "rights itself" according to our limited experience. Our collective understanding of the stock market, for example, bears testament to this.

Over the past few weeks the markets have staged a remarkable rally. Although still down 10% for the year, the Dow, for instance, soared more 20% in the last month. This phenomenon, known to some wary old hats as a bear market bounce, is not in itself unusual. No index moves in a straight line, neither down nor up, after all. What we did find curious, however, was the readiness of the public to declare the worst of it over. We are not suggesting that the market will definitely fall further in the coming months and years, mind you - only that we must recognize that this is a distinct possibility, maybe even a probability.

But perhaps our morbid financial disposition is just that. Maybe the market will recover, looking back a few years from now only to disparage our worrisome visions as fanatical, unrealized, statistical outliers. Maybe. But even so, we'd rather protect ourselves against a fatal error and miss out on this first round of cocktails than take a poisoned sip and die before the next round is served.

In today's issue, therefore, we offer two of history's oldest crisis hedges. One comes out of the ground, the other from the holster of a disgruntled citizenry. Both are probably worth your consideration. AND, as an added precaution, we've loaded up an extra Reader mail...just in case things get really hairy out there. Enjoy...
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Guns...
By Greg Guenthner, editor of Bulletin Board Elite 

Are you concerned about your financial future? Or maybe you're worried that the world just isn't safe anymore...

If so, you're not the only one. In fact, people across the country are feeding their fears by purchasing firearms...

Take Florida, for example. Floridians are applying for concealed weapons permits in record numbers - and the state government is buckling under the weight of a massive backlog of concealed weapons permits, according to the St. Petersburg Times. The state has even been forced to hire more than 60 temporary workers to deal with the flood of applications.

But it doesn't seem as if law enforcement is interested in quelling the panic. "Once the economy gets bad, crime always goes up," a police officer told the St. Pete Times, "People get desperate whenever things are not going the way they feel like they should be going, and they'll do things they normally wouldn't do."

Crime isn't the only factor driving sales. In several news accounts, gun buyers have said they're buying now because they fear stricter gun laws are inevitable under the new administration.

This gun craze is especially interesting since firearms have long occupied a relatively stagnant market space. Take rifle production, for example. From 1973-2005, the number of rifles produced each year decreased on average 3.8%. Shotgun production dropped on average 2.9% for the same period.

Revolvers have seen their production numbers dropping at an average of 4.6% a year. The only segment of the U.S. firearms industry that's actually growing is pistols. Its growth is a 1.9% average each year. Not much to get excited about here.

However, sentiment is rapidly changing. And we think you should seriously consider firearms. No, we're not advocating the purchase of guns... Instead, you should check out a couple of small-cap gun makers. These companies have withstood the test of time. Now, they're enjoying more publicity and rising share prices...

First up is Smith & Wesson Holding Corp. (SWHC: NASDAQ). This company has been making guns longer than any of us have been on the planet. It's also a trusted brand that has expanded its offerings over the past few years...

After a tumultuous few years, this stock has posted a strong 2009. Shares are up 161% since Jan.1.

The gun maker has big plans. Smith & Wesson has moved into the rifle market and wants to take full advantage of this expansion. In February, the gun maker announced it plans to nearly double its annual revenue and improve margins and market share over the next few years.

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Sturm, Ruger & Co. (RGR: NYSE) shares have enjoyed similar success this year. As of this morning, the stock is up nearly 100%. The firearms makers reported huge increases in revenue and backlog during Q4, and several analysts have upgraded this stock to a strong buy.

Ruger stock might even be too hot to handle right now. It's posted most of its gains in just a few weeks. Short-term technicals show this stock is way overbought, so it might be best to wait for a pullback before jumping in.

...and Gold
By Dan Amoss, editor of the Strategic Short Report 

Last week we saw global leaders hobnobbing at the G-20 meeting and the FASB (Financial Accounting Standards Board) softening its standards for mark-to-market accounting. More deficit spending, tweaking of accounting for exotic securities, and monetary inflation are the proposed solutions to the global banking crisis. Oh, and more regulation, of course.

It's remarkable how few pundits are pointing out that banking is already the most heavily regulated and subsidized industry on the planet -- yet still managed to blow itself up. At the root of the problem are the related facts that the banking system utilizes too much risk - even under the watchful eye of regulators - and bank executives are incentivized to take reckless risks ("heads I win, tails the taxpayer loses").

Expectations for the Treasury Department's PPIP (Public-Private Investment Program) seem high. My research on its details leads me to believe that those expecting miracles will be disappointed. Ultimately, this process is intended to recapitalize and subsidize the weak banking system as much as possible, while using complex tactics and creative accounting to disguise the true risks to taxpayers (I consider the bigger consequence of PPIP to be future inflation, rather than the more popular fear of taxes).

If the PPIP fails to live up to its expectations, the Federal Reserve will likely be forced to step in with an even more extreme series of inflationary policies -- potentially doubling the size of its balance sheet again and again, buying every type of Treasury and mortgage-backed security in sight, and debasing the dollar in the process.

I'll be watching the progress of the PPIP very closely and write to you about how I expect it to impact the entire market. Thus far, its details and potential for abuse have heightened my expectation that the Federal Reserve will have to do the heavy lifting to reflate the asset markets. Ironically, the FASB's relaxation of mark-to-market accounting will make banks less willing to sell over-marked assets into the PPIP.

This development has increased my conviction to buy gold during this moment of (temporary) weakness. Specifically, I would recommend buying call option on the GDX, the ETF that tracks the NYSE Arca Gold Miners Index. GDX has underperformed the market recently, after its huge post-October rally. I expect GDX will start resuming its leadership. Its correction in recent days offers a great entry point.

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The gold mining stocks within the GDX exchange-traded fund have, in my view, the best earnings growth potential in the entire stock market in 2009. Costs for fuel and mining material costs are much lower than last year, and gold prices are on a strong upward trajectory. Operating earnings will be growing very quickly for many stocks in this index, and valuations are still below historic averages.

I expect earnings for the group to be up strongly in 2009, and more importantly, the market should pay a higher multiple for those earnings. GDX could easily exceed its 2008 peak of $56 per share in the second half of 2009.

Back in November, when I last recommended options on GDX to the subscribers of the Strategic Short Report, the trade produced a profit of more than 300%. Another big profit is possible on this trade. Considering everything that's happened since then, my outlook for GDX is even more bullish than it was in November.

Joel's Note: If you would like to check out more of Dan's commentary on the unraveling economy and how you can protect your wealth, feel free to read his primer to short selling: The Ultimate Bear Market Strategy 

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[Rude Endnote: ...and, as promised, an extra round about "ammo," courtesy of one of your fellow readers...

"One of the best investments that can be made is in the area of ammo," writes P. Stephens, a Rude reader hunkered down in Virginia. "If you go into any gun store here in the States from the largest such as Cabela's or Bass Pro shops, there is a paucity of ammo for sale and it costs more than double from just a couple of years ago, even with the fall in commodity prices.

"In other words the demand is intense as has been noted in the press. On gunbrokers.com and others you can buy loaded factory ammo and, what I recommend, the necessary pieces for reloading: primers, shell casings and bullets, plus powder.

"The criminals in Washington are planning numerous attempts to restrict or eliminate the ownership of firearms and their use," continues Mr. Stephens. "One such method is to require all shell casings to have a tracking number and that, after 2011, all non identified ammo be out of circulation. They plan on requiring either a license to buy ammo or a registration of the purchaser etc.

"In addition the Obama administration has stopped selling military shell cases from the firing and training ranges to the reloaders, such as Georgia Arms, who had to lay off 30 people because this source has been stopped.

"The reloading cost aspect, although up, is not up in the same percentage as factory loaded or even reloaded ammo that is available at the gun shows.

"The major military calibers are in very short supply, and even .22 Long Rifle Hollow point, the Plinker's delight.

"So," concludes Mr. Stephens, "I would say .308, .306 and .223 in Rifle and .38/.357 .40 .45 Cal. and 9mm in pistol. Yes there are others, but these are the primary calibers. .44 mag .380 pistol and .50 caliber rifle are also considerations. In my opinion these could triple in value over the next 2-3 years or less. At the very least they will maintain their value equal to commodity costs."

We hope you've enjoyed today's edition. We'll be back tomorrow with more from the Rude desk.

Until then...

Cheers,
Joel Bowman
The Rude Awakening
aussiejoel@the-rude-awakening.com 

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