Meeting Minutes

We had a great time at Chili’s discussing market forecasts and trader psychology. (Not to mention watching Spain win the World Cup!) I want to thank everyone for coming out and making this a memorable event! We had 6 attendees: (from left to right) Tommy Schultz, Kevin Day, Andrew Whatley, Jeff Harrington, Elena Swindull, and VJ Arjan.

Paul Krugman and Robert Prechter’s Gloom and Doom Prophecies

Recently, there has been a lot press talking about the pessimism in the market. Some, however, are forecasting economic disaster. Nobel laureate economist Paul Krugman has sounded the drum for the “Third Great Depression”, the first being in 1873, the second in 1929. Robert Prechter, who is famed for calling the crash of 1987, is calling a bottom in the Dow Jones at $1000 (Presently the Dow is at $10,200.) These are incredible prophecies from very respectable economists, which leads some to believe their story and stay safe in U.S. Treasuries.

We at the Scarlet Kings, however, do not share this view. Kevin Day explained that the pessimism in the press is a fad. Let’s remember that Paul Krugman writes a column for the New York Times, and sensationalism sells oftentimes more than the boring facts. Furthermore, the American people who make up its market, over the long-run, are very resilient people and Kevin believes that these people can and will lead the country out of any catastrophe, if there was one.

It is true, however, that Europe faces a greater challenge. Elena Swindull confirmed that there is no sense of unity in the European bloc and this will certainly hinder their efforts to forge ahead through these hard times. The problem, she goes on, will be further complicated by the fact that each member of the European Union has different fiscal and monetary policies which they, up to this point, refuse to change. We’ll see if the austerity cuts lead by Germany and Chancellor Merkel will change that.

Let’s also not forget that even if the U.S. market goes to $0 (theoretically) there are very good growth prospects for the rest of the world, i.e. China, Brazil, and India. Many of us have already allocated a sizable bulk of our total investments in these countries and other emerging markets.

SFEG (Sante Fe Gold Corporation)

In his last trip, Kevin Day, who has owned this stock since 1996 and is very good at practicing the golden investor attribute of patience, made a trip to the actual site, the Lourdsburg Mill, where Santa Fe operates near Albuquerque, New Mexico to not only see the site but also ask about the company’s production timeframe from an executive. He did meet a Mr. Simpson, a superintendent, who felt uneasy about hosting an investor but Kevin, ultimately, did get some very poignant answers.

· The mill is currently producing around $50,000 per day in gold and silver reserves, which comes out to roughly $1.2 million per month

· The company will be adding a second shift for production as the permits to mine are finally in place

· There are at least 2 million ounces of proven gold reserves with additional reserves being a great potential in the Ortiz mine, where production will be starting very soon

· Q3 earnings are what investors should be waiting for

We have all waited patiently for the dividends to pay off, especially Kevin, and hopefully they will not be long in coming now.

The Need for a Republican Candidate for the 2012 elections

Given that President Obama’s ratings are hovering near record lows, one must ask who will be in office two and a half years from now. He has been in office one and a half years and has had many empty promises which has disheartened and fractured the Democratic party. It is unlikely that he will run for office again, and as Kevin Day has said, Hillary will run instead and most probably win, if no serious opposition is posed. The campaign to secure this position will be starting shortly and it will be interesting to watch how this all unfolds. Bottom line is that the Republican party needs to mark out its candidate clearly and quickly if they are to stand a chance.

Perhaps we could all endorse Kevin Day to run as the Dark Horse candidate for the Republican primaries, which is probably a much better choice than the likes of Palin or Guliani :)!

The Trader’s Psychology

“When we lose, we think we’re going to win; when we win, we think we’re going to lose. So we keep our losers and get rid of our winners – hence 90% of us lose.” – Andrew Whatley (I, personally, think he deserves a medal for this very simple and insightful phrase)

VJ Arjan is currently reading a book entitled The Psychology of Trading by Brett Steenbarger. There is a reason, the author explains, why only a small majority of traders and investors actually win in the marketplace. The reason is that most are mentally hard-wired to lose. For example, let’s pose the following question:

If one has a choice to have:

Option 1: $500 guaranteed

or

Option 2: A 50% chance for $1,000 and a 50% chance for nothing

about 90% will take the $500 guaranteed because one is afraid of loss more than afraid of not gaining more.

It is certainly an interesting way to perceive the markets but it is very true. How many of us, the writer included, have panicked at the least sign of counter-trend movement, whilst the greater part of the move remained still to come? For some solution to this problem, we came up with the following:

Establish precise profit / loss objectives BEFORE entering any position, whether for trading or investing.

Furthermore, Tommy Schultz recommended that if the way of the speculator involves taking great risk for great profits then it may be prudent for the trader/investor to decide to create wealth of the amount which will take care of all necessary expenses and then to use the rest in high risk strategies for maximum gain. This way the concept of the pain of loss is thrown out the window and the gains (and the losses) may be allowed to occur and not be stopped by one’s emotions.

A Lesson in Geopolitics by Jeff Harrington

Some very interesting geopolitical thoughts to ponder about the way our world works came from the mouth-and-brain known as Jeff Harrington (the writer has given him a nickname ironically of Master Harrington) :).

Interestingly enough, it turns out that the U.S. is not in Afghanistan, the war which has not become the longest war the U.S. has ever waged, to capture Osama Bin Laden, but to have first move on its abundant resources. Afghanistan, Jeff argues, is rich in oil, natural gas, and copper deposits and we will find out more about this as the government will start the bidding offer to drillers and miners for these contracts.

Somehow China got a small copper mine in Afghanistan, which is interesting to note, because China has not provided direct military aid in the fight against terrorism. Jeff believes that there was a backdoor agreement sanctioned by the U.S. that allowed China in on this deal, in exchange for Chinese agreement to continue purchasing U.S. Treasuries.

Jeff further explains that Afghanistan and other oil-rich countries will be at war for many years to come given their natural resources and fractured political power hierarchy, which makes it easy to divide and conquer. America, ironically, has financed both sides, which is the only way for this war to persist. Originally, the Taliban were financed to get rid of the Soviets in the 1980s, and now they are being persecuted by Afghan military which is being financed by us as well.

Why go in and do this? Well, it turns out that the days of the gentleman diplomats are over and the world turns on the grooves of Realpolitik, or the politics of reality. If the U.S. leaves Afghanistan, someone else will go in – possibly China. And mark you, China have much less regard or care than the U.S. for civilian lives being lost in their desire for political and economic power.

China has developed a reputation on the world stage for its killer instinct, which will serve it well as long as it does not take on Napoleonic proportions. One relevant and recent example is when Google announced that its servers were being hacked by the Chinese government, so far as to get the Chinese government classified engineering blueprints for military helicopters made by Lockheed-Martin. Clearly, China lacks the technology to build such items, but it has no scruples in stealing them. These are all conjectures, but they fit very conveniently into the jigsaw puzzle.

What the Future Holds

The Scarlet Kings next month will have its second year anniversary!

The first of these meeting started at the end of July in 2008, although I did not officially create the blog until October 2008. During this period, the members who have come and contributed or just came and listened to our meetings have witnessed possibly the most brutal collapse of the financial system that will occur in our lifetimes and its subsequence bounce back from life support amidst a host of other trying issues. Perhaps, there is more mayhem to come. Who knows…

All I can say is that I sincerely appreciate and am immensely grateful for all who came and made this organization one that I feel proud to be part of. Not because I am the organizer and feel this way by default, but I have yet to find a group of people who are so well versed and so perceptive about the world that we live in, which leads all attendees to benefit not only in expanding our horizons and our “mental box”, but financially as well.

We all ruminated on where we would be in the future. Perhaps we who come to these meetings will become titans and captains of industry. Maybe seeds of greatness are being planted here and the great Redwoods will tower high in the near future.

All that I do know for certain is that as long as we are alive and kicking that all of us who do come and have continued to do so will be at least worth what the top 3-5% of individuals in this country carries in their bank accounts. In addition to that, we will have gained and enriched our perspectives that may serve to make us into molders of the world around us.

To the future ladies and gentlemen!

Simulated Portfolio

Date	Security	Entry (Oct 08)	Current Price	Profit/Loss
April 10, 2010	FXI (iShares FTSE/Xinhua China 25 Index	$25.16	$40.64	$1,548
April 10, 2010	ILF(iShares S&P Latin America 40 Index)	$26.60	$44.91	$1,831
April 10, 2010	EWZ(iShares MSCI BrazilIndex)	$37.69	$67.75	$3,006
April 10, 2010	PBJ(PowerShares Dynamic Food & Beverage)	$13.27	$15.65	$238
April 10, 2010	GUR (SPDR S&P Emerging Europe)	$29.74	$40.39	$1,065
April 10, 2010	FCX (Freeport-McMoRan Copper & Gold Inc.)	$29.06	$65.98	$3,692
April 10, 2010	WLT (Walter Industries – metallurgical coal)	$38.75	$68.00	$2,925
April 10, 2010	VALE (Companhia Vale do Rio Doce – gold mining)	$13.12	$26.31	$1,319
April 10, 2010	GVA (Granite Construction Inc.)	$35.67	$24.55	-$1,112
April 10, 2010	MT (Arcelor-Mittal ADR)	$26.25	$30.26	$401

The next meeting will be on Sunday, August 8^th, 2010. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com

Next Meeting of the Scarlet Kings

Greetings to All,

The next meeting of the Scarlet Kings will be held on

Sunday, July 11th, 2010 at 1:00PM.

Location: Chili's (4500 Belt Line Road, Addison, TX)

Please join us for a fruitful and lucrative discussion!

Very Sincerely,

VJ

Meeting Minutes

We had an insightful meeting today at Cantina Laredo! We had a total of 5 attendees: (from left to right) Lucy Chen, Andrew Whatley, VJ Arjan, Kevin Day, and Jeff Harrington.

The Market Consensus

There is continued weakness in the market. Kevin Day sees the next two to three months to be more like May and perhaps a bounce in early Q4, around September. We all agreed that now was a time to park some of our profits and accumulate cash.

One sign that we were all looking for was how long the FED could go without raising interest rates. If one recalls, the Aussies were the first and they did so in grand fashion.

Above is a chart for the Dow Jones Industrial Average (.DJI). A chartist would see that the market may be headed much lower. We simply need one more downward bar break below the $10,000 level, and the next level of support would be at $8,200. As can be seen, the break has not occurred as of yet – we’ll know by this week.

On another note, the market may be headed upwards in the long-term. Corporate earnings are outpacing analyst expectations and the average PE for blue chip stocks are hovering around 13, which is not bargain material, but it certainly not unreasonable.

BP: To Buy or Not to Buy

Jeff Harrington bought up several reasons why an investor should not own BP:

· The total payout may reach upwards of $40B – most of this would be in the form of civil claims from fishers to tourism

· This fiasco alone could lead the company to bankruptcy

· The Exxon-Valdez spill was the result of a broken hull, a much more controlled environment than stopping an oil geyser 5,000 feet under sea level

· Hurricane season is coming making the oil spread even quicker and in a less contained manner

· Dividend will be slashed or taken out completely

· The rig was named Macondo, which is a fictional cursed city from Gabriel Garcia Marquez’s novel One Hundred Years of Solitude (A slightly more daring reason)

There are definitely arguments to own BP as well:

· Certainly, now would not be a good time to buy BP – this would be like catching a falling knife

· It is confirmed that by early August the well will be shut off

· If one currently owns BP, a covered short may not be a bad idea

· It could be a potential buyout, and the buyer would probably be Royal Dutch Shell

The Continued Loss of Support for President Obama

One more diehard, partisan member of the Democratic party resorted to calling the President’s response to the BP event as “lackadaisical” and plain “stupid.” Although the response to this attack by other Democrats has been mixed, it is certainly ironic to see such attacks coming from someone who has worked along side Democrats Bill and Hilary Clinton and who defended Obama from Republican ire.

As a side note, Kevin Day expressed his dismay in the President wanting to raise the long-term capital gains tax from the current 15% to 26-28%, which clearly shows his the lack of understanding of how the economy functions, more so for his advisors than himself.

Europe

Kevin Day recently had a long vacation in Europe going from England to Spain. He explained how he felt about the situation there, which suffice it to say, is much, much worse than he had anticipated it to be. While he visited Spain there were countrywide worker strikes.

In England, he found the residents quite optimistic about the new government headed by David Cameron and the Conservative Party. Even being a coalition between their polar opposites, the Liberals Democrats, the residents are at least willing to give this hung parliament a go. Kevin definitely sees some huge challenges, but can see the government making the right and hard decisions required to get its government back on track.

Jeff Harrington added that world governments have taken on additional debt in an all out bet that globalization will save the world economy.

Santa Fe Gold Corporation

Jeff Harrington very generously did some incredible research on behalf of all investors who own SFEG and follow this blog. He called up the investor relations directly who supplied a plethora of pictures and fact sheets about the plant itself. The plant, surprisingly enough, actually exists and is currently producing - just in case, there were some investors on the fence about the whole thing. Below are provided some pictures of the site below – to request all the information that was received, please contact VJ Arjan at scarletkings@gmail.com.

On another note, we did spot an anomaly in SFEG’s normal trading pattern. Above is the trading session for Thursday June 3^rd, 2010. Notice the single order of 1,000 shares that was traded at $1.02 and then subsequently the stock traded around $0.90 a share for the remainder of the day. This is a key reminder of the risk of trading in an illiquid stock. We hardly suspected illiquidity in this scenario, but it is more likely to be a greedy market maker. For the prudent investor, it would be wise to remember this lesson.

The Recent Selloff in Commodities

With the appreciation of the US Dollar against the basket of major world currencies, commodities have taken a nose dive. Kevin Day attributed this to investor’s overall lack of confidence in the world economy. However, this does not change our long-term consensus on commodities. As the FED continues to print money, the US Dollar must continue to depreciate against hard assets.

Market Plays

We had only one market play this meeting and it was brought up by Kevin Day. He believes that there may be some favourable price action with 3M (MMM). Suffice it to say that Kevin and his market nose have had an incredible track record.

The next meeting will be on Sunday, July 11^th, 2010 – July 4^th is Independence Day. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com