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Timing & trends

An Argument for a Contrarian Investment

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Posted by Richard Mills Ahead of the Herd

on Thursday, 24 May 2012 00:00

While it might not look like it now, the most investable trend over the next 20 years is going to be in the resource sector, the renewable and non-renewable resources, the minerals, ores, fossil fuels and biomass a wealthier and growing global population is increasingly demanding from finite supplies and already strained production capabilities.

For example:

The metal content of copper ore has been falling since the mid 1990s. A miner now has to dig up an extra 50 percent of ore to get the same amount of copper. As grade drops the amount of rock that must be moved and processed per tonne of produced copper rises dramatically – all the while using more energy that costs several times more than it use to. With the lower grades of ores now being mined energy becomes more and more of a factor when considering economics.

The average grade of gold deposits has been dropping as well.

“We took the nice, simple, easy stuff first from Australia, we took it from the U.S., we went to South America. Now we have to go to the more remote places.” Glencore CEO, Ivan Glasenberg in the Financial Times describing why his firm operates in the Congo and Zambia

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Ed Note: Richard Mills entire argument & charts to support the conclusion posted below can be read in its entirety HERE 

Conclusion - Junior’s, An Argument for a Contrarian Investment

Our reality - we’re living on a relatively small planet with a finite amount of reserves and a growing human population.

The world’s major miners are making immense profits but they are having an extremely difficult time replacing reserves let alone growing them. Mining is the story of depleting assets, that asset must be constantly replenished, miners that want to stay in business must replace every pound, oz and gram taken out of the ground.

Juniors, not majors, own the worlds future mines and juniors are the ones most adept at finding these future mines - majors do not make discoveries, juniors do, that’s their function in the resource food chain. Junior resource companies already own, and find more of, what the world’s larger mining companies need to replace reserves and grow their asset base.

Junior resource companies - the same ones who today are so oversold and undervalued - are the present owners of the world’s future commodities supply and, most important for investors seeking outsized returns, they act like leveraged exposure (with price gains many times that of the underlying commodity) to the specific commodity(s) investors want exposure to.

Are there a few junior resource companies, with exceptional management teams operating in politically safe jurisdictions, on your radar screen?

If not, maybe there should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

If you're interested in learning more about the junior resource and bio-med sectors please come and visit us at www.aheadoftheherd.com

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Timing & trends

Bob Hoye on Real Estate, Gold, Interest Rates & Stocks

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Posted by Bob Hoye via Michael Campbell

on Wednesday, 23 May 2012 08:57

No one can say that Bob Hoye of Institutional Advisors didn't see the future clearly and in time to take advantage of a once in a generation market dislocation when he declared in October 2007 that:  "A credit tsunami the likes we haven't seen in generations is about to hit"
 
Certainly each of the 500,000 listeners who heard Hoye's warning on Michael Campbell's Money Talks radio show had he opportunity to either get out of the way of the oncoming speeding economic/market train, or profit handsomely shorting the greatest market drop since the 1929 collapse. 
 
Bob Hoye was back on Money Talks a few days ago with some additional advice, some of which is pretty unnerving,  nevertheless Hoye was again very clear that we are now at another critical point in the markets and that its now time to either save your capital and get out of the way, or make some money. Whole interiew here beginning at the 24:30 mark or summary below 
 
First the background. Hoye thinks that there is no way that the Federal Reserve or other Central Banks around the world can overcome the Worldwide deflationary pressures. In other words no inflation as "the credit contraction is, and will continue to overwhelm interventionist Central Bankers" who "are not issuing credit that pushes prices up". Why? Bond vigilantes in a word. 
 
As the Central Banks in Italy and Spain have found out they have to raise interest rates on their bonds to attract investors, and when interest rates rise Governments and businesses alike "cannot service the debt that is out there".  Worse Hoye sees that the the latest recovery from March of 2009  "in North America  is rolling over, probably as we speak. Its already dead in Europe where they've had two quarters of negative GDP growth which defines a recession, and also perhaps really slowing down in China which shows up in your basic commodity prices." With the economy contracting there is "nothing that government economists and Central Bankers can do to issue credit that is going to overwhelm the natural tendency for credit to contract."
 
Hoye also uses history to prove his point there are situations where Central Bankers cannot generate inflation in Post Bubble contractions. Citing  John Law's attempts to thwart the aftermath of the 1720 South Sea/Mississippi Bubble by replacing solid coinage with paper money he generated on 8 printing presses going in Paris at the time. Despite John Laws Central Bank effort he was unable to prevent the credit contraction he was trying to avoid. 
 
What does this all mean to today's investors? 
 
1. Real Estate: 
 
In short Hoye thinks that real estate is not going to recover in this post bubble economy. Worse, very high real estate in places Vancouver are going to experience a fall in pricing like US Real Estate. Hoye points out that after the 1980 boom "British Properties in West Vancouver and and high end properties in Toronto fell to 1/3 of their 1980 highs. Hoye again cites history to support his post bubble real estate argument by looking back to a farm price index after the 1873 bubble in England.  That index of farmland values hit 58  at the height of the bubble in 1873  then fell consistently for the following 20 years down to 38.  In other words it was just a long bear market in land values after a typical post bubble economy. 
 
 2. Interest Rates:

Interest rates will remain low as long as confidence remains in the North American sovereign debt market."You have this oddity in the US of 10 year notes at less than 2%, and the only way I can explain these low interest rates is that in a post bubble crash the serious money that's still around goes to the most liquid items and that is gold, and it also is treasury bills in the worlds senior currency which is still the US Dollar. So its not the Federal Reserves policy to lower interest rates, its a post bubble condition that short rates fall".
3. "The Gold Market is Extremely Oversold"
 
Buy Gold Stocks. "Just looking at the Gold Shares now, we have an index in Gold Shares going back to 1900 and there has been only one other time were it has been this oversold and that was in 1924. So one could say that this is about the most oversold you can get, and our advice on Gold Shares a few weeks ago  is that people should be accumulating good quality Gold Shares into weakness. It might take another week to set the low in here, but then the performance out of this oversold should be rather good. I am content buying either good exploration stocks where you know the story, or some of the senior Golds or Gold share ETF's".
 
4. The Overall Stock Market
 
Hoye was looking for  a rounded top market to occur around February 2012. As it happened the base metal mining stocks peaked in early February while other areas peaked through April. Hoye sees that the "last two weeks have really confirmed that we are in an intermediate sell-off" but that for "a short term trader, the S&P is getting oversold and we could look for a rally in here". As mentioned above despite the potential for Stock Market weakness, Hoye likes the Golds.


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Timing & trends

The Dreaded "Left Tail" of Stock Market Returns

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Posted by Mark Spitznagel, CIO of Universa Investments LP

on Monday, 21 May 2012 23:49

Mark Spitznagel: The Austrians And The Swan - Birds Of A Different Feather

On Induction: If it looks like a swan, swims like a swan…

By now, everyone knows what a tail is. The concept has become rather ubiquitous, even to many for whom tails were considered inconsequential just over a few years ago. But do we really know one when we see one?

To review, a tail event—or, as it has come to be known, a black swan event—is an extreme event that happens with extreme infrequency (or, better yet, has never yet happened at all). The word “tail” refers to the outermost and relatively thin tail-like appendage of a frequency distribution (or probability density function). Stock market returns offer perhaps the best example: 

universa 1\

What is a black swan event, or tail event, in the stock market? 

It depends on who’s asking. 


To those familiar with Austrian capital theory, the impending U.S. stock market plunge (of even well 

over 40%)like pretty much all that came before in the past centurywill certainly not be a Black 

Swan, nor even a tail event


Nonetheless, the black swan notion is paramountin perception: Market participants’ failure to 

expect a perfectly expected eventthat is, they price in only Anglo swans despite the Viennese bird 

lurking conspicuously in the weedsmuch like what is happening today, brings tremendous 

opportunity. 

....read the entire analysis including charts HERE 



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Timing & trends

Bob Hoye: Signs of the Times

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Posted by Bob Hoye - Institutional Advisors

on Friday, 18 May 2012 09:05

"It is surprising that "Gloom" is being reported so soon after "Boom" was front page stuff. Understandably, "Ooops" had its moment, but really Earth-shaking gloom has yet to occur." 

SIGNS OF THE TIMES:

"Growth in loans to households and companies in the 17-nation euro area slowed in March as a cooling economy curbed demand for credit."

"Euro-region unemployment rose to a 15-year high and manufacturing contracted for the ninth month."

– Bloomberg, May 3

"Gloom Builds for Euro Zone, United States"

"Dampened Hopes for Gradual Recovery"

– Reuters, May 4

Perspective

Of the sectors we follow, base metal miners (SPTMN) provided the best lead to the sell-off in the senior stock indexes. We were looking for a rolling top centered around February and the SPTMN set its high in late January and failed on the test in February. Often, mining stocks lead the high in base metal prices and this was the case as metals (GYX) set their high in February.

As noted at the time, the gold sector (GDX) also set a high in early February and this year's high for gold was at the end of the month. In retrospect, it was some five weeks ago that we concluded that the "opposite" action between golds and the big board was developing. This is important for the longer term.

However, the action is somewhat oversold and a pause or bounce in most sectors seems possible.

 

Commodities

Gasoline had a good run to a daily RSI of 90 at the end of February with the actual high at 3.43 at the end of March. This compares to the high of 3.42 in May, a year ago, and with 3.63 in 2008.

The plunge was to 2.91 on Monday, with an RSI at 29. That's a big swing from very over bought to rather oversold, and a brief rally seems possible. The chart follows.

Picture 3

Seasonals have been running some weeks ahead of "normal" and it is uncertain how long the "summer driving" rally will last.

Base metals declined as well, but without the extreme swing of gasoline prices. Prices could briefly bounce, within what seems to be a cyclical bear that started in April 2011.

Soybeans and soybean meal were the last runners in the rally and, as noted last week, had accomplished an Upside Exhaustion reading. The rally for 'beans started at 1094 in December and the high was 1512 last Thursday.

Agriculturals were delayed on the probable commodity rally from October to around February. Soybean complex did the best on the late rally, but these did not participate with the cyclical peak for most commodities set in 1Q2011. A test of the high is needed before the call can be made for another cyclical peak.

Sugar, corn, cotton and wheat have declined to 52-week lows.

The CRB reached 370 on last year's excitement, which compares to this year's at 326. The really heroic high of 474 was helped by the "Peak Oil" mania of 2008.

Currencies

The Canadian dollar set its really heroic high at 110 in late 2007 and plunged to 76.6 with the crash that ended in 2009. The high with last year's excitement about commodities was 106, which compares to 102 reached this year.

It could trade in a narrow range for a number of weeks.      

Action in the DX continues constructive, but it will take some time to rise through overhead resistance at the 80 level. A pause in the advance would assist most financial markets, including nominal prices for gold and silver.

Credit Markets

Generally, US spread markets remain benign while Mother Nature's assault on castles in Spain is generating headlines – again. As the nearby chart shows, prices have declined in the past few days. Because of all of the engineered mark downs and other folderol, exact comparisons to the disaster of last August-September can't be made.

But we can consider that April's price improvement is the set up to the reversal in credit markets expected in May.

We have found that if there is a party in spread products in the first part of the year (Yes!) the seasonal change in May (???) can lead to a disaster later in the year (???).

The collapse of LTCM in August-September 1998 is the classic example of reversing spreads taking out a prestigious firm.

If history continues to guide, sovereign debt markets will drift into another calamity after mid-year. Our study on the subject was written about twenty years ago and we like to use it in a timely fashion. SOVEREIGN DEBT FOLLIES is attached. The sub title is "IT HAS TAUGHT US NOTHING".

Last week's view on the long bond was that the rally against setbacks in the stock market was appropriate, but that it was getting tired. And then the future added a couple of points. The price could decline a little as the orthodox investment world of stock and commodities firms somewhat.

Link to May 11th ‘Bob and Phil Show’ on TalkDigitalNetwork.com:

http://talkdigitalnetwork.com/2012/05/morgan-moves-markets/

Greek Bond Price

Picture 4

BOB HOYE

PUBLISHED BY INSTITUTIONAL ADVISORS

JUNE 29, 2011

(Previously Published February 23, 2010)

SOVEREIGN DEBT FOLLIES

"IT HAS TAUGHT US NOTHING"

 

Another episode of sovereign defaults seems to be well under way, which prompts the question about just how bad can it get? The above quotation is from a 1933 study of that example of government defaults and as the writer notes, it was preceded by a "new borrowing orgy". The word "new" is important because the literature often includes the description "new financial era". The first one, the South Sea Bubble, culminated in June 1720 and it has essentially been the model for five subsequent ones, including the example that completed in 2007.

Although the stock market attracts the most attention during a great financial mania, the action has included the equivalent mania of investors reaching for yield and brokers reaching for commissions. There is a typical path that defines a post-bubble contraction that includes widespread remorse and chagrin. In the credit markets this has included the collapse in sub-prime mortgages, the hit to corporate bonds and more recently the contraction is threatening the sovereign debt market. The focus has been on the PIIGS, but if the past is any guide this is the initial phase of another historical problem in sovereign debt.

During the New Era that culminated so extravagantly in 1825, London was the financial centre and the City floated issues by Russia, Prussia, Spain, and a number of Latin American countries as well as cities.

For example, Peruvian 6 percents were done at 88 in 1822 for a yield to maturity of 6.95%; then again at 82 for a 7.50% yield in 1824, and at 78 (7.85%) in 1825.  Then the market became illiquid and eventually collapsed with the usual post-bubble deflation.  Some 70 U.K. banks stopped payment and Rothschild assisted in preventing the Bank of England's default. 

With the usual swings in the business cycle, the contraction continued until the mid- 1840s.

The next long expansion ended with a mania of asset speculation in 1873. At the height of that mania and as credit markets were becoming stressed an important New York newspaper editorialized that nothing could go wrong. The main point was that the US did not have a central bank that would be constrained by the gold standard in accommodating the needs of Wall Street.

Instead there was confidence that the Treasury System and its admired secretary could issue massive amounts of credit by buying bonds out of the market.

While recklessness was rampant, there were rational comments. The Economist's April 27, 1872 edition advised:

"Avoid states which are constantly borrowing, which must therefore be paying off the interest on their old debt with the fresh loans."

The progress of a disaster in sovereign debt in 1873 was nicely chronicled by headlines in The Economist:

June 7: "The Approaching Spanish Repudiation"

July 5: "[Spain] Making Arrangements for the Payment of Current Coupon"

 August 2: "Spanish Interest Will Not Be Paid"

 August 30: "Anarchy in Spain"

The Argentine crisis of 2001 was documented by headlines from a number of publications.  It is worth noting that as late as June there was confidence "Appetite for Credit Risk has Improved Considerably".

July 18, 2001: "Markets Laud Argentine Debt Accord – Calms Fears of Default"

August 3, 2001: "Flurry of International Contacts to Prevent [Argentina] Default"

December 14-20, 2001: "Angry Argentines Take Their Displeasure to the Streets"

"State of Siege"

"Looters Ravage Cities"

There seems to be a common pattern on the transit from confidence to dismay, and it will be interesting to see how it works out this time around. The distinction is that the 1873 example included many countries and as the historian, S.G. Checkland, wrote "Many half-barbarous states pressed eagerly for funds, and spent them with no display of wisdom."

The Argentine problem in 2001 was not accompanied by insolvencies in a number of countries.

However, there is no question that the 1930s disaster in all lower-grade debt was part of a massive post-bubble contraction. It was reviewed in Foreign Bonds: An Autopsy, a rather appropriate title, published by Howland Swain Company in 1933:

"The fiscal history of Latin America … is replete with instances of governmental default.  Borrowing and default follow each other with almost perfect regularity.  When payment is resumed, the past is easily forgotten and a new borrowing orgy ensues.  This process started at the beginning of this past century and has continued down to this present day.  It has taught nothing."

How bad can it get? Typically the post-bubble contraction afflicts all aspects of the financial markets – including sovereign debt. The process is devastating and continues until both lenders and borrowers vow to never be reckless again.

Ampersand

Sovereign Follies 2010:

         January 14:                           "Greece Unveils Stability Program"

         January 21:            "Investors are concerned that Greece won't be able to finance its budget deficit."  

         February 14:      "Years of unrestrained spending, cheap lending and failure to implement reform."

         February 17:      "Greek Tragedy Averted, For Now"

         February 24:      "Greek Police, Protesters Clash"

         April 11:      "Emergency Aid Approved"

         August 10:       "Greek Debt Crisis Finally Over"

         August 10:        "Greece is one part of the crisis and it has faded from the headlines."

2011:

                           May 29:            "Thousands of protestors denounce Greece's entire ruling class."

                          June 28:            "Greek Debt Crisis Leads to Mass Strike"

                          June 28:            "Greece Faces 'Suicide' Vote on Austerity"

"Bankruptcies of governments have, on the whole, done less harm to mankind than their ability to raise loans."

– Prof. R.H. Tawney, Religion And The Rise Of Capitalism, 1926

Two-Year Greek Government Notes

Picture 5

  • August 10, 2010:  "Greek Debt Crisis Finally Over":           Yield 9%.
  • June 28, 2011:  "Greece Faces 'Suicide' Vote on Austerity":    Yield 30%.


 



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Timing & trends

The Short‐ & Long‐Term Direction For Commodities

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Posted by Jack Crooks - Black Swan Capitak

on Thursday, 17 May 2012 09:04

The United States, meanwhile, becomes a recipient of global capital flows when uncertainty shadows over developed‐nations’ capital markets and emerging market growth prospects.   
 
So, from an equities perspective the US has outperformed global stock markets; and from a global growth perspective commodities have been beaten down.  
 
From here, if you believe global growth will remain subdued and other fundamental risks will hurt economies and markets throughout the world, it’s tempting to expect US stocks will play catch‐up and move lower with global equities and commodities. After all, the Federal Reserve hasn’t brought new quantitative easing to the table and likely won’t for some time.  
 
But it may be a bit premature to expect US equities will plunge. Likewise, this downturn in commodities may be getting a bit long in the tooth. 

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