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Energy & Commodities

Why Uranium Prices Will Spike in 2013


Posted by David Sadowski via Raymond James

on Friday, 24 August 2012 07:29

Analyst David Sadowski of Raymond James sees a lot on the horizon for uranium: a supply shortfall, escalating Asian demand and seasonality, to name just a few. As a former geologist-turned sellside analyst, Sadowski's conviction in uranium's bullish future is rock solid, and he urges investors to get exposure now, as prices in this sector can climb quickly once they're set in motion. In this exclusive interview withThe Energy Report, Sadowski shares his favorite names that are set to deliver megawatt-size returns to investors.

COMPANIES MENTIONED: AREVA - BHP BILLITON LTD. - CAMECO CORP. - DENISON MINES CORP. - PALADIN ENERGY LTD. - RIO TINTO PLC - UR-ENERGY INC. - URANIUM ONE INC. - URANIUM PARTICIPATION CORP. URANERZ ENERGY CORP.

The Energy Report: David, how does your background as a geologist help you to see value and growth potential in mining companies?

David Sadowski: Defining ounces or pounds is not an easy business. If it was, there would certainly be far more economic deposits out there and metal prices would be a lot lower. Luck is involved, but most companies use systematic evaluations like geological surveys, drilling and other data to take a lot of the guesswork out of finding the next discovery. The ability to interpret these data is equally important, and it allows an analyst to make an independent determination on the growth potential of a project rather than just relying on what management is saying. In this way, I feel like having an understanding of how economic ore deposits form is essential to developing a meaningful forward-looking opinion, particularly on early-stage prospects. In my view that's one of the most important tools for the successful analyst.

TER: You're also clearly comfortable speaking with engineers and geologists at these companies.

DS: Yes, quite right. That's a very important element to my role. You have to be able to speak the same language and understand what they're doing on the ground, and that helps the analyst determine whether or not the company is headed in the right direction. It's a key skill to have.

TER: I was also very curious about your transition to finance as a sellside analyst. You once had a responsibility to the companies for which you worked, but now your stakeholders are institutional and retail investors. What mental shifts did you have to make?

DS: As an exploration geologist, one is really focused on the rocks, sometimes even at the microscopic level, and that's a much different scope of focus than that of a mining analyst. The financial and operational outlook for the company and its share price must always be on the analyst's mind, and we're not looking at companies in isolation, as a geologist might do. If you're in the business of projecting where the commodity price is going, as I am for uranium, the scope of analysis is global and extends from government policy right down to whether we think a specific ore zone will be amenable to heap leach, for example. As you mentioned, first and foremost I look out for the interest of investors rather than the mining companies, and this responsibility demands even higher levels of objectivity, precision and rigor. It's a constant challenge and that makes it an exciting and fulfilling role.

TER: Speaking of forecasts, uranium has dipped below the $50/lb level. I'm not sure, but I think these round numbers represent psychological support and resistance levels. What minimum price level must be sustained for small or near-term producers to maintain adequate margins?

DS: Well, if we look at existing operations, the majority of them would be losing money by selling their material at $40/lb. But there are a few exceptions, some of which are quite large producers, likeCameco Corp.'s (CCO:TSX; CCJ:NYSE) McArthur River or BHP Billiton Ltd.'s (BHP:NYSE; BHPLF:OTCPK) Olympic Dam. By our estimates, the only two potential projects that are likely to work in the $40/lb range of average realized price would likely be Cigar Lake and the expansion at Olympic Dam, but these are definitely major outliers. Cigar Lake is the second-highest grading deposit in the world, and it's located in an excellent jurisdiction in northern Saskatchewan with significant existing infrastructure nearby. Meanwhile, Olympic Dam only works at that price because its uranium production is a byproduct of much more significant gold and copper output. When we look at the majority of additional projects needed to fill the looming supply gap, we think they need prices north of $70/lb to go forward. This is one of the key reasons why we feel the sub-$50/lb prices are unsustainable.

TER: What is your case for rising demand for uranium?

DS: We're definitely bullish on the outlook for uranium. Although prices have softened in recent months, we have a very strong conviction that this trend is soon to reverse and investors should be exposed to uranium today. Beyond the high incentive prices for new supply that we just touched on, there are three primary reasons for our view. The first one is compelling supply/demand fundamentals. Next, there is the seasonality of uranium prices. And, most importantly, there are industry catalysts. Shall we take a look at each one?

TER: Please, go right ahead.

DS: After the Fukushima Daiichi accident last year, the nuclear industry has done some soul searching and decided to take a slower, more cautious pace in the construction of new reactors globally. But what many people don't realize is that according to World Nuclear Association (WNA) data, there are nine more reactors in the planned and proposed category today than there were before the accident. Demand for nuclear power has remained resilient with ramping electricity requirements around the world, volatility in fossil fuel prices, energy supply security concerns and a global preference for carbon-neutral sources. The majority of this demand is from Asia. In fact, we estimate 82% of new capacity through 2020 will be built in only four countries—China, India, Russia and South Korea. Part of the reason for that is that state-owned utilities don't face the same problems associated with other regions, like high upfront construction costs, widespread antinuclear public sentiment and lengthy regulatory timelines. So, this continued growth should support commensurate levels of demand for uranium for decades to come.

All of this demand begs the question, where is this uranium going to come from? Well, we don't think supply is going to be able to keep up. Due to recent soft prices, many major projects have been delayed or shelved, like BHP's Olympic Dam expansion, which I mentioned earlier, and Cameco's Kintyre project,AREVA's (AREVA:EPA) Trekkopje project and the stage 4 expansion at Paladin Energy Ltd.'s (PDN:TSX; PDN:ASX) Langer Heinrich mine. Even the world's largest producer, Kazakhstan, may slow its pace of production growth. And, further complicating this issue is dwindling secondary supplies, like surplus government stockpiles, which in recent years have contributed 50 million pounds (Mlb)/year. But, that number is expected to halve over the next few years. We are projecting a three-year supply shortfall starting in 2014, and that certainly paints a very rosy supply/demand picture for investors.

Seasonality also favors uranium exposure today. Over the last 10 years, uranium spot prices have dropped on average $4/lb during the third quarter (Q3) but have rebounded by at least that amount in Q4, which is the strongest quarter of the year. This is often correlated with the annual WNA symposium, where many market participants sit down and hammer out new supply agreements. This year's conference is going to be held September 12–14 in London.

Last but not least, there are several near-term catalysts that we think will start the price upswing. In Japan, all but two reactors are now offline, and there's significant uncertainty and government debate about how many will eventually restart. As the world's third-largest nuclear fleet, it has obvious implications for future uranium demand. For a variety of economic, political and environmental reasons, we think Japan will restart most of its reactors by 2017 with the first batch of reactors likely starting early in 2013. As more units start to return to service, it will provide additional confidence that the nuclear utilities in Japan are unlikely to dump their inventories into the market, which should support prices in the near-term.

Meanwhile in China, the government paused construction approvals for new reactors immediately after last year's Fukushima accident. But with these safety reviews now successfully completed, they're poised to start re-permitting new projects, and this should undoubtedly support increased uranium contracting. Let's not forget that China will be far-and-away the largest source of nuclear demand growth for the foreseeable future. We expect a six-fold increase in installed nuclear capacity by the end of this decade.

The final major catalyst is the expiry of the Russian Highly Enriched Uranium (HEU) agreement to down-blend material from nuclear warheads into reactor fuel. This agreement has supplied the Western World for two decades but is due to conclude at the end of 2013. The Russians have repeatedly stated they're not interested in extending this agreement, and we expect this to remove about 24 Mlbs/year or 13% from the global supply. That's equivalent to shutting down the world's largest mine, McArthur River, as well as all six operating mines in the U.S. That's a massive impact. So, for these reasons we think prices are poised to turn here. We forecast prices to average above $60/lb in 2013 and north of $70/lb in 2014 and 2015 before settling to $70/lb in the long-term.

TER: These catalysts are spread out over the next 18 months, which is not a long time. Stock markets generally look ahead. So, why are prices lagging as they are?

DS: That's a good question. I think what we're seeing is a significant amount of uncertainty in the marketplace surrounding the availability of some material and who is going to be a near-term buyer. The purchasing side is largely comprised of nuclear utilities, which are usually very conservative and cautious. Based on our experience, they tend not to make rash moves and prefer to wait until all information is available before jumping into new sales contracts. For instance, they would rather have certainty on whether utilities in Japan and Germany are going to be selling any of their inventories before they start buying. This has led to very low volumes in recent months.

However, we're already starting to see contracting activity pick up with major long-term deals signed by Paladin and one with the United Arab Emirates, both this month. And the WNA meetings are now only a few weeks away. This mounting activity could be just what the market needs for the metal price to shift to higher and more sustainable levels. And recent history shows that when the price moves, it can move really quickly as we saw in 2007, mid-2009 and late-2010 when the weekly uranium spot price jumped in increments of $5–10/lb.

TER: Could these current low prices force juniors to sell themselves to the larger companies, the producers?

DS: Well, we certainly expect further consolidation in the space. This industry is pretty much divided into the haves and have-nots. On one side we have state-owned utilities in countries like China and Korea, which essentially have zero cost of capital and the stated intention to build their exposure to uranium production. We also have large producers, like Cameco and Uranium One Inc. (UUU:TSX), that are cashed up and looking to grow. But, meanwhile many have-not companies have been under significant pressure in this current low uranium price environment with weak balance sheets and share prices. They could be looking to either sell assets or be taken over completely. Last year we saw Hathor get acquired by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). Extract Resources was bought by the Chinese nuclear utility, China Guangdong Nuclear Power Corp. (CGNPC). And, Mantra Resources was just purchased by Russia's ARMZ Uranium Holding Co. These major deals could just be the start of another major trend of M&A in our view.

TER: I'm surprised that those acquisitions you just mentioned haven't been a bullish signal to the market.

DS: We definitely think that they're a bullish signal. It means that the larger companies are willing to lay out capital and put it at risk to build their future pipelines, which is a sign to us that they have confidence in where the uranium price is going and that they want to have higher production in the future to take advantage of those higher prices.

TER: David, everything you have said sounds to me like you believe that we are now in a legitimate value market in uranium equities. Is that the way you feel?

DS: Yes, definitely.

TER: What are your best ideas that you're telling investors about?

DS: We prefer higher-quality, lower-risk names with minimal capital requirements. One of those is Cameco. It's the world's largest publicly listed uranium producer. Its market cap is over $8 billion (B). So that makes it very acceptable for many investors who have certain constraints and mandates to get exposure to the uranium space. It's historically been the go-to name in the space. This company features strong production growth and a very low production cost. And it's got a critical milestone coming up with the startup of its massive 50%-owned Cigar Lake project, which is due to come on-stream in late 2013. When fully ramped up, Cigar Lake is going to be the second-largest mine in the world. Cameco also has a very healthy balance sheet with access to about $4B in capital, and we wouldn't be surprised if it puts that money to work by making an acquisition in the next 6–12 months.

TER: You have a $28 target price on Cameco, which does not represent huge upside gain from current levels. Is this what you think of as a safer, more conservative play?

DS: Yes, certainly. It reduces your risk via diversification into the other parts of the fuel cycle, such as conversion, refining and electricity generation, while you're still getting some serious exposure to the uranium space. Even if we don't project a really big return to our target, we think it's a safe play and we recommend it. There's less volatility in this one.

TER: What's your next idea?

DS: The next one in terms of lower-risk names we'd recommend is Uranium Participation Corp. (U:TSX). Our target is $8, but we've got a Strong Buy on it because we think this is a great low-risk way to get into the space. It's the world's only physical uranium fund, and it's designed to give investors pure-play exposure to the uranium price without any of the associated exploration, development or mining risks. The fund usually trades at slight premium to its net asset value (NAV), but currently it's about 13% below NAV. We think it's trading at a great entry point right now. Its current share price implies a uranium price of about $44/lb. If you're like us and you think spot prices are unlikely to descend to those levels, then Uranium Participation offers good value today. If you're an investor looking for more leverage, it may not be the one for you. But, I think if you're going to buy a basket of equities this is one that you may want to include.

TER: What about investors who are willing to take on a bit more risk for greater returns?

DS: If you want more leveraged exposure to a potential spot-price rebound, we would consider a couple of other companies. The first one is Ur-Energy Inc. (URE:TSX; URG:NYSE.A), and we've got a $1.80 target and a Strong Buy rating on this one as well. It's got an excellent flagship project called Lost Creek in mining-friendly Wyoming. We see production starting up there in the second half of next year. The project's got low capital and operating costs and it's scalable as well. Despite a somewhat small 1 Mlb/yr mine plan, the design of the backend of the Lost Creek plant should accommodate about 2 Mlb/year of uranium. It should be able to incorporate other satellite deposits, such as those acquired from Uranium One earlier this year as well as from Areva last month. Ur-Energy is also a catalyst story. It's got only one final mine permit required before construction can start, and we have strong conviction that final approvals from the Bureau of Land Management (BLM) will come in by the end of September, particularly following release of the Final Environmental Impact Statement (EIS) last week—a major milestone. Currently Ur-Energy's valuation is very attractive, trading at the lowest price/NAV (0.5x) of any of our covered equities, and we think receipt of that approval from the BLM could help close the gap towards developer valuations.

TER: Over the past four weeks it's up 34%. I'm guessing that the near-term expectation of this BLM permit is the reason for this stock's very high relative strength.

DS: I think so. I think we're trending towards that date, and it's become very important because this company has faced a little bit of difficulty over the last few years with some of its permitting timelines. It has missed a few targets, and that has really hurt the share price. And, yes, when this permit comes in we think it should be a great catalyst for the stock to re-rate towards developer valuations.

TER: Would you mention another name?

DS: Uranium One is another one of these stocks with a bit higher risk profile, but we think this risk is justified, and that is demonstrated by our higher target price. We are rating it Outperform with a $3.60 target. It's got an excellent suite of low-cost in situ leach mines in Kazakhstan. It's the world's fourth-largest producer, and it's also one of the fastest-growing producers out there as well. We modeled over 15 Mlb of production in 2015, up from only 10.7 Mlbs in 2011. Uranium One has the highest exposure to spot prices than any other company in our coverage universe, so it's a great way to play this space if you're a strong believer in uranium prices going upwards. Uranium One is 52% owned by ARMZ Uranium Holding Co., a strong partner, and that's allowed it to access the Russian ruble bond market, which has been a boon for the company. It's at a great entry point at current levels, with a 0.7x current price/NAV.

TER: David, Uranium One has a $2.3B market cap, and because of that there are a lot of mutual funds that could buy this stock. But it strikes me that its market value is a quarter the size of Cameco. Mutual funds could get some very significant upside from Uranium One.

DS: That's a really good point to make. There are very few universally investable uranium equities. And by that I mean that there are very few publicly listed uranium equities in Canada, for example, that exceed that $1B market-cap threshold. Cameco is the biggest one at over $8B in market cap, and then you've got Uranium One, and Paladin Energy. And, beyond that there are very few places that you can put your money if you're the type of investor that's got the specific size and liquidity constraints or mandates, like you said, as a mutual fund. Those are pretty much the top three go-to places if you want uranium exposure.

TER: Is there one more you could mention? You have a Market Perform rating on Denison Mines Corp. (DML:TSX; DNN:NYSE.A). I'm interested in hearing about it because the company is once again an explorer.

DS: Denison Mines has a great management group lead by Ron Hochstein, and it has a 60%-interest in an excellent exploration project called Wheeler River, which is one of the best discoveries that we've seen in about a decade, perhaps trailing only Hathor's Roughrider. It's also one of the highest-grading uranium deposits that has ever been discovered. We think that the project could nearly double its resources at depth, along strike and on regional targets, and so we model 70 Mlbs at 12% target resources at Wheeler River. Denison also has a 22.5% ownership of the state-of-the-art JEB mill, which is one of only four active conventional uranium mills in North America. It's unique in that it can process high-grade ores without having to downblend. That's a strong competitive advantage. For those reasons, we think Denison is a good takeout target. Cameco and Rio Tinto's faceoff for Hathor last year was probably their first battle in a larger war for the prime assets in the basin, and Denison has two of them. That said, we are cautious on the name today given limited visibility to production at its minority-held Canadian projects and in Mongolia and Zambia, as well as potential financing risk next year. We have a Market Perform rating and $1.80 target on the company.

TER: I have enjoyed meeting you very much, David.

DS: Thanks for having me George. It was a pleasure to speak with you as well.

David Sadowski has been a member of Raymond James' mining team since June 2008, and now covers the uranium and junior precious metal spaces as a research analyst. Prior to joining the firm, David worked as a geologist in Central and Northern B.C. with multiple Vancouver-based junior exploration companies, focused on base and precious metals. David holds a Bachelor of Science in Geological Sciences from the University of British Columbia.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

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DISCLOSURE: 
1) George S. Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Ur-Energy Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) David Sadowski: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.



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Stocks & Equities

Markets are Rigged…...So What? - Is The Cult of Equities Over?


Posted by Chris Mayer - Comment by Peter Grandich

on Friday, 24 August 2012 00:48

Peter Grandich: "The market itself is not what it once was. It has really become one big crap shoot. A week doesn't go by when there isn't news of somebody who has illegally or in some way didn't go about it the right way, used the market to a disadvantage or advantage over the general public. And I also think that while that might have spooked the retail person out I believe that continues in many areas unabated.  We saw just a few weeks ago a computer error, just one entry by a programmer almost wiped out and severely wounded a major brokerage house. That's how big and bad the Casino has become and one day that will come back to bite us in a very bad way but for now its really become more like a casino than what was originally intended....a place where you could purchase part ownership in a business but that isn't what really drives the market anymore".

What really concerns Peter is the complacency of people who have accepted what the market has become, a place where more and more evidence comes forth that the markets are not fair, that it is heavily tilted against individuals. According to Peter  there doesn't seem to be any change coming, nor desire to change from the regulators  who have accepted that it is the new norm".

Markets are Rigged…So What?

 

Great gobs of money continue to drain away from stock mutual funds. And even some big-name investors have put up the white flag. Louis Bacon famously gave back $2 billion to his investors a couple of weeks ago because, he says, he can’t figure the market out.

This has led some to say that the era of stocks is over. “The cult of equities is dying,” writes the oft-quoted Bill Gross, who manages money at Pimco. “Like a once bright-green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of ‘stocks for the long run’ or any run have mellowed as well.”

Well, maybe…

I’m with David Goldman, who writes in the Asia Times under the penname Spengler that Gross is only “half-right.” The market, as always, has its enthusiasms. He writes:

Visible and reliable cash flows trade at an unprecedented premium as bond yields collapse. Valuations of utility, tobacco, energy trust and other big dividend payers are stupidly rich and are likely to remain so. A sea change in equity valuations has put a premium on secure cash flows while amplifying the effect of uncertainty. It is possible to measure these changes by a number of statistical means, some direct, some indirect.

Goldman points to mining stocks, which are very uncertain and have returned a negative 24% in the last two years. Utilities, by contrast, are very stable. Utilities have returned 30% in the last two years. That’s very frustrating for those holding mining stocks.

He offers more evidence, but you get the idea. Stable, predictable cash flows and yields are popular. Unstable, uncertain cash flows with no yield are not. (Eventually, this will break. Timing is, as always, uncertain.)

Second, I wonder if the points Gross raises are even relevant. I mean, investors have been yanking their money out of stock mutual funds since the crisis of 2008. The market has more than doubled since. And it is now within spitting distance of all-time highs.

Volume, liquidity, public participation in equities… All of these are overrated concepts. Market values can move dramatically with hardly any volume at all and be just as real as a change accompanied by lots of volume.

Beyond these objections, though, I think there is some truth to what Gross is saying.

I hear more and more people say the market is rigged against them. They say it is a game for insiders to fleece gullible outsiders. Wall Street has not helped this image at all. There seems to be no end to lurid scandals or crises of confidence in the system.

I have to say I, too, have felt this way more often of late. However, I believe there are ways to invest safely and feel good about it. You can ignore the scandals. You can ignore Wall Street.

One way does involve direct investments in stocks, but by paying careful attention to the tenets of what I call the CODE System:

 

  • Cheap — as measured by stocks trading below replacement costs or below private market value
  • Owner-operators — as measured by high insider ownership of the people in charge and/or a good track record of delivering results for shareholders
  • Disclosures — which means a business we can understand and that reports results with good disclosures. Transparency is another word for the virtue we seek here
  • Excellent financial condition — as measured by a relative absence of liabilities, lots of cash and/or cash flow and the ability to “do deals” (i.e., borrow at super-attractive rates, take advantage of opportunities, convert assets to other uses, etc.).

 

I like to call this philosophy “investing like a dealmaker.” It is one I’ve distilled from a decade of experience as a corporate banker doing deals, along with my own ongoing two-decade study of investing. Of course, I’ve also managed money on my own account all along the way.

Another way to beat rigged markets is to invest in funds or private partnerships that also pass the CODE test.

For example, you can easily buy shares in Gabelli’s Focus Five Fund (GWSVX). This is a fund with a well-defined mission and cut from a process that has produced stunning results. Own some shares and sit on them. Let portfolio manager Dan Miller do the hard work for you.

So my ultimate answer to Gross is this: Who cares? For those of us willing to dig, there are always plenty of opportunities — some of them in the stock market and some not. The question is not about any cult of anything. It’s about what makes sense and what doesn’t. Whatever other people do or think is irrelevant.

I’ve been particularly influenced by the ideas of Martin Whitman, who for years managed the Third Avenue Value Fund. He’s also written a pair of excellent, though technical, books that express similar ideas: Value Investing: A Balanced Approach and The Aggressive Conservative Investor. (Far less technical, though written in the same spirit, is my own first book, Invest Like a Dealmaker: Secrets From a Former Banking Insider.)

In my Capital & Crisis newsletter, I’ve been more draconian in applying the CODE of late, which in part has accounted for an itchy trigger finger in selling positions. The time to get tough is when the market is merrily rolling along. Before things roll over — not after. Otherwise, I’m happy to sit with my cash for a while until an extraordinary new opportunity opens up.

More time and care yield a much more-satisfying result. This is the way it is in life. Investing is no different. The results will be better and more satisfying than if we try to take shortcuts to find and trade more ideas. In my mind, it’s a lot like finding and eating good food.

Last night, we ate dinner on the back patio amid the hum of cicadas. We had basil from our garden, tomatoes from my in-laws’ garden and cheese from a local farm. Of course, it would be easier to just buy tomatoes and cheese from the grocery store. But it would not be the same.

I grilled chicken thighs over hardwood charcoal. (We raise chickens, but for eggs.) It’s a rare thing to do it this way nowadays. It takes more time. You have to light the fire and let the coals ash over and spread them around. The heat is uneven and you have to watch more closely what you are grilling.

I remember one little guest asking once, “What’s that?”

“Charcoal,” I said.

“Oh,” he said. “My dad just turns it on,” he said.

Yes, it would be faster to have an electric grill that you just turn on. But I can’t help but think of the words of that great eater (and cook and writer) Nicolas Freeling. “Nothing, of course, could be more stupid than an electric barbecue,” he writes in his classic The Kitchen Book. “The principle of a grill is that the food should meet smoke as well as heat.”

Of course, it would be much easier to just buy ticker symbols based on what you hear other people tell you on TV or what you hear in the news, rather than do all this research. But the result, like a store-bought tomato, is very different from the juicy blood-red tomato from a home garden. It is the difference between the work of an electric grill and that done by flames and smoke.

Everyone is always in a hurry, it seems to me. I say relax and slow down with your life and money. Enjoy, savor and seek out quality over quantity.

I just finished reading Bill and Will Bonner’s book, Family Fortunes: How to Build Family Wealth and How to Hold on to It for 100 Years. The key to old money — those long-lasting fortunes — boils down to one thing. “The secret is simply this,” the authors write: “The rich take the long view.”

They go on:

“If you look carefully, almost all ‘Old Money’ secrets can be traced to a single source: a longer-term outlook. The truly wealthy are careful to spend their money on things that hold their value over time…

“Serious Old Money investors barely follow the news and never react to it. They know that the really important trends take years to develop and then many years to play themselves out. You can take your time… months… years… before making a decision. There is no need to feel rushed…

“Investment success happens by taking big positions in big trends and leaving them alone for a long time.”

Not easy to do, but I think this is right. It is something to shoot for.

Regards,

Chris Mayer,
for The Daily Reckoning


Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents

Video Report: Legally Collect Thousands of Dollars Each Year…From the OTHER government-backed retirement program! Finally – you can get on the inside! Here’s why you must do so now…



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Currency

Fed Minutes & the US Dollar


Posted by Jon Vialoux - EquityClock.com

on Thursday, 23 August 2012 16:44

"With the Fed’s suggestion of further monetary easing, commodities rallied, breaking firmly above the 200-day moving average, according to the CRB Commodity Index.   And while commodities rallied, the US Dollar Index plunged, coming close to achieving the target suggested by the short-term head-and-shoulders top of 81.   This bearish setup for the US Dollar was pointed out on this site at the beginning of the week, however, thoughts were that the move would play out over a matter of weeks rather than days.   With the US Dollar nearing that downside target, the long-term rising trend-line could soon be tested, potentially offering a hindrance to this commodity rally.   Despite the significant dollar decline over the past two sessions, equity markets have failed to move higher, hinting of equity market exhaustion at current overbought levels.   The US Dollar Index remains seasonally negative through September before stabilizing into October and November".

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.....for more of Jon Vailoux's analysis of the Markets go HERE

 

Equity Clock is a division of the Tech Talk Financial Network, a market analysis company that provides technical, fundamental and seasonality analysis on a daily basis via TimingTheMarkets.com and EquityClock.com.   Equity Clock’s mission is to identify periods of reoccurring strength among individual equities in the market using methodologies presented by some of the top analysts in the industry, including that of Don Vialoux, author of TimingTheMarkets.com.

Feel free to use any of the content or seasonality studies (charts, timelines, or otherwise) presented as long as a link-back to this site at EquityClock.com is provided.

For further information on indicators used in reports presented on this site, please visit our reference page.



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Personal Finance

Market Update: Gold, Stocks, Bonds, Oil, US Dollar


Posted by Peter Grandich - Grandich.com

on Thursday, 23 August 2012 09:37

Gold – Once again we’ve risen close to a key level for gold but I must remind some “yet again” we’re not in a new up-leg until if and when (more like when)we get two consecutive closes above $1,650. Gold’s technical picture is quite bullish but rest assured the “bums” shall attempt one of their raids as sure as Canuck fans are already getting their Stanley Cup -2013 hats ready.

U.S. Dollar - I said the bullish camp was overrun with almost 100% bulls and it was nothing more than a dead-cat bounce in a secular bear market for the terminally ill U.S. Dollar. Watch for a dramatic short covering rally if the Euro can close above $1.25 (I think its when).

U.S. Stock Market – The least resistance continues to be up but a pullback as it nears all-time highs is likely.

Bonds – The worse investment for the next decade remains just that and look for some more switching from bonds to stocks when 10-year goes above 2%

Oil and Natural Gas - $100+ oil near and I’m near certain Israel is close to attacking Iran in next 60 days. Natural gas remains an avoid.

Junior Resource Market indeed saw an exhaustion of selling and is bouncing but any thought of one getting even this year is foolish (except if gold runs to new highs). But the bottom has been put in.

 

IF YOU ARE GOING TO FOLLOW MY BLOG, THE FOLLOWING IS A MUST READ. IT IS TAKEN FROM MY “2012 OUTLOOK” AND CAPSULIZES MUCH OF WHAT I KNOW AND BELIEVE ABOUT THE JUNIOR RESOURCES INDUSTRY.  PLEASE REVIEW THIS BEFORE ANYTHING ELSE. IF YOU DISAGREE, DON’T BOTHER READING ANY FURTHER.

ball-150x150

“Those of us who look into a crystal ball end up eating lots of broken glass.”

The finest gentleman I ever met in nearly three decades of being in and around the financial services industry, Mr. Kennedy Gammage, often said the above when asked for his outlook. At best, some of us can make an educated guess. At worst, one would have been better off with darts. In 2011, yours truly fell somewhere in between.

In a world where “what have you done for me lately” is paramount, I begin 2012 with a mixed bag of thoughts and a sense it shall end up better being a live chicken versus a dead duck. Because I derive a living and much of my personal investing dollars are geared towards an industry where failure is the norm, the junior resource market, I believe I’ve become more realistic of my chances and have borrowed an old slogan of “bet with your head, not over it.” Unfortunately, too many people don’t treat it as gambling and are not prepared financially and mentally to lose part or all their capital – a feat all too common in the junior resource market.

Instead of having a very small amount of high-risk capital allotted to the junior resource segment with a true understanding that failure is the norm and losing part or all of one’s capital is very real, they instead plow a large percentage of their monies and then look to blame anybody but themselves when the odds stacked against them play out. The fact that most of the pundits in this arena never note the dark side doesn’t help.

So first and foremost, to any and all readers of my blog I say that when it comes to the junior resource market, failure is the norm and I will have my fair share of it. Don’t fool yourself into thinking a business where 9 out of 10 companies eventually failed to go the whole nine yards is a place where you should place any capital that you’re not fully financially and mentally prepared to lose.



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Stocks & Equities

Copper Prices Signaling Stock Market Top


Posted by Chris Vermulen - GoldandOilGuy.com

on Thursday, 23 August 2012 08:30

The past 5 – 6 weeks have seen equity prices move considerably higher amid growing concerns regarding the European debt crisis, the instability of the Middle East, and ultimately the potential for a major economic slowdown in the United States.

U.S. equity indexes have continued to climb the proverbial “Wall of Worry” since the first week of June and have put on an incredible run. This past Friday saw the S&P 500 Index (SPX) post the highest weekly close of 2012. The perma-bears have been calling for a top and continue to run scared as light volume and volatility have given the bulls an edge during August.

The next key overhead resistance level for the S&P 500 Index to hurdle is the 1,440 resistance zone lingering slightly overhead. I try to refrain from calling tops or bottoms as I feel its a fool’s game that ultimately humbles most market prognosticators. If calling tops and bottoms was easy, investors and traders alike would be able to produce monster gains all the time with uncanny precision.

Instead of trying to predict where the S&P 500 Index will find resistance or create an intermediate to longer-term top, I will simply posit some technical and macro-economic data that indicates we are likely closing in on a major top.

As stated above, the recent rally we have seen has taken place on relatively light volume and plunging volatility as measured by the Volatility Index (VIX).

trading-Chart1

As can be seen above, Friday’s weekly close for the VIX was the lowest in 2012 and ultimately one of the lowest closing price levels in several years. While the VIX is trading at a major intermediate low, there remains a lower support level going back to late 2006 and the early part of 2007 around the 10 price level.

The perma-bulls would argue that we could see those 2006 – 2007 lows tested, but based on September monthly VIX options the option market seemingly is arguing that we are approaching an intermediate low in the Volatility Index. The chart below illustrates the September VIX option chain based on Friday’s closing prices.

trading-Chart2

Price action is never wrong, but many times a great deal of information can be acquired by simply reviewing option prices. As can be seen above, the VIX closed on Friday at 13.45, a new 2012 low. However, when we consider the prices in the VIX September option chain shown above I would point out that the VIX September 13 Puts are 0 bid.

What this essentially means is that the VIX options market is saying that the Volatility Index is unlikely to move below 13 in September. For readers unfamiliar with options, selling a naked put or using a put credit spread are two trading structures that are bullish regarding the underlying asset which in this case is the VIX.

The VIX September 13 puts are offered at 0.05 on the ask, but are at 0 on the bid. This means that the VIX market makers are not expecting to see the VIX move below 13. Clearly this is not a guarantee as there is never a sure thing in financial markets. However, this pricing situation for the September 13 VIX Puts is favorable for the equity bears in September.

In layman’s terms, the VIX needs to move higher in the next 3 weeks based on the fact that the September VIX 13 Puts are 0 bid. This is one of several clues that we could be nearing a major top in the S&P 500 Index in the very near future.

When we look at a weekly chart of the S&P 500 Index (SPX) it is obvious that we have a major longer term breakout which occurred this past week. However, there remains additional resistance overhead in the 1,440 – 1,450 price range.

trading-Chart3

While 1,440 might be a major area where a significant top could form, a rally above this level cannot be ruled out entirely. However, the chart above gives traders and investors a context for where possible tops could form.

A reversal could play out almost immediately at the current levels or we could move considerably higher before finding major resistance that holds. For now, we do not have enough evidence based on the S&P 500 Index price chart to proclaim that a top has formed or will form in the near future.

Another underlying asset that I monitor closely is copper futures. Generally speaking, if copper futures are rallying economic conditions tend to be strong. The opposite can be said when copper futures are under selling pressure. Recently copper futures prices have been trading in a relatively tight trading range, but the longer-term weekly chart shown below demonstrates that should prices start to selloff, a major selloff could transpire.

trading-Chart4

As shown above, there is a monstrously large head and shoulders pattern (bearish) that goes back to early 2010 that has formed on the weekly chart. Should the neckline of this pattern get taken out on a weekly close the selling pressure that could transpire could be devastating regarding the price of copper.

However, a major selloff in copper would also indicate that economic conditions were weakening globally. If copper triggers this bearish pattern, it would likely not be long before other risk assets followed suit.

In addition to the possibility that major selling pressure could await copper should that pattern trigger, another macroeconomic data point would argue that economic conditions are already starting to contract. The chart shown below, courtesy of Bloomberg, illustrates the amount of waste hauled by railroad cars and the implicit correlation to U.S. gross domestic product (GDP).

trading-Chart5

Recently Zerohedge.com posited an article that featured this chart and a link to that article is found HERE. The article and the accompanying chart demonstrate that as more products are produced, additional waste can be expected. As shown above, the amount of waste being produced and hauled by railcar has fallen off a cliff and should longer-term correlations remain intact a contraction in U.S. GDP is likely not far away.

There are a multitude of other topping triggers that I follow that are all screaming that a major intermediate and possibly even a longer-term top is nearby. However, at the moment the price action in the S&P 500 Index (SPX) is arguing otherwise.

Picking tops and bottoms in advance is extremely difficult and generally foolhardy, however when multiple triggers are going off regarding a possible type I pay close attention to price action. While I will not go as far as to say where specifically a top in the S&P 500 Index will form, I believe that a top is forthcoming and could even occur in the next 2 – 3 weeks.

Price is never wrong, and eventually I suspect that price will tell us what we wish to know. For now, I am going into the next few weeks with caution regarding the upside in risk assets. However, it is important to point out that I am not looking to get short risk assets either.

My research indicates that a major inflection point is coming and it could coincide with the Federal Reserve’s Jackson Hole summit. It could coincide with an event that we are unaware of as well. At the moment risk in either direction seems high and caution regardless of directional bias should be exercised. The next few weeks should tell the ultimate tale.

By Chris Vermeulen and J W Jones

If you would like to receive my free weekly analysis like this, be sure to opt-in to my list:http://www.thegoldandoilguy.com/free-preview.php

By Chris Vermeulen 
Chris@TheGoldAndOilGuy.com

Please visit my website for more information. http://www.TheGoldAndOilGuy.com

If you are looking for a simple one trade per week trading style then be sure to join www.OptionsTradingSignals.com today with our 14 Day Trial.

 

J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized. 



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