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Timing & trends

An Argument for a Contrarian Investment


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


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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Gold & Precious Metals

Gold & Silver Long Term Signal


Posted by JW Jones via Chris Vermulen - The Gold & Oil Guy

on Wednesday, 23 May 2012 08:00

I am a contrarian by nature. I generally try to do the opposite of the crowd in every situation I find myself regardless of whether I am in a movie theater or trading options. As expected, the gold miners have shown relative strength recently. The miners were just absolutely massacred during the recent selloff in equities and precious metals.

CLICK HERE to read the full article

Art1



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Stocks & Equities

Investment Themes - Risk, Return and Value in Western Canada


Posted by Agcapita

on Wednesday, 23 May 2012 07:22


The challenge current investors face is that sovereign debt default via inflation/currency debasement obviously doesn't create any new wealth but it certainly reallocates it amongst economic participants, and it is a process that takes place largely unnoticed until it is too late for most.

Sadly, that is the entire point of the ongoing zero-interest rate policies - to quietly expropriate as much scarce capital as possible for the benefit of bankrupt but politically influential sectors of the economy - particularly in finance and real estate.

Where do you invest in such a world - a world of negative real interest rates, bloated central bank balance sheets and solvency challenged governments? I do not intend this letter to be a definitive answer to that question by any means, rather a quick overview of some ideas which we believe are worth consideration.   

There are still pockets of good risk-adjusted returns to be found in the developed world despite the relentless overall deterioration in western growth fundamentals - or perhaps due to the dogmatically Keynesian mindset of our monetary and fiscal authorities, because of them. I hope it does not come as a surprise that for the diligent researcher there are ways outside of gold to go long monetary malfeasance while obtaining some growth exposure and perhaps a margin of safety as well.

Consider the value of commodity-linked returns in a politically stable part of the world - western Canada. Commodity production assets, or more generally commodity linked cash flows, have interesting inflation hedging characteristics, can be useful tail risk hedging tools (farmland) and when located in Canada provide linkage to emerging market growth and tight supply dynamics without emerging market risk. In addition, agriculture and energy have another useful quality in volatile times - highly inelastic demand curves.

For those unfamiliar with western Canada's commodity endowment, it is a region with less than 10 million inhabitants but is the epicenter of one of the world's most impressive concentrations of real assets.  Its approximate global reserve rankings (or production rankings in the case of beef, timber and wheat) are as follows:

  • Potash - 1
  • Oil - 2
  • Uranium - 3
  • Timber - 5
  • Wheat    - 6
  • Gold - 7
  • Beef - 10
  • Natural Gas - 20

The advantage of producing the commodities that the emerging economies need and importing the manufactured goods they make is significant - western Canadian growth rates have averaged twice those of central Canada over the last decade.  So for investors looking for commodity linked returns with political safety - western Canada is a good choice.

Why the reference to political risk? When seeking to generate commodity linked returns political risk can never be ignored, as I believe it is a key differentiator of returns. Just ask investors in Sino-Forest or YPF to name just two recent demonstrations of this principle.  

Private Equity ("PE"):  Canada has some of the best PE returns globally (particularly smaller transactions):

40

At the most basic level western Canadian PE returns are linked to commodity prices and the consistently higher and more stable rates of growth that have been occurring in this market. However, there are some additional factors driving returns as well: Firstly, there is a strong supply of small & medium enterprise deal-flow in western Canada due to high levels of entrepreneurship (roughly speaking a "SME" is a business with less than 100 employees or an enterprise value of less than $10 million). SME penetration in the west is almost 30% higher than the Canadian per capita average.

Secondly, the number of Canadian baby boomer retirees has been increasing rapidly and is projected reach more than 40% of the working age population by the late 2010s.  It is no secret that baby-boomers continue to be an influential cohort and in retirement will have a significant effect on the pricing of assets, just as they did during their key investment years, except now they are entering liquidation mode.  The effect on the private equity market is simple - retiring baby boomer entrepreneurs must sell their numerous SME businesses which should create both deal flow and downward pressure on cash multiples. Phrased another way, PE returns should improve.
 
Saskatchewan Farmland: Since the beginning of 2007 Saskatchewan farmland has appreciated at a rate of over 12% per year due to increasing agricultural commodity prices but much more because of a large price discount to fundamentally identical land in the neighboring province of Alberta. In fact, the differential between the rate of appreciation of similar land in Alberta and Saskatchewan is over 50% with Saskatchewan farmland generating substantial "margin of safety" returns as the long-term price parity with its neighbour is restored. On a fundamental price per bushel of yield basis Saskatchewan stills trades at a material discount to global averages, a diminishing legacy of regulatory barriers to capital that have disappeared for domestic investors.
 
Conventional Heavy Oil: When investing in conventional heavy oil in western Canada, you are subject to two discounts: 1) the discount of heavy to WTI prices and 2) the discount of WTI to global prices. Conventional heavy oil represents a relatively inexpensive oil BTU and we believe spreads will compress over time, enhancing returns to heavy oil production assets. In addition, we are experiencing historically low natural gas ("NG") prices. The perverse effect of low NG prices is to force operators with high levels of NG in their production mix to sell oil production assets to raise capital.   This in turn tends to creates oil production deal flow - even though oil cash flows are robust.
 
Natural Gas: For the extreme value oriented investor with a long-term horizon, NG assets with large reserves and low production levels necessary to maintain leases represent a low cost-of-carry long position. Our analysis leads us to believe that for this purpose such a position has distinct cost, volatility and return advantages over traditional long NG futures exposures or investments into operating companies. Assuming that the market will find a way to exploit one of the most inexpensive BTUs in world (North American NG) then we should expect prices to recover over the medium to long term as these BTUs are eventually pulled into other markets - perhaps in the form of feed stocks (ethylene & propylene), finished goods (fertilizers) or LNG. Obviously this is not an investment with a view to an immediate return but for value investors who believe in the long-term strength of the energy markets surely something worth considering. 



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Personal Finance

Big Trouble Ahead


Posted by Marting Armstrong - Armstrong Economics

on Wednesday, 23 May 2012 06:42

"They are coming to take your money away Ho Ho, Hee Hee, Hum Hum!"

I have been warning that government is getting VERY aggressive all because of the Sovereign Debt Crisis. I have warned that this problem CANNOT be solved in the manner in which they are pursuing – taxing everyone & everything. They are about to destroy the economy and we are headed toward a major period of authoritarianism. There is a steady flow of bills being introduced in Washington that are design to eliminate the Constitution all to save the Bureaucracy. They are going to make DWI a federal offense. Sure, drunk drivers are dangerous. The question becomes what is drunk? When there is money involved and profit for government, do not be foolish to really think they are doing anything for society. The kill switch on the Internet is to cut off the free press and to eliminate the right to assemble since they saw how the Arab youth used social media to organize their revolutions.  

Now on January 1st, 2013, the US government will be requiring everyone to have direct deposit for Social Security checks and pensions. Why? Well guess what.  There is another bill HR 4646 that will impose a 1% tax on ALL transactions in a bank account. This is not income. This is money flow - a 1% tax on all bank transactions which will include paychecks, retirement checks and Social Security checks. That will even include a 1% tax on your refund check from the IRS. They want direct deposit and eliminate “paper money” to enable them to now tax your cash flow regardless if you make money or not.  This bill was introduced by Representative Chaka Fattah (D-PA). They will tax everything before REFORM because this is all about retaining power. The next target 2016 is looking very grim indeed. Forget the gold standard. They want everything electronic and eliminate cash!

....read more about the Sovereign Debt Crisis by Martin Armstrong HERE

sovereign debt crisis countriesindangerzone



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