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Energy & Commodities

Punished Uranium a Top Pick For 2013


Posted by Chris Berry Discovery Investing Morning Notes

on Wednesday, 19 December 2012 09:12

It appears that a positive catalyst for higher uranium prices has unfolded as the citizens of Japan have voted to put the Liberal Democratic Party (LDP) back in power by a large margin. This is significant as the party has voiced support for a return to nuclear energy in the country (as well as aggressive monetary policies which should be positive for commodity demand).

Only two of the 50 reactors in Japan are currently operating, but given the high cost of importing fossil fuels (estimated to be ~ $100 million per day), once can see why a return to nuclear- generated electricity holds an appeal. Nuclear generation costs are largely sunk. Plants, though aging, have been built and the typically large up front capital expenditure for new technology and extensive regulatory delays are not a deterrent in Japan as they are elsewhere in the world.

Not So Fast!

To be clear, if and when a re-start of the Japanese reactors commences, it may take longer than many anticipate as each nuclear plant must be inspected and cleared to resume operations. Reportedly, the Japanese Nuclear Regulation Authority is actively inspecting six plants to determine if they were built on active fault lines. Additionally, there is still ardent opposition to restarting the nuclear power plants in Japan.

From a recent Bloomberg article:

“People who voted for the LDP are supporting their economic-stimulus measures, not nuclear power policy,” said Toshihiro Inoue, a member of the “Goodbye Nuclear: the Action of 10 Million” civil movement, whose online petition to stop atomic reactors in Japan has so far received about 8.2 million signatures.

The fact that there is still opposition to reactor restarts is something investors should not dismiss in formulating an opinion on investing in uranium. Could local opposition to nuclear energy be the “black swan” for the uranium business the same manner that local opposition continues to hamper Lynas in the rare earth business? While we think it is too early to know for sure, any balanced appraisal of uranium investing must consider this.

That said, we are of the belief that it’s not a matter of if but when and how many of Japan’s reactors are restarted. A country such as Japan that must generate such a large portion of its electricity via nuclear power cannot afford not to.

Two other issues with the nuclear industry circle in our minds. We are concerned that the continual “refit” of old technology is one of the most dangerous issues. This is the current case in Japan as well as the U.S. It is, of course, prohibitively capital intensive to build new large scale reactors. Modular, lower cost reactor technology in the field still seems a few years away. Second, storage of spent uranium byproducts is still a problem without a solution. Would a transition in Japan (and elsewhere) to a thorium fuel cycle make more sense?

However Other Uranium Catalysts Are Lining Up

In a recent presentation at the San Francisco Hard Assets Conference I made the case for higher uranium prices in 2013 based on a looming supply and demand imbalance comprised of:

1. The “producers” are headed to the sidelines. These include BHP Billiton, Areva, Paladin, and Cameco who are either delaying or mothballing projects due to a low U3O8 price rendering projects uneconomic.

This trend collectively removes at least 20 million pounds of uranium from the market. A higher U3O8 price will, no doubt, bring many of these companies back into the market. However will they be able to do so in time to satisfy increased demand from countries such as China, India, the UK, the UAE, Slovakia, and Poland? There are ~ 436 nuclear reactors on line globally with 63 under construction and another 150 planned. The need for additional uranium to power the existing reactor fleet plus the additional reactors coming on-stream paints, we think, a particularly bullish picture for uranium exploration and production plays in 2013 and beyond.

2. The looming end of “Megatons to Megawatts” – the agreement between Russia and the United States to use uranium from Russian nuclear warheads a fuel in the 104 nuclear reactors in the United States. The agreement is set to expire at the end of 2013 and if it is not renewed, wholly or in part, could remove 24 million pounds of U3O8 from the market. This is 50% of USA consumption in a given year (a good sign for US-based uranium producers). While we cannot speculate as to whether or not the M-to-M Agreement will be renewed under different terms or at all, one must consider the possibility of a uranium supply disruption here.

3. As we mentioned above, Japanese reactors coming back on line will require additional uranium supply – reportedly 10% of global supply (approximately 15 million pounds). Again, when, not if this occurs, this will be bullish for uranium investors.

Uranium Is One of Our Top Picks For 2013

The uranium sector has been punished since the accident in Fukushima in 2011 and we submit that investing in junior miners involved in uranium is one of the great contrarian investment themes for 2013. A beaten down sector, unloved by the investing populace at large and shunned by major producers in the space is poised for a spike in demand. How that spike 

in demand will be met is unclear. The low cost exploration and near term production stories would appear best positioned to deliver above average returns in the coming months.

Ideally, choosing a basket of stocks with different risk profiles would seem to offer the optimal risk-reward profile. We have written on and still like European Uranium Resources (EUU:TSX-V) as an early stage developer in Slovakia and also view favorably UR-Energy (URE:TSE) and Uranerz (URZ:NYSEAMEX ) for their low cost near term production profiles in the Western United States.

Screen Shot 2012-12-19 at 3.54.47 AM

Source: u3o8.biz

As you can see above, despite the general downward trend in the U3O8 spot price, the election results in Japan have helped the price tick upwards. We think this could be the turning point in the sector many have been waiting for and reiterate our affinity for select uranium names in 2013.

Chris Berry of Discovery Investing 

 

The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. I own shares in EUU. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin. 



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Bonds & Interest Rates

Clarity: What The Heck Central Banks Are Really Doing


Posted by Dr. Martin Murenbeeld via Michael Campbell

on Wednesday, 19 December 2012 08:24

According to Stanford University Economist John Taylor about 70% of all US Bonds last year were purchased by the US Federal Reserve. The Fed is not alone in these actions either, as the President of the ECB Mario Draghi declared himself ready to buy mountains of debt with this statement: "within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough".
 
imagesAccordingly,  one of the great questions on everyones mind is simply - what are the consequences going to be of Central Bankers being so involved in the marketplace?
 
To answer that question Michael Campbell asked a man whose opinion on North American interest rates, currency market trends and the gold market are in high demand. Dr.  Martin Murenbeeld BSc., MSc., PhD & Chief Economist of DundeeWealth Inc had some penetrating things to say about Central Bank actions.  
 
In short, despite the great concern that the Central Banks printing of money is going to lead to the destruction of currency and wild inflation:
 
1. The Big point is the deflationary forces so powerful that Quantitative Easing by the Fed and other Central Banks purchasing of Bonds hasn't made a difference. "No one is overly concerned at this point, because the Quantitative Easing by the Fed and other Central Banks really have not raised inflation numbers above what is considered to be reasonable, like 2%. I would argue that in fact what the QE's have done is kept inflation positive as opposed to it going negative. I know there is a lot of  criticism out there with respect to QE, that the economy is only eeking out 2% growth and it isn't working. Well I'm saying just a minute, you could have been looking at -2%. In that sense I think its been a Godsend". 
 
2. Net Net the Federal Reserve argues that they aren't just printing up money electronically and using it to buy Treasury Bonds. They have a point says Martin as he points out that with the Fed's last Quantative Easing, Operation Twist,  the Fed's balance sheet didn't go up much at all. Martin says that was because they were buying longer term treasuries while they were selling shorter term treasuries. Another respectable mind Dennis Gartman confirms that view when he stated "Well, the Fed is buying $40 billion to $45 billion worth of securities every month, but we forget that they're also allowing about $35 billion to $40 billion—if not more—to mature off on the back end. So the monetary base has actually not grown at all in the course of the last year".
 
3. Interestingly, Martin points out that the Fed is keeping the money supply up, which is basically what Milton Friedman, the most conservative economist of the last 100 years said the Fed ought to be doing. 
 
4. Martin says "that the surprise in all of this" is when Ben Bernanke announced his most recent Quantative Easing program on December 12th, the Stock Market and Gold didn't do better. Despite the Federal Reserves intention to keep short-term interest rates near zero at least until the unemployment rate falls below 6.5% or projected inflation gets above 2.5%, neither the Stock Market or the Gold Market rallied. That tells Martin that there are some other things going on. "Certainly I think the fact that Bernanke stressed so much during his press conference his concerns about the Fiscal Cliff, that acted like a huge wet blanket on the Markets" Martin pointed out that the tax increases and spending cuts that could come out of the Fiscal Cliff negotiations are going to effect the economy in 2013. "No matter how you cut this cookie, there is going to be some Fiscal drag on the system because the US has to move from where it is now Fiscally, to to where it wants to be fiscally, which is a much lower Deficit".  He points that out when he discusses Gold. "Gold is very sensitive to liquidity, and it turns out in fact that the ECB and the Fed both have not expanded their balance sheets much over the course of 2012 is one of the things that has been holding Gold back a little bit".
 
 
5. The 64 Dollar question on the Fed buying of debt is what is going to happen down the road. "The real issue is how are the Central Bankers going to unwind what they have done. No one really knows. It all will depend on how suddenly the economy starts to pick up". Basically if the economy recovers gently most argue that it won't be an issue. On the other hand if all the money in the system suddenly starts to be lent out there could be sudden surge upwards in the economy and all of a sudden inflation is well about 2% and the Fed will be way behind the curve. 
 
 
6. Gold: From the Big Picture point of view Martin thinks we've got a downdraft in Gold that comes from slowing world growth and the recession and quasi depression in Europe. Opposing that you have an updraft in the Gold Market that comes from the monetary stimulus and reflation. "I have characterized this period as very similar to 2008. We had Gold prices going down 30% in 2008 on the back of the massive recession we had. We don't have quite as large a recession today but we certainly have weakness. So that is holding Gold back. To get Gold rising we need more stimulus, and we need to see the effects of that stimulus show up on the balance sheets of the ECB and the Federal Reserve". Martin is somewhat positive for 2013 that we will see the balance sheets of the Central Banks begin to expand. He points out that the President of the ECB, Mario Draghi, agreed to buy all of the debt of the week European countries but he hasn't done anything so far because those countries haven't asked yet. But Draghi does stand ready to buy that debt and Martin thinks that he will do it in 2013, which will expand the ECB's balance sheet and be positive for Gold. 
 
 
About Dr. Martin Murenbeeld
 
Dr. Murenbeeld start his company M. Murenbeeld & Associates Inc. in 1978. The company moved from
Toronto to Victoria in 1989, where it continued to consult international clients on developments in the gold, foreign exchange and credit markets, and international economic trends before it was acquired by DundeeWealth Inc. in July 2004. The principals of DundeeWealth Economics have nearly 70 years of combined experience providing independent analysis and advice on economic and financial developments, with special emphasis on North American interest rate and currency market trends – and on trends in the gold market.

 



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Stocks & Equities

Expect a Weak Post Inauguration Stock Market


Posted by Chart of the Day

on Wednesday, 19 December 2012 02:22

Today's chart illustrates how the stock market has performed during the average post-election year. Since 1900, the stock market has tended to underperform from early January to late February and again from early August to early November during the average post-election year. Some parts of the year have, on average, outperformed. The most notable period of outperformance has occurred from late March to late May. In the end, however, the stock market has tended to underperform during the entirety of the post-election year. One theory to support this behavior is that the party in power will tend to make the more difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election.

Notes:
Where should you invest? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.

20121219

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December 25, 2012 - Christmas Day
December 26, 2012 - Kwanzaa (1st day)

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Energy & Commodities

The Impressive Dr. Copper


Posted by Mad Hedge Fund Trader

on Tuesday, 18 December 2012 18:16

Is Copper the New Red Gold?

12-18-12-tmhft-7-1-resize-380x300Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminal. Thousands of illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $20,000 at black market recycling centers.

Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of the “fiscal cliff”.

Demand for American home construction is slowly crawling out of the basement, and demand from China is starting to turn around as well. On Friday, we received further confirmation of this reversal when the Middle Kingdom announced its Purchasing Managers’ Index was at 50.9, a 14 month high, and its third month over the boom/bust level of 50.

It helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. This is a problem, because the opening of a new mine can take as long as 15 years when the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.

Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to, end user demand.

12-18-12-tmhft-6-1The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile’s ETF (ECH), the world’s largest copper producer. And you can look at Freeport McMoRan (FCX), the world’s biggest publicly listed copper producer (click here for Time to Get Back Into Copper?). And yes, you can even buy .999 fine copper bullion bars at Amazon by clicking here.

I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If it doesn’t work out, I guess they can always eat their inventory by pursuing a new career as electricians. Hey, a good union and a steady $70/hour paycheck, what’s so bad about that?

12-18-12-tmhft-1-JJC

12-18-12-tmhft-2-ECH

12-18-12-tmhft-5-COPX

 

 

From the Diary of a Mad Hedge Fund Trader.

John Thomas writes the Diary of a Mad Hedge Fund TraderThe Mad Hedge Fund Trader



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Personal Finance

Promises Will be Broken


Posted by Bill Bonner - The Daily Reckoning

on Tuesday, 18 December 2012 09:49

Stock-Market 21-150x180When wealth was easy to identify and easy to control — that is, when it was mostly land — a few insiders could do a fairly good job of keeping it for themselves. The feudal hierarchy gave everybody a place in the system, with the insiders at the top of the heap.

But come the industrial revolution and suddenly wealth was accumulating outside the feudal structure. Populations were growing too…and growing restless. The old regime tried to tax this new money, but the new ‘bourgeoisie’ resisted.

“No taxation without representation,” was a popular slogan of the time. The outsiders wanted in. And there were advantages to opening the doors.

Rather than a small clique of insiders, the governments of the modern world count on the energy of the entire population. This was the real breakthrough of the French Revolution and its successors. They harnessed the energy of millions of citizens, who were ready to be taxed and to die, if necessary, for the mother country. This was Napoleon’s secret weapon — big battalions, formed of citizen soldiers. These enthusiastic warriors gave him an edge in battle. But they also ushered him to his very own Waterloo.

Napoleon Bonaparte himself was an outsider. He was not French, but Corsican. He didn’t even speak French when he arrived in Toulon as a boy. But there never is one fixed group of people who are always insiders. Instead, the insider group has a porous membrane separating it from the rest of the population. Some people enter. Some are expelled. The group swells. And shrinks. Potential rivals are brought in and bought off. Weak members are pushed out. Sometimes, a military defeat brings a whole new group of insiders into power. Elections, too, can change the make-up of the core group.

The genius of modern representative government is that it allows the masses to believe that they are insiders too. They are encouraged to vote…and to believe that their vote really matters. Of course, it matters not at all. Generally, the voters have no idea what or whom they are voting for. Often, they get the opposite of what they thought they had voted for anyway.

The common man likes the idea that he is running things. And he pays dearly for it. After the insiders brought him into the voting booth, his taxes soared. In America, taxation with representation proved far more costly than without it. Before the War of Independence, government spending was as little as 3% of GDP. Now, according to the figures above, US government expenditures tote to 38.9% of GDP. And if you live in a high-tax jurisdiction, such as Baltimore or New York, you will find your state, local and federal tax bill will run to nearly 45% of your income.

In short, the insiders pulled a fast one. They allowed the rube to feel that he had a solemn responsibility to set the course of government. And while the fellow was dazzled by his own power…they picked his pocket!

It didn’t stop there. Under the kings and emperors, a soldier was a paid fighter. If he was lucky, his side would win and he’d get to loot and rape in a captured town for three days. Relatively few people were soldiers, however, because sensible people despised them and societies were not rich enough to afford large, standing armies.

The industrial revolution changed that too. By the 20th century, developed countries could afford the cost of maintaining an expensive level of military preparedness, even when there was not really very much to be prepared for. But the common man was skinned again. Not only was he expected to pay for it, still under the delusion that he was in charge, he also was made to believe that he had a patriotic duty to defend the homeland insiders! That is the real reason that the modern democratic system has spread all over the world. It allows the insiders to mobilize more of the resources and energy of the country on their behalf. Nothing can compete with it.

You may wonder, though, why the real insiders would devote so much of national output to programs that benefit people other than themselves. The answer is obvious; because that is how they retain power. They must buy it. And since every vote is equal to every other one, they bid for votes on the basis of price, not quality. Everyone really knows his vote is not worth very much. That is why so many are cast on the basis of what seem to be cultural or symbolic issues of little material consequence — such as gay marriage or abortion. But other voters use their votes to get the material benefits that they want. Naturally, the elites want to buy them at the cheapest prices, so they begin the bidding in poor neighborhoods. Trouble there is that poor people tend not to vote at all…so they have to aim a little higher and pay a little more, which ends up in the middle and lower-middle classes…where health and retirement benefits are key election issues. In order to win an election, all major political parties solemnly swear to do what none can do honestly…or reliably — to keep the money flowing to these voters. The party that wins is the one that makes its promises most convincing…the one that seems most able to deliver.

But now the insiders are in trouble. The typical citizen is beginning to realize that he’s been had. As long as the insiders could plausibly promise him more and more benefits, he was willing to go along. But now, growth has stalled. With more and more people retiring, social costs are rising faster than revenues. Public finances can’t keep up. Democracies can’t deliver. And since the recipients of social spending are also the deciders, the faux-insiders who vote for the candidates of their choice, the government can’t adapt. It can’t avoid its own suicide. It will continue spending, diverting energy from the people who produce to the people who consume, until the system collapses. The ‘complexity’ of the system now strangles it.

Today, no major government in the developed world can make good on its promises. The US, for example, has committed itself to pay $86 trillion in debt as well unfunded health and retirement benefits. In 2012, the feds added another $7 trillion to this figure. GDP, meanwhile, grew by about $320 billion. Financial obligations are now growing 21 times faster than the economy that will have to pay them.

Growth rates have trended down over the last half a century. It doesn’t seem to matter who was in the White House, or what was the price of oil, or whether interest rates were high or low, or whether the government ran deficits or surpluses. The same thing happened in France as in the US. From GDP growth around 5% in the 1960s and 1970s, growth rates in the developed world have been cut in half.

Nor is the current financial crisis to blame. Growth rates began to decline at least 40 years ago. Today’s rates are not extraordinarily low. And nobody really knows why this is happening. A steadily declining GDP growth rate seems to defy our assumptions about the way the world works.

The world now has more scientists, more accumulated knowledge, more money spent on research and development. These things should mean accelerated growth rates. They should allow people to get richer and richer at a faster and faster pace. Why has growth stagnated?

We don’t know. But we don’t have to know. The question is: where’s the downside? The US used a lot more energy in the period 1920-1980. Its GDP grew fast too. Now, energy use and GDP growth have both leveled out. So what?

This discussion might be merely inconsequential; instead, the future of the United States of America, Europe, Japan and the entire world economy hangs on it.

Growth — more GDP…more jobs…more revenue…more people — is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.

Growth over the last hundred years — in population, GDP, wages, prices — made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.

“Without growth,” we observed last week, “this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous.”

Western governments have bet heavily on high rates of growth. But those bets are starting to look like losing wagers. And it was not only government that bet heavily on high rates of growth. Private households bought bigger houses than they could really afford — counting on growth to raise housing prices. They also went deeply into debt, expecting wage growth (and perhaps inflation) to bail them out.

Investors, too, were “long growth.” That is, they bought stocks in anticipation that growth would make their holdings more valuable. They took it for granted. Over the long run, they said to themselves, stocks always go up. Why? Because the economy always grows.

In a stagnant economy, stocks are only worth whatever their stream of dividend payments deserve. One company might become more valuable than others, thanks to luck or better management. But if the economy itself is not growing, a company can only grow by taking market share away from another company. Overall, investors will be even. But that’s little comfort.

When you’re headed for The Downside, you don’t want to speed up.

If Napoleon had lost at Austerlitz, he never would have invaded Russia. If Hitler had run out of fuel at the Dnieper he never would have made it to Volga. And if it hadn’t been so easy to make his first $1 million, Bernie Madoff might never have lost $65 billion.

Regards,

Bill Bonner
for The Daily Reckoning

Read more: Promises Will be Broken http://dailyreckoning.com/promises-will-be-broken/#ixzz2FPq3l5Jy



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