Sunday, February 27, 2011

Where Are We?

When I was 22 I went to Montana and completed a training course in order to become a certified elk hunting guide.  When you hunt elk in northwestern Montana it can be a multi-day process.  Usually mules are used to travel into the mountains and then the foot work begins.  You will at times sit on a ridge and scan another mountain with high powered binoculars.  Once a herd is spotted you will go on foot down one mountain and up the other trying to cut off the herd.  This can be an all day process.  A large part of the training involved keeping your bearings during this foot journey.  The path looks entirely different at the top of the mountain because once you have descended into the forest every tree looks the same.
The best way to orient your mind is to remember that every pair of mountains has a small stream that marks the low point, that stream flows down as well so if you can use that as your basic map you can usually survive.

Today there is a serious danger of getting caught in the trees as an investor.  Let's take a look at the silver market in the is context.  I watch the front month silver contract all day and am currently fascinated by this market yet it remains bearish or neutral in the public mind.  One of the factors that has me spellbound is that many of my friends are now patiently waiting 4-6 weeks form delivery of physical silver.  Also, the silver market is deep into a state of backwardation.  I am also catching wind of refiners having tremendous trouble getting their hands on silver.  Let's look at the weekly action in this market. Week ending close as per www.kitco.com:

  • 2/4/11 $29.14 up 4.03%
  • 2/11/11 $29.91 up 2.64%
  • 2/18/11 $32.66 up 9.19%
  • 2/25/11 $33.38 up 2.20%
The metal itself is up 19.17% over this time time period.  There is a massive shortage of silver and whoever is short is facing a huge problem.  I believe simple economics is working in favor of the longs.  It is important to control some physical silver and seek an alternative to the JPM managed etf considering JPM is the largest short in the market having inherited the Bear Sterns hedge book.  
Also, I will not go into detail but silver miners have possibly the best series of economic factors one could possibly imagine working in their favor and the stocks continue to not recognize this.  It is important to pick your miners and take positions BEFORE the market wakes up.  Please see my post on phases of markets to explain why.


Oil markets are also fascinating.  I posted a piece on oil prices rising on 2-20-11 on our previous blog.  Since that time prices have risen nearly 20%.  If you insist on reading the Wall Street Journal to stay informed you will be reading a history book.  The world uses approximately 83,000,000 barrels of oil a day.  That figure will drop some but not enough to offset the effects of rising prices.  The propped up dictatorial regimes supported by their merchant banking friends are losing power by the day.  As your local Starbucks Barista celebrates while asking for a 30% tip for making you a cup of coffee you may want to tell him he better be glad he rides a bike to work.  These rebel regimes that he cheers for will be very difficult to negotiate contracts with and they also tend to be terribly inefficient.  Also, any surviving regimes must demand higher prices in order to suppress uprisings.  What can I say about this market?  It blows my mind how misinformed the average petroleum consumer is and then I remind myself of the difference between education and experience.  The former comes from reading instruction manuals and the latter from not reading them and learning from the experience.  The American society is about to receive an expensive dose of the latter.  Let's hope they can survive.

As I look for the economic signposts and make decisions I try to go with the easy and obvious trades so that I can stay employed.  I was reminded by a good friend that if you lose all of your capital you are no longer a capitalist.  When I look at the economics behind the silver market, the oil space, the infancy of the uranium boom, the gold miners, the massively overbought debt markets and the ongoing currency war I see many opportunities to profit.

Try to focus on the view from the top of the mountain and when you must venture into the trees try not to lose site of the map you saw at the top.

No comments: