Friday, March 11, 2011

Current Market Conditions

It is critical to remain objective when risking capital so lets take a quick look at where we stand as we come to the end of a volatile week.

The SPX experienced it's first breach of the 50 day moving average since Bernanke announced plans to continue openly propping up asset prices in his Jackson Hole speech last August.  In fact, a glance at the chart almost looks like someone drew it and there were no actual market participants involved.  Makes you wonder right?

This might be a good time to clarify that statement as recent emails have caused me to see that some readers do not understand what is going on with the Federal Reserve's criminal theft of your wealth.
The Federal Reserve is not a government agency it is a private bank owned by it's member banks, most of which are European.  There are many excellent books covering this topic and if you feel that this is conspiracy talk you should do some homework.  The US Treasury creates bonds and offers them for sale through the Federal Reserve's primary dealers who operate in concert with the central bank's controlling New York branch.  The primary dealers are required to bid in order to maintain stability in the auction process.  Currently, the dealers buy the bonds from the treasury, hold them for 2 weeks and sell them to the Federal Reserve at a slightly higher price.  These banks, and the Fed's NY trading desk, have been in the stock market purchasing futures and related instruments in order to keep the market on a nice easy accent for some time now.

The key here is to think about the bigger picture.  The US is running deficits of over $1,200,000,000,000/yr as they have televised fights over how to cut $40bil or 3%/yr and they are issuing debt to finance this overspending and their central bank is purchasing the debt printing fresh dollars to exchange for it. The WSJ editorial page tells you that there is no problem because they can just sell the debt back onto the market later but think about what would happen to the price of those securities if they were offered for sale along with the tsunami of bonds used to finance the ongoing operating cost of this giant welfare system?  The price would collapse.  Since prices and interest yields on bonds have an inverse relationship, the cost of this behavior could be enough to cause debt service on new issuance to rise dramatically, eating an even larger portion of tax revenues.  Do you see how this can become a negative vortex?  If a company behaved this way it's creditors would force it into bankruptcy.

This behavior is concerning because it gives assets an artificial price.  Savers are punished in this environment as short term rates are near zero and asset prices are not discovered by market participants.

One excellent way to protect yourself if by purchasing something that is not subject to manipulation.  Deeply over-sold physical commodities such as a house that Countrywide Financial had a $200,000 note on and is fire-selling for $25,000 would be a good use of funds.  This way you control a physical commodity, a dwelling, and you can rent that at market rates.  You will always be able to demand the market rate for shelter regardless of what happens to the instrument that you accept as payment.

Another way to protect yourself is to purchase physical gold or silver.  This can not be easily faked in small quantities such as 1oz coins.  Try to buy one a month for security.  Collecting them is fun too.  Do not ever store them in your home and be careful of trusting your bank's vault which is a member of the Federal Reserve System discussed above.  Private storage options should be considered or clever hiding only telling one trusted person, possibly your attorney.

Notice how the recent sell off has not impacted the price of precious metals.

Gold has retreated nearly 2% in this current sell-off.  This is a very bullish sign.  One problem that the economic criminals are running into is that if they artificially sell down the price of gold the Asian demand for physical delivery has created a constant bid in the market.  The Chinese Yuan will soon be the new world reserve currency.  Believe the unbelievable if you want to drink in front of the herd.

Finally, you will need some capital gains and the miners are your best bet.  This sell-off has unfairly smashed the miners.  One reason this happens is that the average sheep has a Jim Cramer Mad Money portfolio of AAPL, BBY, NFLX and AMZN stock worth $100k.  He makes 10% on that as the Fed manipulates.  Next he thinks, "If I margin this account I could make another 10% using borrowed money!"  Good idea, speculative mining stocks are his best bet.  Margin call on the main portfolio, dump the spec trades.  Miners are trading down 20% in some cases this week when the metal in the ground is down 2% as shown above.

I can't tell you what to buy and how much to pay for it in this post but I am available for consulting.  Always pick mining stocks carefully as we have discussed ad nauseum on this site.

Good luck.

Japanese Earthquake

The footage coming out of Japan is absolutely unbelievable.  Watch here as what appears to be the largest earthquake ever to hit a densely populated area causes this inescapable tsunami.

Wednesday, March 9, 2011

Rare Earth Elements......

As your complementary education on the Rare Earth Element space rolls on we continue to use this site as a megaphone in our attempt to help you wake up and harmonize with reality.

Molycorp NYSE:MCP is the only major US Rare Earth Element miner currently in operation.  As previously stated, this firm will likely be used as an acquisition vehicle.  Their mine is established and quick to market but the deposit is not as desirable as others in development.  There are 17 elements in this sector and some are dramatically more valuable than others.  They are given the names "heavy" and "light" although that is not entirely correct but we are trying hard not to rock the boat of the mainstream press any more than necessary.  MCP is currently sporting a market cap in excess of $4bil.  Some of the development stage deposits owned by other smaller companies are set to have a product mix more than 4 times as valuable per/kg and currently have market caps in the $100-500mil range.  Either MCP is overvalued or these smaller deposits are undervalued and the logical trade is to be long the best small miners.  We have posted a detailed description of how to do this and what to look for when picking the best out of the more than 200 that claim to be in this business.  Good luck, you will need it.

Here are a few excerpts from MCP's earnings release that came out after the close of US trading:

  • The Company realized an average sales price of approximately $34.02 per kilogram, compared to an average sales price of $16.10 per kilogram in 3Q 2010, and an average sales price of $4.72 per kilogram for 4Q 2009 (Please see my post on current market value per/kg)
  • “Rising demand and reduced Chinese exports have created extraordinarily tight market conditions,” Smith explained. “In 2010, China exported approximately 30,258 metric tons, which compared to demand outside of China in 2010 of about 55,000 tons. This gap in supply and demand is expected to worsen in 2011, as independent forecasts predict that full year 2011 export quotas will total less than 30,000 metric tons, compared to total demand outside of China of about 60,000 metric tons. That points to a high likelihood of shortages of many rare earth products.”  Smith noted that senior government leaders in China consistently stress China’s intent to continue to restrict rare earth exports, and the possibility of China becoming a net rare earth importing nation by 2015.   (Demand was 100,000tns in 2010 not 55,000.....Mr Smith should read this blog!)
  • “These dynamics are why we believe rare earth pricing will remain robust for the foreseeable future,” Smith added. “It also is why Molycorp recently committed to expanding its production capacity from 19,050 metric tons per year in 2012 to 40,000 metric tons per year, which we expect to achieve in 2013. That will position Molycorp to capture new markets and customers, and benefit from continued strong pricing.”  (They are producing the least demanded elements......they will use their inflated stock to buy a more valuable deposit then ship concentrated ore to their facility......the investment bankers have not figured this out yet!)
  • Business Outlook-For the remainder of 2011 and for the foreseeable future, the Company anticipates that the Chinese government will follow through on its announced intent to continue to limit the quantity of rare earth oxides available outside of China. In addition to reduced export quotas, the Company believes that the following factors and expected actions by the Chinese government will further restrict production and supplies available for export:
    • China will continue to successfully curb the illegal export of rare earths;
    • China will enforce production quotas because of concerns about limited reserves;
    • China will continue to coordinate pricing at the federal level in an effort to shore up rare earth prices;
    • China will continue to force industry consolidation;
    • China will continue to increase environmental oversight and enforce tougher environmental controls over rare earth producers; and
    • China’s internal consumption of rare earths will continue to increase as it Gross Domestic Product increases.   (How can we possibly add anything to this list of reasons that we have yet to enter Phase 4 of this super major bull market move?)
Well, there you have it.  Now we await the event that sends us into Phase 4.  It will likely be a sovereign nation unable to procure oxides necessary for production of defense related equipment or a multi-national manufacturer being forced to shut an operation due to lack of supply.  When it hits, you will know.

Monday, March 7, 2011

USA Inc. Financials

This is an excellent document prepared by Mary Meeker who is a former Morgan Stanley analyst and now partner at KPCB.  She takes a look at the United States as if it were a business.

After you are finished reading, ask yourself how long this business can continue to issue 3.5% 10yr paper?

Is $36/oz Silver Cheap or Expensive?

How do you know if something is cheap or expensive?  Most novice investors look at the price of silver and say it is overpriced because they could have bought it last month for $28.25/oz.  Stay away from these people as they will be the ones that finally convince themselves to go "All In" on the bull market at the very top.  They do it every time and subconsciously they can't help themselves.

Last month I wrote that I was still acquiring silver at $30/oz and described why.  I would not be surprised to see a shakeout in the market and frankly have been shocked that it has not happened yet.  This shakeout event will provide another nice entry point for silver buyers.  At the risk of sounding like a broken record, there are some large paper short positions that are trapped in the market.  The COMEX does not have the silver necessary to deliver and is settling positions in cash and offering up to a 25% premium in order to keep peace.  As I have urged many times, please do your homework before buying a "physical" silver fund.  Calling your broker is not homework.  Reading the prospectus or a summary is the only acceptable method of discovering whether a fund has actual silver or paper silver.

See for example this chart below that shows the price of one trustworthy silver fund who keeps a 450 page pdf file on it's website listing the serial number from every bar held by the fund.  For beginner chartists, the while line is the fund's share price, the blue line is the funds net asset value per share and the green chart below shows the difference between the two.

What conclusion can we draw from this chart?  People in the know are paying up to 20% over the net asset value for the shares of a fund that actually has the metal.  What does that tell you about where silver is headed over the next few months?

While a shakeout is highly likely at some point, I feel that $50/oz silver before the end of the year is virtually inevitable.

Sunday, March 6, 2011

More Chinese Rare Earth Element Protectionism......

From far above this issue is very clear.  As I have said so many times before, this is a supply demand trade.  The world is currently using 100ktn per year of these elements.  China is exporting roughly 30ktn this year.  One Australian firm and one American firm should be producing in 2011 and 2012 respectivly and that will add around 30ktn per year to supply.  Those firms do not produce a significant quantity of "Heavy" rare earths though.  The prices of these can be 40x the price of "Light" rare earths.

The article below is just one of the ways that the Chinese are protecting their most valuable weapon in this cold war with the US.

This is still the most misunderstood sector of the market that I have ever studied.  There does not appear to be one analyst at any major investment firm that can even comment on this market.

We continue to patiently hold the right stocks and wait for the catalyst that will send us into Phase 4 of this super major bull run.  A sovereign supply shock will likely be the event needed to wake the world up and send nations scrambling to gain control of their share.

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China Minmetals Head Backs Beijing Rare Earths Plan

In the latest sign China is on its way to consolidating its rare earths industry, the head of the country’s largest metal and minerals trading company threw his support behind government plans to consolidate the number of companies with access to Chinese rare earths.

A worker waters the site of a rare earth metals mine at Nancheng county, Jiangxi Province.
The comments reinforce a message the Chinese government has repeated for months: Industry consolidation and stricter quotas are coming. At the same time, they’re a reminder of a simmering international trade dispute in which many countries – particularly the U.S. – contend the quotas are a violation of free trade agreements.
China argues that more tightly controlling supply of the metals is a matter of environmental protection and a right it is afforded under international trade agreements.
Zhou Zhongshu, president of China Minmetals, told the state-run Xinhua news agency that under the current setup local officials award mining licenses to smaller local firms, which he says are less likely to embrace environmental protection practices and produce inferior products. He said the current system “hinders the development of the sector,” Xinhua reported.
That’s an oft-repeated argument for the Chinese side, though it is being increasingly challenged in the U.S. and EU. Opponents of China’s plans argue that because China controls more than 95 percent of the world’s rare earths supplies, strategically limiting exports could have significant impacts on the global economy. So-called rare earths are usually defined as a collection 17 elements, which became increasingly important in recent years for their role in producing electronics as well as military weaponry.
Last month, the WTO ruled against China’s trade policies on several key steel-making ingredients. It’s a ruling that industry analysts say clears the way for the U.S. to file formal WTO complaints over China’s rare earths policies.
While the U.S. has grown increasingly concerned over rare earths supply access, China has begun building its stockpile, which further increases the Chinese government’s power to influence the minerals’ prices. Some analysts question the wisdom of China’s stockpiling of rare earths because it raises the hackles of other countries.
“In my view, [a reserve] makes the Chinese position worse,” Steve Dickinson, an attorney at the Seattle law firm Harris & Moure, told The Wall Street Journal.
Neither side seems to be budging in the ongoing dispute. It’s one that has left industry watchers and government officials waiting for a resolution that seems likely only to come from a WTO ruling.
–Brian Spegele