Thursday, March 17, 2011

Snooze Button

No need to worry about this.......Question is, how are we financing ongoing deficits greater than 10% of GDP and spending $1.50 for every $1.00 received by the treasury?  Currency is produced out of thin air and no one pays attention to what it is used for.

Geithner says Congress must raise debt limit

Wed, Mar 16 2011
WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner said on Wednesday that there was no alternative except for Congress to raise the debt ceiling so that the government can keep borrowing.
"Congress has to do it. There's no alternative," he said in response to questions at a House of Representatives appropriations subcommittee.
He repeated a warning that it would be have "catastrophic" consequences for the economy if the debt ceiling was not raised and the country defaulted on its debt obligations.
(Reporting by Glenn Somerville; Editing by Chizu Nomiyama)

In the credit boom people making $50,000/yr were tapping home equity lines to take cruises to Cozumel and buy yellow Ford Mustangs.  They lived as if they made $80,000/yr.  When the party stopped what did they have?  A bunch of receipts, no increase in assets.  In fact, they were only left with liabilities.  What would their banker have said if they used Geithner's line, "There is no alternative, there will catastrophic consequences if you don't renew and increase my equity line!"

When this finally grinds to a halt, there will be a very similar result.  The psychology of the borrower and the behavior that characterizes these binges has not changed since we were riding around on camels.  Only circumstances and surroundings differ, the human reaction is still the same.

How will you know when this happens?  You probably will block it out using normalcy bias as we discussed yesterday.

We leave you with an example that will help explain how this will unfold.  The world barely recognizes the name Mohamed Bouazizi but he is the straw that broke the camels back.  He gave in to the anger building in many Tunisians who were tired of effects of the autocratic regime and he spoke for many when he lit himself on fire in protest.  He died January 4, 2011 with little mention in the major press.  He most likely had no idea that he was the first domino to fall.

How does this relate?  Use the template.  What has been learned from the ongoing revolution in the middle east which was preceded by apparent peace even one day before violence broke out?

One party in a major trade deal will refuse the abused US dollar as a medium of exchange, expressing a personal lack of faith and willingness to trade goods for the paper.  This will set in motion a chain of events that will change the way Americans view the world and their wealth.  Unfortunately it will be too late for many as John Maynard Keynes will not be here to save them.  The printing press will be overwhelmed by the markets and a new fiscal era will be ushered in.

How long will it take to happen?

Wednesday, March 16, 2011

Market Conditions

If you suffer from Normalcy Bias please consider clicking away from this page now.  People has a riveting story about how Kelly Osborne has a great chance to win the new season of Dancing With The Stars.  If you are not familiar with Normalcy Bias, it is a condition that causes the mind to deceive you when facing danger.  This is a common condition but if you suffer from it you will not like reading this update.  In the US any opinion that differs from being blindly positive is considered unpopular.  There is a great deal of danger facing the current economic structure.

The situation in Japan is bad and getting worse.  What the press will not tell you is that the Japanese bond market has been a giant bubble waiting to burst for 20yrs.  Shorting this market has earned the moniker "The Widow Maker" trade.  The size of this market is approaching a quadrillion yen.  What you read in the papers about this situation is useless.  Here are the facts:

  • The population is aging and needs income
  • The society is becoming top-heavy
  • Japan is the 3rd largest holder of US Treasuries
  • The great deflation is no longer able to hide behind reckless money printing
  • GDP will slow to an unacceptable level only worsened by the current disaster
  • Interest expense on Japanese bonds is approaching 50% of treasury revenue before any increase in rates
What will happen to US treasury rates if the 3rd largest holder begins selling to create liquidity needed for survival?  Oh, thats right, the US central bank will create more money from thin air and purchase the bonds.  Good plan.

There is limited time to discuss this so we must keep moving.

The guys at your local Starbucks collecting their 125th week of unemployment benefits and working on their still unfinished novel have enjoyed arguing about the situation in Wisconsin.  In the interest of time we will jump straight to the facts.  This is a trimmer, a shot across the bow or a warning siren.  The federal, state and local government entities in the US are bankrupt.  Their obligations outweigh their resources.  This is not sustainable.  The society has slipped into a hyper-regulated, over-leveraged sloth-like condition.  While the citizens watch who will win the Oscar for best supporting actress, China buys up the world's resources using dollars that Americans borrowed in order to finance their consumption.  The congress begged the Federal Reserve to finance this binge in order for them to selfishly preserve power.  The payoff for the privately owned Federal Reserve is the ability to privatize profits and socialize losses.  This is pure madness and it you don't like it go read something else, we suggest People Magazine.  If you are smart you will order Rosetta Stone software and learn Mandarin so that you can have decent dialog with your new boss.

We are not done, now moving on to the Middle East.  The "Youthquake" has struck.  We borrowed that phrase from a trusted advisor because no more appropriately descriptive term was available.  Look for French Revolution style revolts throughout the region combined with Iranian sponsored uprisings.  We don't need to predict every detail.  Here is the summary:
  • Higher oil prices 
  • Less stable energy supply infrastructure 
  • Less respect and control in the region for the US
  • Abandonment of the petrodollar as a base for exchange
Get ready to serve your new master.  The US society is going to get a wake up call that it will not be ready for.  The snooze button is not available.  Get up and work or get left behind.  The problem is there are not enough jobs for all working age members of the society.  We have no solution for this problem.  Like a sick alcoholic, counseling and rehab will not work, only smashing into the telephone poll and being put on the 6:00 news will cause the essential cathartic change to occur.

The SPX failed to hold support of 1280 on my chart and was destined to continue the fall.  There appears to be much more air between here and solid ground.  The Federal Reserve has been operating in the markets purchasing equity, options and futures on major indexes for many months now and appears to be out of the market at this time allowing it to trade freely.  Gravity has resumed control.

In closing, we are on the precipice of the greatest wealth transfer event that any living person can imagine.  As over-leveraged societies break down under the weight of their own obligations, real assets will be the only life raft for capital.  Entire paper fortunes face great peril.  We face the eventual economic reset that will be unavoidable.  Suggested positions include, physical precious metals, mining stocks, food commodity investments when possible, unleveraged real estate, farm land and any other asset that has tangible value.  Bonds, currencies, leverage and paper assets should be avoided.

We feel that $50/oz silver and $1,600/oz gold are inevitable during 2011, drastically higher prices will follow.

Tuesday, March 15, 2011

Uranium Mining Stocks

The selling in uranium mining stocks has been nothing short of relentless.  Solid, credible and reasonably well financed companies with 43-101 compliant resource estimates have been sold down to a fraction of the values that they commanded last week.  Some have lost over 60% of their market capitalization.  Let's review the facts then discuss possible action to avoid dangerous emotional behavior.

The world's current demand for uranium is not being met by production.  According to Wikipedia the world currently demands 66,500 tonnes from total annual production of 55,500 tonnes.  The Russian Megaton to Megawatts program and sovereign state surpluses have made up the difference.  The Russian program ends in 2013.

As previously mentioned on this site the Chinese government will open the first 50 reactors in their directive to achieve the goal of 20% non-carbon generated power.  This is only the beginning.  Unburdened by elections these plans remain intact.

Although China is a resource rich land, they possess a trivial amount of uranium and rely on external sources to meet their supply needs.  The spot price of uranium has fallen 10% to $60/lb since our last post on the issue.

We do not want to trivialize the current Japanese condition when pointing out that the 50 year old reactor's backup cooling system failed after being struck by a 9.0 magnitude earthquake and a direct hit from one of the largest tsunamis to ever make landfall.  After these two events I am shocked the buildings survived long enough to have time to overheat.  This is truly an unfortunate event but this will not stop the expansion of nuclear power as the only solution to the world's energy needs.  Any nation that resists this solution will enjoy dirty carbon based energy purchased at twice the price of their competitors in a country with a developed nuclear grid.

Here is some satellite imagery of the Fukushima reactor complex courtesy of Digital Globe:

So, what do you do about your uranium portfolio?  Easy, these stocks are on sale.  Look to add to your holdings slowly.  They could go lower.  If we see body bags on television they will fall more.  Some well managed assets are already trading down to $20million market cap levels and any lower becomes laughable as someone that needs supply will take out the entire share float.  Any guesses on who that might be?

These stocks will have a snap back rally and then re-test the lows so there is really no rush.  Try to leg into the additional purchases of solid companies realizing that it might take time for fair value to return.

Monday, March 14, 2011

Rare Earth Elements

At the risk of boring our readers we will again provide an update on the conditions driving the market for Rare Earth Elements and the companies that mine them.

Another week, another price increase.  The news in the industry is that price quotes are good for only one hour.

The chart below is provided by a major mining company and shows current market pricing as it relates to their specific mix of elements.

Rare Earth OxideDistribution200720082009Q3 2010
 Q4 2010
Lanthanum Oxide25.50%3.448.714.8823.6752.4998.00
Cerium Oxide46.74%3.044.563.8823.0552.6297.00
Neodymium Oxide18.50%30.2431.9019.1255.8181.38172.00
Praseodymium Oxide5.32%29.0529.4818.0354.3778.62157.00
Samarium Oxide2.27%3.605.203.4014.4036.5892.00
Dysprosium Oxide0.124%89.10118.49115.67281.54287.85522.00
Europium Oxide0.443%323.90481.92492.92585.31611.54830.00
Terbium Oxide0.068%590.40720.77361.67593.38620.38 820.00
Av.  Composition11.5914.8710.3216.0262.18118.71

As you can see the price per/kg has risen another 5.75% since our last update two weeks ago.  More detailed pricing is available at and you should determine which elements make up the mix at your company's mine and track their prices.

What is the most interesting fact on this price sheet?  The mix of elements mined by this company has almost doubled in price since the end of 2010.  Many of our Rare Earth mining picks have been in a consolidation and have not accurately reflected the price movements of their underlying asset.

With all of the talk about alternative energy in the wake of the Japanese disaster we can only imagine what the reaction will be when the news media realizes that we can not build windmill turbines and other critical components without Rare Earth Elements.  The fact remains that today China controls 97% of the world's mined supply and plans to continue restricting exports.

Again, there are over 200 companies that "claim" to be in this business.  We feel that we have picked the best for ourselves and our partners.  Only time will tell but certainly their is pressure building as the divergence between the stocks and the underlying elements continues to grow.

Uranium Prices

Uranium is a misunderstood element.  The yellow material holds the key to the world's coming energy woes.  Some research on Peak Oil would be wise at this point.  Solar, wind, tidal and other popular energy alternatives are merely pet projects and will never provide more than 5% of the worlds energy.  Also, these can not be produced without heavy rare earth elements, a subject we continue to shout about but deaf ears refuse to listen.

China's current pipeline of reactors coming online alone creates enough demand to shock the fragile supply chain in it's current form.  After a speculative run-up in the last decade to nearly $140/lb a massive sell-off ensued ending in a more than 2yr stall around the $40/lb mark.  Summer of 2010 marked a firm bottom and capitulation as prices began to rise when major Canadian producers were able to purchase surplus material on the spot market to meet rising demand for contract delivery.

Here is a chart of this confirmed breakout move.
Ux U3O8 Price ©
Currently US Government Energy interests are selling material onto the spot market.  This will be viewed as foolish within the next 18 months as we have a firm target of $100/lb for U308 in that time period.  While we are confident about our target we do expect the per/lb price to eventually exceed that level.

The best way to trade this trend is by purchasing a basket of uranium mining stocks.  Anchor your basket with 1/3rd blue chips and let the other 2/3rd take you on a ride as the true economics of this situation are realized and accepted.  There will be spectacular profits in this space because popular opinion is so drastically out of sync with economic reality.  When this is the case it makes for a lonely trade.  When you are in a lonely trade the reward will be super-sized profits since you are first to the party.

If you are under the impression that only the "Environmentally Reckless" Chinese will use nuclear sources of fuel then get used to competing with an enemy who has access to energy at 20% of your cost.  Economics always wins in the battle against emotionally charged public opinion.

Just a quick warning......videos like this one of a reactor exploding can be harmful to your junior uranium miner's market capitalization.

Try to use logic rather than emotion.  Also, try to focus on economics first then use swings in popular opinion to take advantage of buying opportunities.  This event will mark another bottom in the price of uranium and the mining companies that produce it.