Buying U.S. Junior Gold Miners During A Dollar Debasing

November 4th, 2010

There have been some exciting mergers and acquisitions (M&As) within the junior mining sector over the past few months. As gold and silver settle from the previous move, many projects will be re-rated and acquired by majors that are struggling with decreasing resources. I believe the industry is undergoing consolidation and we’re seeing the beginning of a major international race to control future gold and silver ounces in the ground. The bull market in gold and silver is intact, and though we may see some short-term pullbacks in bullion prices, the junior mining sector will continue to outperform.

Investors are aware that the sector is ripe with takeover candidates as the junior miners outperformed bullion since the late-July rally began; not until mid-September did they underperform. Now it seems like the previous uptrend is continuing after finding support at the 50-day moving average. Junior explorers are gaining interest as investors transfer their strategically devalued fiat currencies into valuable precious metals resources in the ground.

As the dollar collapses to three-year lows, I expect more companies to acquire projects or consolidate to gain control of and leverage their exploration assets. The Federal Reserve has been quite vociferous about its goal of pumping the economy with more cash. And it appears the US is leading the race to devaluation, as many emerging markets have been critical of the Fed’s dovish actions. This is creating a domino effect wherein other countries are now forced to devalue their currencies in order to prevent the collapse of their own economies. A devalued currency helps an economy by making its products cheaper domestically and increasing exports.

The recent surge in M&A activity suggests the mining industry is predicting the price of gold will continue to appreciate for the foreseeable future. High-quality projects with high-grade mineralization and low cash costs are receiving a premium. As the price of gold rises, high-grade deposits with good assets will be accelerated into development and production.

I expect aggressive miners to buy out partners to gain 100% control of projects in order to expedite resource and reserve growth. When a miner controls the project completely, it can be more aggressive with resource expansion and development of a discovery. It also has leverage to the expansion of the resource. Particularly in an industry that’s interested in growth stories, companies are hungry for large open discoveries to replenish their reserves.

One company that’s taken a 100% control of a discovery is Fronteer Gold Inc. (FRG). The company bought out AuEx Ventures, Inc. for a premium due to the upside leverage to the expansion of the Long Canyon Project. The Long Canyon Project in Nevada has great potential for expansion because it’s completely open in all directions, is high-grade, and has exceptionally low cash costs. The cost to get this project into production is very low because it’s a heap-leach operation.

The $100 million cost is well within Fronteer’s ability to finance the development completely. With its asset base in Nevada, Labrador, and Northwestern Turkey and its current cash position of over $140 million, there should be no dilution to shareholders. This is a rare situation in the junior mining sector where investors constantly face share-dilution risk when companies need to raise capital to fund exploration or develop projects.

Long Canyon has been compared to an early stage version of Newmont Mining’s (NEM) Midas Gold Mine, which is a huge Carlin deposit. Carlin deposits continue to expand because they usually have deep, underground sulfide roots. Fronteer has not yet discovered these at Long Canyon. Both Fronteer and AuEx believe Long Canyon and West Pequop may be connected by a huge sulfide root system. And both believe what’s been found to date on both sides of the mountain is on the periphery of the main deposit. The closer the company gets to the center of the mountain, the higher the grades. Fronteer is now looking for the sulfide roots as it’s expanding a near-surface, high-grade oxide and trying to fast-track the project into production.

It seems Fronteer is getting a better view of where the high-grade stuff is located in Long Canyon. I believe the Pequop District could be Nevada’s next major mine with multimillion ounces of high-grade gold. A new resource estimate, expected in early 2011, will take into account the progress of the 2010 drilling program, which has expanded the project’s size and grade. I expect further drill results to continue to drive cash costs down and bring further recognition to this world-class discovery.

One company that I’m convinced is catching the eye of majors is International Tower Hill Mines Ltd. (THM). The company has resources of more than 10 million ounces (Moz.) gold on its Livengood Project in Alaska. As gold has made a significant move in 2010, International Tower Hill Mines has consolidated. Now, with the recent volume surge and break of the upper resistance line, I believe International Tower  Hill Mines could continue the 2009 price trend and outperform bullion as the company develops different mining options that drive down costs.

I believe the company has the best development project in Alaska. In my opinion, it has the greatest chance of becoming a successful and operational mine. International Tower Hill Mines has what many of its competitors are struggling for: a favorable permitting and infrastructure situation. The mine is close to infrastructure, right off a central highway, and doesn’t have the same permitting issues as other major mines being developed in Alaska.

After many years of investing in mining companies and seeing the downfall of many mining investments, I’ve realized these two features are key to success. The Livengood Project is on an all-weather highway in a major mining center. The state of Alaska is also proposing a natural gas line that would connect and provide power to the mine. And there are no native claim issues. In addition, the project is in the top 2% of gold discoveries with more than 10 Moz. gold. The big producers are looking for large deposits to expand their resource bases, but they don’t want the risk associated with projects that have permitting issues or that lack infrastructure.

Down the road from Livengood is Kinross Gold Corp.’s (KGC) Fort Knox mine, which produced more than 260,000 ounces of gold in 2009. It’s only natural to assume that when a suitor comes to make an offer for Livengood, Kinross — with the infrastructure and labor force already there — will make a counter offer. The Fort Knox mine life will be nearing completion as Livengood begins.

International Tower Hill Mines has come to long-term trend support and broken to the upside. Major volume is moving in, and the second uptrend may be beginning. As it moves closer to a prefeasibility study and improves the project economics, the share price should receive a premium.

The global credit crisis and the low-interest-rate environment facilitated by central banks are causing more producers to find ways to utilize cash positions to gain resources with huge growth potential. This fiscal environment of currency devaluation and quantitative easing, which may continue for some time, will force the producers sitting on large cash positions to acquire more assets. There’s a lack of major discoveries, and companies showing impressive, high-grade results have seen huge share appreciation.

Read more here:
Buying U.S. Junior Gold Miners During A Dollar Debasing

Commodities, OPTIONS

All Treasuries All the Time: The Impact of QE2

November 4th, 2010

So… This is what life after “QE2” looks like:

  • Record gold prices
  • Stocks back at pre-Lehman levels
  • And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

  • The Fed will buy $600 billion in Treasuries over the next 8 months
  • The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
  • There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

[Pause for back-of-the-envelope math]

…then we quickly see the Fed plans to monetize all of all the debt that Treasury plans to spit out from now through the middle of next year, and then some.

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back.

“If this were Greece or Ireland,” Bill Bonner wrote yesterday before the announcement, “the government would be forced to cut back. With quantitative easing ready, there is no need to face the music. If bond buyers will not finance America’s trip to bankruptcy, the Fed will provide as much brand-spanking-new money as necessary.”

The main difference between QE2 and its predecessor is this: The bulk of the junk the Fed put on its balance sheet during QE1 was mortgage securities, with about $300 billion of Treasuries thrown in for good measure. Now it’s all Treasuries, all the time.

And most of those Treasuries are of medium-term duration – very few 30-year bonds are in the mix. Thus, the yield on the long bond rocketed past 4% yesterday. It sits at 4.05% as we write.

Still, what’s really notable about QE2 is the form it did not take. In August, former Fed vice chair Alan Blinder wrote an Op-Ed in The Wall Street Journal. He tossed out a number of suggestions for QE2 that, for better or worse, would actually goose the economy and not just shore up the banks’ balance sheets:

  • The Fed could buy assets beyond the realm of Treasuries and mortgage securities. It could buy corporate bonds, small business loans, or credit card receivables
  • The Fed could stop paying interest on excess reserves to member banks. And if that didn’t encourage them to make more loans…
  • The Fed could start charging the banks interest to stash their excess reserves.

Yesterday, the Fed chose “none of the above.”

It didn’t even take up Blinder on his suggestion to adopt new language hinting at an even-longer lasting commitment to near-zero rates. We just got the same old blather about “exceptionally low” rates “for an extended period.”

Yawn.

Stretch.

“Today,” Fed chief Ben Bernanke wrote in this morning’s Washington Post by way of explaining himself, “most measures of underlying inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.”

Of course, that “underlying” inflation level does not take into account your need to eat, or heat your home or drive to work.

And it’s only going to get worse. Your neighborhood grocer is seeing his costs rising. “The big challenge,” says the CEO of a California grocery chain to The Wall Street Journal, “will be how much can we swallow and how much can we pass along?”

He’s holding out as long as he can, but skimping on tires for your delivery trucks (seriously, that’s one of his cost-cutting measures) only gets you so far.

Yesterday, we discussed rising food, gold and commodities costs in the context of the Fed decision during this interview with Financial Survival Radio. Have a listen here:

Addison Wiggin
for The Daily Reckoning

All Treasuries All the Time: The Impact of QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
All Treasuries All the Time: The Impact of QE2




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

All Treasuries All the Time: The Impact of QE2

November 4th, 2010

So… This is what life after “QE2” looks like:

  • Record gold prices
  • Stocks back at pre-Lehman levels
  • And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

  • The Fed will buy $600 billion in Treasuries over the next 8 months
  • The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
  • There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

[Pause for back-of-the-envelope math]

…then we quickly see the Fed plans to monetize all of all the debt that Treasury plans to spit out from now through the middle of next year, and then some.

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back.

“If this were Greece or Ireland,” Bill Bonner wrote yesterday before the announcement, “the government would be forced to cut back. With quantitative easing ready, there is no need to face the music. If bond buyers will not finance America’s trip to bankruptcy, the Fed will provide as much brand-spanking-new money as necessary.”

The main difference between QE2 and its predecessor is this: The bulk of the junk the Fed put on its balance sheet during QE1 was mortgage securities, with about $300 billion of Treasuries thrown in for good measure. Now it’s all Treasuries, all the time.

And most of those Treasuries are of medium-term duration – very few 30-year bonds are in the mix. Thus, the yield on the long bond rocketed past 4% yesterday. It sits at 4.05% as we write.

Still, what’s really notable about QE2 is the form it did not take. In August, former Fed vice chair Alan Blinder wrote an Op-Ed in The Wall Street Journal. He tossed out a number of suggestions for QE2 that, for better or worse, would actually goose the economy and not just shore up the banks’ balance sheets:

  • The Fed could buy assets beyond the realm of Treasuries and mortgage securities. It could buy corporate bonds, small business loans, or credit card receivables
  • The Fed could stop paying interest on excess reserves to member banks. And if that didn’t encourage them to make more loans…
  • The Fed could start charging the banks interest to stash their excess reserves.

Yesterday, the Fed chose “none of the above.”

It didn’t even take up Blinder on his suggestion to adopt new language hinting at an even-longer lasting commitment to near-zero rates. We just got the same old blather about “exceptionally low” rates “for an extended period.”

Yawn.

Stretch.

“Today,” Fed chief Ben Bernanke wrote in this morning’s Washington Post by way of explaining himself, “most measures of underlying inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.”

Of course, that “underlying” inflation level does not take into account your need to eat, or heat your home or drive to work.

And it’s only going to get worse. Your neighborhood grocer is seeing his costs rising. “The big challenge,” says the CEO of a California grocery chain to The Wall Street Journal, “will be how much can we swallow and how much can we pass along?”

He’s holding out as long as he can, but skimping on tires for your delivery trucks (seriously, that’s one of his cost-cutting measures) only gets you so far.

Yesterday, we discussed rising food, gold and commodities costs in the context of the Fed decision during this interview with Financial Survival Radio. Have a listen here:

Addison Wiggin
for The Daily Reckoning

All Treasuries All the Time: The Impact of QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
All Treasuries All the Time: The Impact of QE2




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

China’s Leg Up in the Rare Earths Market

November 4th, 2010

Basically, rare earths are exotic elements that are critical to the future of high tech, clean energy, Big Science and – oh by the way – national defense. The list includes 17 elements like terbium, ytterbium, and yttrium.

Back in chemistry class you may have heard of the “Lanthanide Series” of elements, which includes 15 of the 17 elements. Also back in chemistry class, somebody doubtless raised their hand and asked the teacher what you needed to know about the Lanthanides. If your chemistry class was like most chemistry classes, the teacher probably said, “Don’t worry, they’re not on the test.”

Periodic Table of Elements

Well, these elements are on the test now. Why? Because the Chinese control 97% of world output of rare earths, and have tight control over much else as well in the realm of technology metals. Recently the news is that the Chinese have been restricting exports of rare earths, and apparently some other metals. That’s a problem.

All of the rare earth elements have one or more excellent atomic properties. These include incomparable chemical, electrical, magnetic and/or optical properties. For example, neodymium (Nd) makes strong magnets even stronger. Europium (Eu) is necessary for television screens to show color images. Lanthanum (La) is useful in high energy-density batteries, as well as being critical in petroleum refining.

Now think about all the rhetoric you’ve heard about how “we” are going to transition to a high tech/clean tech future of solar panels, windmills, electric cars, smart grid, wired-world. Oh yeah? Problem is, most of these technologies simply WILL NOT WORK without large amounts of rare earths.

That is, the electric cars, wind turbines, solar panels, miniature electronics, smart grid, etc. will not get built in the US (or Canada, Japan, Europe, Australia, etc., for that matter) if industries cannot secure long-term supplies of rare earth minerals. And, oh by the way, that goes double for advanced defense technologies. For example, EVERY missile in the US arsenal uses some quantity of rare earths – every single one!

What’s the problem? In the past 15 years or so, the West closed down essentially all of its rare earths refining capability. The entire market (well, 97% of it) was conceded to the Chinese, for a lot of reasons – economic, wages, resource-base, environmental and much more. Now that the West wants to build out a different energy and technology future, the Chinese control critical substances from ore bodies through to final oxides and metals.

It’s as if somebody (the West) wants to set up a fancy, Napa Valley-style winery (new, clean, high tech), but doesn’t have any grapes (rare earths). This vintner-wannabe will have to buy the grapes from a producer in China. Do you really think that the Chinese will sell the guy the best grapes, and help him create a world-class brand of wine?

What do the Chinese say? They say that they’re just acting rationally. They’re closing down unsafe mines and controlling past environmental pollution. They’re consolidating the industry, as most other industries consolidate over time.

The Chinese say that they’re just encountering natural issues of depletion, from mining their ore bodies over the years. They say that they just don’t have “more” rare earths to export, because of natural economic and market forces.

Of course, the Chinese also say that if you move your factory to China, they’ll put you on an allocation for rare earths. You’ll have enough to operate. That is, you’ll have enough raw materials as long as you set up a joint venture with a Chinese firm and share all your technology. Of course.

Byron King
for The Daily Reckoning

China’s Leg Up in the Rare Earths Market originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
China’s Leg Up in the Rare Earths Market




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Why Printing Money Won’t Correct the Correction

November 4th, 2010

Well, dear reader, you know the story as well as we do.

“US Stocks Rise as Fed Announces Additional Treasury Purchases,” says Bloomberg.

US stocks advanced, with banks helping benchmark indexes erase losses, after the Federal Reserve announced an additional $600 billion of Treasury purchases through June in a bid to boost growth in the world’s largest economy.

The S&P 500 climbed 0.4 percent to 1,198.03 as of 3:16 p.m. in New York. The measure had fallen as much as 0.8 percent. The Dow Jones Industrial Average added 26.64 points, or 0.2 percent, to 11,215.36.

“Nothing in here tells me that we should be selling stocks,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “The latest economic figures have been good. We have the Fed and the elections behind us. So there’s less uncertainty.”

The S&P 500 surged 17 percent since July 2 through yesterday as odds increased that Republicans would take control of the House. The GOP, while falling short of winning the Senate, narrowed the chamber’s Democratic majority yesterday in an election shaped by voter anxiety over jobs and the economy.

Republicans gained at least 60 House seats across the country, capitalizing on concern that government spending has increased over the last two years and delivering a rebuke to the domestic agenda of President Barack Obama.

The S&P 500 may rally as much as 16 percent in the next six months because the election will stymie legislative initiatives in Congress, billionaire investor Kenneth Fisher said.

What? Does he just make this stuff up? Maybe stocks will go up. Maybe they’ll go down.

We don’t know. And we don’t care. Stocks aren’t cheap. And the country is still at the beginning of a major adjustment…a Great Correction that will probably depress business profits for many years.

Besides, the stock market never has completed its historic rendezvous with the garbage pile. Yes, every investment asset class goes from the trash heap to the penthouse – and then back. By our calculations, US stocks are on the downside of that slope. We’ll wait ’til they reach the dump – that is, when they’re at giveaway cheap prices – before we get excited about them again. We want to pick them out of the trash at pennies on the dollar.

Of course, we could wait a long time. From trough to peak typically takes 16 to 20 years. If you take the peak as of January 2000…when the NASDAQ hit its high…we have another 6 or so years to wait. But if the peak was the peak in the Dow of 2008…heck, we could wait until 2028 until we finally hit bottom.

And don’t forget. Japan waited 20 years between its glory days of 1989 and its low of 2009. We could do the same. But so what? We can wait….

But let’s talk about happier things. This year the voters – God bless ’em – threw out more bums than usual. The Republicans gained 60 house seats.

That means Congress is gridlocked. Obama doesn’t seem to understand what is happening. And Ben Bernanke is cranking up the presses.

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.

Bill Bonner
for The Daily Reckoning

Why Printing Money Won’t Correct the Correction originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why Printing Money Won’t Correct the Correction




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

From Stagnation to Stagflation

November 4th, 2010

With economic growth as measured by real final demand so weak, any increase in inflation which is not associated with a higher rate of real growth will represent a transition from the economic stagnation of the past few years to an even more unsatisfactory state of affairs, a dreaded “stagflation”, which came to plague the US and, to a lesser extent, global economy in the late 1970s.  But wait, some might object, US CPI reached double-digits in the late 1970s/early 1980s, surely this is not a fair comparison? To which we reply: Good point. Let’s make certain that we are comparing like with like and adjust for changes that have been made to the CPI calculation methodology in the interim, as these have been substantial.

A respected independent economist, Mr. John Williams, maintains an excellent website publishing what he has termed “Shadow Government Statistics”, which show how the economy is performing today, using statistical methodologies from the 1970s for GDP, CPI and so on. These statistics allow for a proper comparison of contemporary and past US economic data. The results are illuminating, to say the least. Whereas the official, current rate of CPI is at a “59-year low” 1.1% y/y, when applying the same statistical methodology that prevailed in the 1970s–comparing like with like–in fact US CPI is currently 8% y/y! 8%! And there is a substantial food and import price inflation shock about to arrive!

TIPS may not be pricing in 8% y/y inflation or higher, but why should they? They don’t pay the old CPI as a coupon, they pay the current CPI. As such, TIPS implied inflation rates simply can’t tell us that we are perhaps already deep into an economic stagflation comparable to the late 1970s!

For those skeptical that this is a legitimate line of inquiry, consider some ominous parallels between current financial market developments and those of the late 1970s:

•    The dollar is weak nearly across the board;
•    The gold price has soared to records;
•    The prices of commodities generally are now also rising rapidly;
•    The stock market is rising;
•    Yet all of the above are occurring alongside generally weakening US leading economic indicators

The evidence strongly suggests that US CPI is not 1.1% y/y but rather somewhat higher. But if US CPI is in fact somewhat higher then this implies that the real rate of GDP growth is commensurately lower, as real growth = nominal growth – price inflation. Yet with official GDP growth as weak as it is, then that would imply that, in fact, true real GDP growth is outright negative. Impossible? Well, consider some other interesting economic facts:

•    The economy is not adding jobs and, in fact, employment remains far below the peak reached in 2007;
•    State sales tax revenue growth is negative, implying negative real retail sales growth;
•    The Conference Board consumer survey of inflation expectations is around 5%

Isn’t it far, far easier to understand the behavior of financial markets and the broader range of economic data hiding behind the headline figures, by assuming that CPI is somewhat higher, and real GDP growth somewhat lower, than official figures suggest? We leave it to the reader to decide.

If the real state of economic affairs in indeed as bad as Mr. Williams’ data imply, then we are, in fact, already deep into a stagflation which is only going to get worse. The financial market implications are significant.

First of all, it is likely to become increasingly evident that current US bond yields are far too low to compensate investors for the increasingly rapid loss of purchasing power. As such, either yields are going to have to rise or, to the extent that the Fed stands in the way, the dollar decline.

Second, corporate profits are going to suffer in a severe squeeze between sharply rising input prices on the one hand and poor real final demand on the other. This is likely to weigh on equity markets although equities are likely to outperform bonds as corporations, in particular those producing/providing relatively non-discretionary goods and services, are able to pass on some costs to consumers.

Third, within equities, financial shares are likely to underperform, possibly dramatically. The more severe the stagflation becomes, the more likely that, eventually, interest rates are going to rise. While goods-producing firms able to export might benefit in time from a weaker dollar and lower relative wage costs, financials do not benefit directly from such developments. Rather, their valuations are a direct function of the level of interest rates. A glance at the relative performance of US financials during Fed Chairman Volcker’s 1979-82 assault on inflation, via higher interest rates, is instructive in this regard.

Fourth, commodities are likely to remain the best performing asset class. Gold and other precious metals may, or may not, lead the way, as their prices are already elevated relative to those for other commodities. Crucial here will be the perceived risk of the US financial system. If confidence in the financial system deteriorates substantially, precious metals are likely to be the best performers. If financial conditions are relatively stable, a more balanced and widespread outperformance of commodities becomes more likely.

Needless to say, this is not a benign investment environment. Those living on fixed incomes are going to see their purchasing power substantially eroded over time. Those who think that stocks are cheap due to highly misleading comparisons with the unsustainable asset bubbles of the past are going to be disappointed. Adding to the misery for stock market investors will be the “green-tape” associated with new environmental and natural resource regulations; a more aggressive regulatory regime generally; tremendous political and hence tax policy uncertainty; and an astonishingly widespread culture of corporate fraud, which has no doubt been substantially facilitated by the complete lack of even basic enforcement of US contract and securities laws before, during and following the financial crisis of 2008.

While the above comments are rather specific to the US, certain other developed economies, including parts of the euro-area, the UK and Japan, have issues which are in many cases similar and in some cases even worse. And while emerging markets are likely to continue to outperform on trend, at least in relative terms, investors should be cautious regardless of where they are looking for value around the world.

For those readers who have been following the Amphora Report, no doubt this edition represents another rather depressing installment. We are long on criticism and rather short on proposed solutions.  From time to time we do try to offer reasons for hope and, this time around, we close with a few.

First, we note that alternative, non-Keynesian economic thinking is beginning to find its way into the mainstream press. Regular readers of the Wall Street Journal (US), Financial Times (UK) and Daily Telegraph (UK) have probably already noticed this. Policymakers are more likely to listen to these sorts of media sources than those of the blogosphere, however pertinent, sophisticated and credible the latter.

Second, economic policymakers in a growing number of countries, in particular in Europe but also in certain emerging markets, are beginning to take proactive measures to place their economies on a more sustainable path, even if this places them in direct confrontation with the US. Germany is an important case in point, as are France, Brazil and India. We would even place the UK in this group.

Third, some influential business leaders in the US are now speaking out against plans for additional stimulus, arguing instead that more fundamental economic restructuring is now necessary, however painful it might be in the near-term. This is a welcome contrast to the near universal acceptance of the business community back in 2008-09 that, without substantial fiscal and monetary stimulus, the US would somehow become an economic wasteland overnight.

Fourth, while we are not partisan in our politics, we welcome the growing political activism in the US, Europe and elsewhere. In all cases, there is much more citizen engagement and fundamental debate taking place around all manner of economic issues. While in certain cases demonstrations are turning violent, it is important to understand that this is an unfortunate symptom of supposedly representative political systems not living up to the spirit of their specific constitutions or of their democratic traditions generally. Long may the activism continue.

These are all important developments. The first step toward curing an addiction–in this case artificial, unsustainable and ultimately counterproductive economic stimulus–is to recognize it for what it is. As the media, policymakers, businessmen and all citizens wake up, the odds grow that we might just manage to avoid an even worse fate than that which already awaits us as the consequence of colossal past policy mistakes.

No, there is no easy way out. There is no free lunch. Indeed, that lunch is going to get much more expensive before long.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

From Stagnation to Stagflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
From Stagnation to Stagflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

The Rare Earth Bonanza

November 4th, 2010

Rare earths have gotten a lot of attention lately. Deservedly so, as you’ll see. And this creates some opportunity for nimble speculators. Let’s take a look…

Last month, China cut its shipments of rare earth exports to Japan. China and Japan have a maritime spat going on and this ban is probably fallout from that. In any event, the ban alarmed Japanese manufacturers who depend on China for rare earths.

The term “rare earths” refers to a group of obscure minerals, such as cerium, rhodium and neodymium. They are critical to a host of cutting-edge technologies. We use them in everything from hybrid cars to low-energy light bulbs. They are also used in all kinds of electronics, from cell phones to laptops. You’ll also find rare earths in batteries, polished glass, exhaust systems and more.

Japan makes all these things. In fact, it is the world’s largest consumer of rare earths. China is the world’s largest producer of rare earths, with 97% of the market. So you can see this is a matchup of heavyweights.

Japan has vowed to find new supplies.

New supplies are out there, but there is not much production coming on line until a couple of years from now, if all goes according to plan. In the meantime, rare earths prices are up as much as fourfold this year.

This has not had as dramatic an impact as, say, a fourfold increase in the price of oil would. That’s because for most applications, rare earths are only a small percentage of the cost of the final product. The following is from Stratfor, an intelligence firm, which shows you that even now, rare earths often make up 1-2% of the total costs of a product.

Rare Earths Cost

Still, prices have gone up enough – and availability is tight enough – to cause some alarm in Japan.

I think the situation is alarming not only for Japan, but for users of rare earths everywhere. This will stimulate the search for alternative suppliers. And China may want it that way anyway. The production of rare earths is tough on the environment. As the FT reports, commenting on China’s approval to develop a new rare earths mine in Jiangxi province:

For the industry as a whole…there are signs that the Beijing government does not wish it to get too big. The consolidation of China’s rare earths sector is part of a broader national effort to shift away from this type of low value-added, high environmental impact products.

To that end, China has raised export taxes on rare earths as high as 25%.

Stratfor, too, points to the fact that China’s rare earths industry was often not profitable. Stratfor mentions some the other things China is doing that impact both supply and demand:

That its prolific, financially profitless and environmentally destructive production of REE [rare earths elements] has largely benefited foreign economies is not lost on China, so it is pushing a number of measures to alter this dynamic. On the supply side, China continues to curb output from small, unregulated mining outfits and to consolidate production into large, state-controlled enterprises, all while ratcheting down export quotas. On the demand side, Chinese industry’s gradual movement up the supply chain toward more value-added goods means more demand will be sequestered in the domestic economy.

So China’s production of rare earths may fall…and it may consume more of what it produces at home. That means less for the rest of world.

Most of the production went to China in the first place because it was cheaper. And miners didn’t have to worry about the environmental damage they caused.

Both those things are changing.

The Japanese are out looking for rare earths outside of China. The FT reports Japanese firms checking out deposits in Vietnam, India, Canada and Brazil. Most of these projects are still in the early stages. And even the near-term projects need significant funding. But when they come online, they will be significant new sources of supply.

Japanese firms are finding ways to use less rare earths in some cases. For instance, Japanese engineers found a way to use half the rhodium used to make catalytic converters. There are other experimental efforts ongoing that try different materials altogether. As Stratfor notes, the rare earths boom “means many industries are in a race against time to see if alternative REE supplies can be established before too much economic damage occurs.”

So there is a window of opportunity here. I agree with Junji Nomura, who is in charge of research and development at Panasonic. “Rare earths will be a big problem for two-three years, but in four-five years, the problem will be gone.”

That’s a wide enough window to make good money speculating in rare earths. There are a handful of quality deposits out there that will begin production in the next few years.

Regards,

Chris Mayer
for The Daily Reckoning

The Rare Earth Bonanza originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Rare Earth Bonanza




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Quick Profiles in Breakout Trading Stocks CAT XOM and F

November 4th, 2010

Ahhh breakouts – while most traders love them, they can be frustrating to trade for others.

Given this morning’s activity, I wanted to do a quick profile on three leading stocks breaking out to new 52-week highs and revisit the “Popped Stops” logic from this morning’s post.

First, I’ve been very interested with Caterpillar (CAT) at the $80 level for a “Break or No Break” situation – this morning, we broke hard to the upside which created an opportunity for those ready to take it.

To me, this is trading at its finest.  It’s a throw-back to the Mark Douglas style of trading/analysis as described in Trading in the Zone where he states you should formulate trades based on massive support or resistance areas that price HAS to break one way or the other.  Your trade is then the direction of the resolution – downward from resistance or upward on a break.

No one can deny that $80 was an important level for Caterpillar.  And, the stronger (and more accepted) the level, the more definitive the break will be once price ejects from the resistance – or powerful the downside move will be when resistance holds.

Why is that so?

In part, traders and investors are taking real-life bets on whether price will break through or break down from resistance (not including fundamental analysis reasons why investors believe share prices should be higher or lower due to valuations – a whole other story).

For the technically oriented traders, those desiring to short-sell Caterpillar at the $80 level thus place stop-losses above $80 or $81 in the event price does break through – they don’t want to be caught in a breakout move short.

So, WHEN price breaks through to $80 and $81, they are forced to BUY-BACK their shares to cover – and this creates upward fuel for a rally.

At the same time, there are vested buyers pushing share prices higher who now rush in to purchase shares on a clean breakthrough of resistance.

Thus, a “Positive Feedback Loop” develops where short-sellers rush to BUY to cover, which triggers sidelined buyers to jump off the sidelines and buy shares, which may trigger those already with a position to add MORE shares, which triggers more short-sellers (with stops at $82 or $83) to cover, which … and so on.

This is the logic of the “Popped Stops” play which have become increasingly common in today’s technically-focused (charts) market.

And beyond Caterpillar, we see the same logic playing out today across the market, as seen in market leader Exxon-Mobil:

Without getting too deep, there was actually TWO big chances to play breakout moves in XOM – the first being late September/early October with the triangle (pattern) trendline break, then the break above the $63 prior high level and so on.

Then there was the mini-break above resistance at $67 in October.

And today gave traders another chance to position long for a quick “Popped Stops” feedback loop of sellers buying to cover at a loss and bulls rushing in off the sidelines to buy.

The feedback loop will continue as long as those two forces interact.

Finally, we see the same sort of thing in Ford (F) but its shares actually broke strongly higher yesterday:

Similarly, we had the opportunity the first time on the October breakout from the August high at $13.25 then a similar situation yesterday on the break to new highs beyond $14.50.

This is a concept that is real, is applicable, and that can make you money if you understand it.

The key is NOT to believe that resistance HAS to hold (is required to hold) and to approach the chart with an open mind, not imposing your will on the stock.

The Popped Stops play takes advantage of those who refuse to stop-out on the initial breakout, and thus lose MORE money by holding on and eventually capitulating (buying to cover) later.

The same logic works in reverse for big downside breaks of support.

Learn this concept and study these charts and understand the dynamics of supply and demand as shown on charts – it can both save you money and – if you are aggressive enough to play breakouts early – can make you money.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Quick Profiles in Breakout Trading Stocks CAT XOM and F

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You Won’t Believe Where I Found High Yields and Growth

November 4th, 2010

You Won't Believe Where I Found High Yields and Growth

As the Director of Income Research behind High-Yield International, it's my duty to find the best income investments all over the world. And what I'm finding is that few places can compare to the yields and growth we're seeing in South America right now.

Uncategorized

You Won’t Believe Where I Found High Yields and Growth

November 4th, 2010

You Won't Believe Where I Found High Yields and Growth

As the Director of Income Research behind High-Yield International, it's my duty to find the best income investments all over the world. And what I'm finding is that few places can compare to the yields and growth we're seeing in South America right now.

Uncategorized

These 4 Small Stocks Could Continue Their Incredible Run

November 4th, 2010

These 4 Small Stocks Could Continue Their Incredible Run

Just like most of the rest of the stock market, September was a surprisingly strong month for small caps. And October started out with a bang, but ended in a whimper.

Together, however, it was an impressive two-month rise in stocks with market capitalizations under $2 billion, as the Russell 2000 index of smaller stocks rose +12.3% in September, and a smaller but respectable +4.1% last month. By comparison, the S&P 500 Index was up nearly +9% in September and gained +3.7% in October — which still was its best percentage return for that month since 2003.

Still, as traders finished out the month on Oct. 29, which marked the 81st anniversary of the Crash of 1929, called “Black Tuesday,” they're looking ahead to what the midterm elections might bring and what Federal Reserve Chairman Ben Bernanke might have up his sleeve to try to kick-start a stagnant economy in the waning months of 2010. [How the Fed Will Affect Your Portfolio This Week]

With that in mind, here is a look some of the best-performing small-caps in October…

ZAGG (Nasdaq: ZAGG)
Technology lifted the Nasdaq Index, and that trend carried over to small caps as well. One of the better performers was ZAGG, which rose +73% in October. The Salt Lake City company makes protective gear (screen shields and cases) plus other accessories for gadgets, primarily for Apple's (Nasdaq: APPL) iPod, iPhone and iPad products. ZAGG's stock reflects these products' popularity, with its share price nearly doubling this year.

Some wonder if its reliance on Apple's success will come back to haunt it, but I don't think the growth spurt is over for ZAGG's business — or its stock.

Uncategorized

These 4 Small Stocks Could Continue Their Incredible Run

November 4th, 2010

These 4 Small Stocks Could Continue Their Incredible Run

Just like most of the rest of the stock market, September was a surprisingly strong month for small caps. And October started out with a bang, but ended in a whimper.

Together, however, it was an impressive two-month rise in stocks with market capitalizations under $2 billion, as the Russell 2000 index of smaller stocks rose +12.3% in September, and a smaller but respectable +4.1% last month. By comparison, the S&P 500 Index was up nearly +9% in September and gained +3.7% in October — which still was its best percentage return for that month since 2003.

Still, as traders finished out the month on Oct. 29, which marked the 81st anniversary of the Crash of 1929, called “Black Tuesday,” they're looking ahead to what the midterm elections might bring and what Federal Reserve Chairman Ben Bernanke might have up his sleeve to try to kick-start a stagnant economy in the waning months of 2010. [How the Fed Will Affect Your Portfolio This Week]

With that in mind, here is a look some of the best-performing small-caps in October…

ZAGG (Nasdaq: ZAGG)
Technology lifted the Nasdaq Index, and that trend carried over to small caps as well. One of the better performers was ZAGG, which rose +73% in October. The Salt Lake City company makes protective gear (screen shields and cases) plus other accessories for gadgets, primarily for Apple's (Nasdaq: APPL) iPod, iPhone and iPad products. ZAGG's stock reflects these products' popularity, with its share price nearly doubling this year.

Some wonder if its reliance on Apple's success will come back to haunt it, but I don't think the growth spurt is over for ZAGG's business — or its stock.

Uncategorized

These Mining Stocks Have Gained 200%-Plus and Could go Higher

November 4th, 2010

These Mining Stocks Have Gained 200%-Plus and Could go Higher

What's one of the hottest micro-cap stocks of the last three months? I'll give you a clue: it's a mining company that's stock tripled in value since mid-August. But instead of mining gold, silver or platinum, this company digs something else entirely different out of the earth.

If you guessed lithium, it's a good guess, but you'd be wrong. [Although StreetAuthority's Nathan Slaughter sang lithium's praises in this article.]

The company in question, Uranium Resources (Nasdaq: URRE), actually mines uranium, as you might guess. Uranium Resources' surging shares have company. Shares of Uranerz Energy (AMEX: URZ) and UR Energy (NYSE: URG) have roughly doubled, while most other uranium plays have also tacked on strong gains in recent months.

Uncategorized

These Mining Stocks Have Gained 200%-Plus and Could go Higher

November 4th, 2010

These Mining Stocks Have Gained 200%-Plus and Could go Higher

What's one of the hottest micro-cap stocks of the last three months? I'll give you a clue: it's a mining company that's stock tripled in value since mid-August. But instead of mining gold, silver or platinum, this company digs something else entirely different out of the earth.

If you guessed lithium, it's a good guess, but you'd be wrong. [Although StreetAuthority's Nathan Slaughter sang lithium's praises in this article.]

The company in question, Uranium Resources (Nasdaq: URRE), actually mines uranium, as you might guess. Uranium Resources' surging shares have company. Shares of Uranerz Energy (AMEX: URZ) and UR Energy (NYSE: URG) have roughly doubled, while most other uranium plays have also tacked on strong gains in recent months.

Uncategorized

How Martha Stewart Can Double Your Money

November 4th, 2010

How Martha Stewart Can Double Your Money

More than 200 stocks hit new 52-week highs on the New York Stock Exchange on Tuesday as the market powers ever higher. Toiling on the sidelines of this surge is former highflyer Martha Stewart Living Omnimedia (NYSE: MSO), which has the dubious distinction of being one of just a handful of names hitting 52-week lows these days.

The question for investors: is the Queen of domestic design becoming irrelevant, or simply the victim of bad-timing?

To be sure, it's no fun being a magazine publisher these days. High-profile titles such as Newsweek are seemingly near death, while other esteemed titles such as The Atlantic are forced to cut the number of issues they publish each year. Yet Martha Stewart Living's publishing business looks quite healthy — at least in terms of circulation. The company's flagship Martha Stewart Living actually recently increased the amount of circulating copies its guarantees to advertisers to 2.025 million, while lesser titles such as Everyday Food (1 million) and Whole Living (650,000) are also posting rate base increases.

Trouble is, the weak economy has been pressuring ad rates. So these titles are doing just fine in terms of consumer popularity, but are generating steadily lower ad revenue. That should change when the economy finally starts to turn and ad budgets expand again. To be sure, we live in a digital world, and Martha Stewart Living's nascent digital publishing initiatives, which are growing impressively, will never supplant the revenue that print advertising can garner. But as the number of magazine titles keeps shrinking, Martha Stewart's titles should eventually stand out even more clearly to advertisers as platforms with a compelling reach.

Yet shares have already been reflecting this weak publishing environment for quite some time. Instead, they are slumping recently as the company switches horses mid-stream in terms of both merchandising and broadcasting partners. Those moves are hurting results now, but should pay off later.

On the merchandising front, Martha Stewart Living is no longer deriving any revenue from the longstanding relationship with the Kmart division of Sears Holding (Nasdaq: SHLD). That was always a contentious partnership, with Martha Stewart accusing Kmart of operating shabby stores and poorly promoting her eponymously-branded merchandise.

The company has subsequently inked deals with Home Depot (NYSE: HD), Macy's (NYSE: M) and PetSmart (Nasdaq: PETM), but those retailers have been slow to make up for the lost revenue associated with the Kmart divorce. However, those retailers are still in the process of expanding the number of Martha-branded items in their stores, and by the middle of next year, quarterly merchandise revenue (which carries very high margins) should start to look more impressive. An upturn in the economy would surely help, too.

Just to keep it interesting, Martha Stewart Living threw another wrench into the mix. Tiring of erratic broadcast times (sometimes at 2AM) through its TV syndication deal, the company took all of its content to the Hallmark Channel in September. Early results were not promising, as viewers seemed to fail to follow Martha from over-the-air broadcasts to basic cable. Ratings were initially quite low in September, but started to rebound in October. Hallmark and Martha Stewart Living intend to heavily promote the broadcasts into the holiday season, which is often a time of peak viewership. With the holiday viewing base intact, the company hopes that 2011 broadcast revenue will be back at previous levels — if not higher — than in 2010.

The broader view is to have those magazine titles promoting both the TV programs and the retail partners, and to have the TV programs promoting the magazines and the retail merchandise. Right now, that whole effort is stumbling like a colicky horse. And shares move ever lower.

Action to Take –> What was a $20 stock in 2006 now trades for less than $5. Pretty much anything that could go wrong has gone wrong. Martha Stewart Living's strategies are logical, yet the company's execution on those strategies has not been impressive. But this is still a franchise that has deep resonance with female consumers. Those consumers are cash-strapped right now, and the advertisers that want to reach them are hesitant to spend. But it still looks as if time will heal these wounds, and shares will rebound as the magazine/retail/broadcasting kinks get worked out.

Shares may not see $20 again anytime soon, but a double from current levels in 2011 is certainly feasible if these synergies start to bear fruit.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
How Martha Stewart Can Double Your Money

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How Martha Stewart Can Double Your Money

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