On August 20th, 2007 it was clear to me that an important bottom had been set with the August 16th fear driven spike-down capitulation low. The carnage in the broad averages were in keeping with a standard correction. But what was most telling was the profound damage seen in stocks related to the natural resource sector, emerging markets and small capitalization shares in general. It was quite common to see shares having lost 20 to 50 percent of their value over the course of the previous 30 trading days, with a capitulation spike bottom marked on August 16th. These are the signals one looks for when navigating a correction. Certainly, the Fed's surprise 50 basis point cuts to the Federal Funds Rate and Discount Rate on August 17th played a major role in solidifying the bottom, but shares in the most volatile sectors were already making their way back up late in the day after the early morning capitulation spike bottom low.
Now, if I was smart, I would have launched Investor Intelligentsia on Monday, August 20th, and loaded up model portfolios with my favorite down and out shares. No such luck. I was tending to my own portfolio and the needs of my clients. The easy money off that correction represented some 40% moves, on average, for my favorite stocks. Nevertheless, the challenge coming later to the markets during this ongoing "credit crunch" period provides Investor Intelligentsia with all the more opportunity to exhibit superior market investing agility.
I would like to add some content developed immediately following the August 16th bottom, however. The material below is posted on a Yahoo members group and can be accessed with permission of the moderator. I find it helpful to review both mistakes and correct calls. Analysis of core fundamentals is crucial when a huge correction is underway. The below is but one example, using the gold sector and two companies for illustration.
----- Original Message -----
From: Eric Dubin:
Sent: Friday, August 17, 2007 7:37 AM
Subject: Re: Today's blue light specials
The FED move to cut the discount rate was announced minutes after I sent out my email about gold and Agnico-Eagle and EXMIN. Needless to say, that FED move took away the "easy money" entry range I was talking about with Agnico-Eagle ($35 to $37). But even entering at anything below $40 is a great price to get in for an initial position, especially if you are light on blue chip gold exposure.
As for EXMIN, so long as you approach it as risk capital, and so long as you employ a dollar cost averaging method of accumulating it and are willing to deal with big volatility, I see entry attractive even on up to US$0.58. At the moment it's trading at $0.41 Canadian, with a day range of 0.38 to 0.43. The current Canadian/US$ exchange rate is 0.94193 so the bid/ask spread translates into US$0.377 x US$0.386. This is still a lower risk entry point - given how far the stock fell in the last month.
--
Eric
__._,_.___ ----- Original Message -----
From: Eric Dubin
Sent: Friday, August 17, 2007 5:19 AM
Subject: Re: Today's blue light specials
Greetings,
I'll toss out an idea for solid prospecting - literally. GOLD mining companies. ...and if you don't own physical gold right now you shouldn't be bashful about accumulating it. More on physical gold later.
I don't have time to write a big email this morning (holy cow - now that I'm done and I'm looking over what I wrote, I see that a big email flew out anyway :-).
I'll come back this weekend and write more. However, the thesis for owning gold is straightforward. We've had a medium-sized decline in gold and a HUGE decline in miners on account of the unwinding of the Yen carry trade, the needs of hedge funds getting redemption request by the August 15th deadline for their industry, and margin calls in general. The dollar's bounce in response to the flight to "quality" as traders and investors flee from risk and into money market funds and US Government tbills on up to 2yr. notes also creates a temporary hit to gold. Sentiment for gold sucks - the level of despondency among even gold bugs is about as low as it gets and this certainly falls into the contrary indicator category. Finally, add to the mix the fact that physical demand has remained strong in a seasonally weak period even in the face of considerable gold selling by central banks patching up their credit profiles (Spain) or attempting to cap the price of gold (all of them). All told, gold and precious metals mining shares have been hit hard, but the fundament thesis for owning them - and gold in particular - hasn't been stronger in decades, if not EVER (no joke, given the state of global financial derivatives notional value and systemic risk).
In the "junior" and "exploration" sector, the damage is utterly massive. It's not hard to find companies that have lost half of their value in the last month. But there are even great values among large, blue-chip firms. At the very top of my list I'd recommend looking at Agnico-Eagle Mines (NYSE: AEM and also trading in Toronto). This is my largest holding in the gold space. Unlike the giant firms like Newmont or Barrick, Agnico-Eagle actually has a stunningly attractive production growth profile over the next four years. The company is big enough to be considered a blue-chip, but small enough to be a take-over target by the majors. If you're trying to get exposure to gold but doing it by buying Newmont or Barrick, that's actually a less than ideal strategy given that these lumbering giants have a problem with reserve replenishment. The sweet spot to be in for lower risk are among the large mid-tier players that have growing production profiles, and Agnico is, in my opinion, the absolute best pick of the litter.
They're gushing cash - and that's going to ramp up as their new production comes on line. They're among the industry's low cost producers. Their properties are in politically secure and mining-friendly political jurisdictions. When it comes to top quality gold mining companies, I submit that there is no better company than Agnico-Eagle at this time (a title that used to belong to GoldCorp but GoldCorp now has a heck of a lot of base metal exposure, and base metal exposure can be tricky when dealing with the chance that global economic growth will slow). Getting in at anywhere between US$35 to US$37 for a 50% position using a dollar cost averaging strategy of buying - leaving some dry powder - is a good strategy.
Gold and gold miners are an interesting segment to consider at this stage. Concerns of global economic slowdown will, on balance, not have a negative impact (although physical gold demand beyond investor demand is subject to economic growth, especially in India, the largest gold consumer). On balance, however, this is an asset class that should be ok regardless of economic recession or growth prospects in the US and globally. In particular, as the US economy slows down further and as the Fed deals with the credit crunch, interest rates are going to fall and this will provide a swift kick higher to gold. Frankly, we're already in a recession, and the backward looking stats we see on employment and other "positives" people point to are painting an incorrect picture. The economic stats are butchered too. Things like the GDP price deflator that is used to remove the impact of inflation from the reporting of real growth is a joke. Inflation is running at least twice as high as reported figures. The statistics have been rigged and it's actually easy to demonstrate this because our lying government has surprisingly been rather open about all the various jiggering they've done to things like the CPI. It's not conspiracy theory but rather, publicly documented in the records of various commissions such as the Boskin commission and in the papers that the Fed and executive branch agencies produce (but this is a big subject for another day).
Anyway, as the credit crunch ravages the financial system in stages, we'll eventually see a shift. At the moment, gold and gold share trading have been dominated by liquidity needs among investors and in particular, traders and hedge fund managers. This is going to change in the not too distant future. It's hard to nail a specific date on this, but I think half other liquidity grab is already behind us. The balance of supply and demand is going to soon switch to reflect more investor demand attracted to gold's traditional roll as bulwark against credit inflation. The Fed is talking tough now - particularly St. Louis Fed Gov. William Poole (I'm no fan of Jim Cramer but Cramer is right about Poole's forecasting ability). This credit crisis is already spinning out of control and things are already breaking in the financial system. We've had over 100 small and medium-sized mortgage financial companies declare bankruptcy, and you all know how much pain is visible at the big firms (I can't believe I cashed out of my Countrywide Credit puts a week ago - DOH! Dumb move, Eric). In a few months it's going to be clear that a major reflation effort is going to be needed to "fix" the latest in a long series of deflated bubbles. At the moment, gold is actually bouncing higher, and the Yen carry trade has been bouncing between a periodic laying in of new positions and then, but minutes later, more unwinding by other players. Things are in flux. But you can see in gold at the very second I write this note part of the process of the line of buyers moving into the "investor demand" line. The trend hasn't started yet. But the first signs of it happening can be seen.
Gold at this point has the unique aspect of not having a heck of a lot of downside related to any type of economic condition you can conjure up. Historically, it performs reasonably well during periods of deflation. But ultimately, I think we're going to have some prodigious reflation efforts hitting the global system within months, and that's going to push the dollar down, gold up, and inflation up. By the end of 2008 gold will have taken out $1000/ounce and we're going to take out the 1980s high within six months.
If you want some tremendously powerful leverage, I recommend you look at a company called EXMIN. This is a "junior" company based in Canada with properties in Mexico. Compared to their peers they have an extensive inventory of highly attractive properties, with over 20 projects and one of the largest - if not THE largest - land position in Mexico. They have a highly qualified management team. They have major joint venture partnerships, and in fact their enter business model is focused on finding economically viable gold and silver resources and farming out the development of mines. Their most significant relationship is with Hochschild, a cash rich strong mining company that ranks as the fourth largest silver producer in the world. Hochschild is expanding into Mexico and their means of doing it is primarily through working with EXMIN.
Early on, during the bear market in the mining industry, the executives at EXMIN scoped out great properties to own and they put together a fantastic stable of exploration claims just as the bull market in precious metals was getting started. Their relationship with Hochschild recently advanced to a higher stage - they struck-up an expanded joint venture, with Hochschild taking a ~20% stake in EXMIN - and they will be funding the development of a mine project (Moris) that will be cash positive later this year (and eventually, they'll be jointly developing other targets as well).
Cash burn is a major problem with junior mining companies, but EXMIN might be in a long-term position to not have this issue - at least not to the extent that dilutes their peers. That's a great position to be in as they turn their attention towards developing their top quality projects and exploration lands. But it also means that they don't have a need for extensive relationships with investment banks. You will not see much focus on this company by the traditional mining-friendly investment banks. I consider that a good thing, on balance. Companies like Mag Silver
have had astounding success with the joint venture model and I believe that among juniors, EXMIN has the best chance of replicating what Mag Silver has done.
EXMIN also has other joint venture partners on other projects, including one with Mexican mining giant Industrias Peñoles (the largest silver producer in the world - a giant in the Mexican mining industry).
EXMIN is a high risk, high reward situation. Widows and orphans stay away! But it does have much lower average risk vs. other junior companies given that they've got near-term cash flow coming from an actual mine (Morris), and given their industry-leading joint venture partnerships. I kid you not. This stock could very well be a "50 bagger" over the next five years from yesterday's closing quote. But even without that vision of titanic upside, I consider a double from yesterday's closing quote within the next 52 weeks to be a reasonably high probability bet (but again FOR "RISK CAPITAL ONLY").
It trades in Canada:
but you can buy it in the US using the pink sheet OTC shares
(use a limit order, calculate the exchange rate equivalents of the bid/ask you see in Canadian quotes, with delayed quotes perhaps best seen using the TSX.com website http://tinyurl.com/2h8las</a> )
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