Sunday, March 30, 2008
And your picture caption is?
Another wild week on Wall Street is behind us. It's time to put things in perspective, enjoy the weekend, and have a laugh or two. Feel free to drop us a line with your picture caption suggestions. We'll come back and add a few choice selections if you folks come up with hilarious ones. This was his last Easter Egg Roll at the Whitehouse. Poor chap. He'll miss the holiday. It sure beats running a country.
Tuesday, March 25, 2008
Commodities Sell-off Excessive: Adding Yamana, Monsanto, Terra Nitrogen, Powershares Agriculture ETF and more Silvercorp, Mosaic and Potash
Last week's commodity sell-off was excessive. We're going to increase our exposure to precious metals and basic materials today. We will purchase the following positions at the open:
Silvercorp is an addition to our existing position. The company will be the most profitable silver company in the world in the months and years ahead. They already pay a dividend and if you were around for the previous metals run in the 1970s and 1980s you'll recall that there were many companies that paid healthy dividends. Silvercorp carries on that tradition. Their corporate headquarters are in Canada, and their main operations are in China. There's country risk with the position, but we believe this is minor relative to the opportunity for stellar growth.
Mosaic: We're adding a honking 300 shares to our existing position, as well as another 100 shares to our Potash Corp. holdings. Mosaic is one of the world's leading producers and marketers of concentrated phosphate and they're also a big potash producer. Prices for these fertilizer components are going to continue to rise for at least another three years, and will reach levels well above current expectations. This may be hard to believe given how strong both the commodities and the shares have performed. But the agricultural boom remains in an early stage of development. Diets in developing countries are increasing quantities of meat protein consumption, which adds demand for grains worldwide. The world's grain inventory supplies are at 40 year lows and the situation is so precarious that the CEO of Potash remarked a few weeks ago that we could see global famine if weather fails to provide perfect growing conditions for any of the world's leading grain exporting nations. Investing in the companies that boost agricultural productivity also is a back-door way to invest in water and the distribution of water. Arid countries that import grains not only boost their food stocks, but they reduce the need for domestic agricultural water use. Unfortunately, this is critical for the survival of hundreds of millions of people worldwide.
Our new position in Terra Nitrogen further increases our exposure to fertilizer stocks. As their name implies, they are a large nitrogen fertilizer producer. The corn cycle is a heavy nitrogen fertilizer user and weakness in nitrogen fertilizer producers relative to companies that focus on potash and other compounds has created a buying opportunity in the shares. We believe Terra Nitrogen will bounce back this summer as expectations for stronger nitrogen fertilizer sales across the industry come into focus.
Monsanto's seed sales should surprise to the upside, and the stock has corrected severely over the last month. This wild trading is common with Monsanto given it's high valuation. But the earnings growth story here is powerful and remains intact. Few companies have the dominating position that Monsanto controls, regardless of industry. When selecting companies that will benefit from the agricultural commodities super cycle boom, Monsanto is a logical selection.
Finally, as a way to stash some of our excess cash into non-dollar assets, we are adding 1000 shares of the Powershares ETF that holds roughly equal positions in the futures contracts of corn, sugar, wheat and soy beans. In our view, the Powershares DB family of commodities ETF deal with the potential problem of contract roll-over negative yield situations better than other ETFs, and they also track performance of underlying commodities well. The managers have a history of being able to generate respectable income distributions at the end of the year as well. At a later date, when we want to liberate some cash, we'll sell this position. But last week's sell-off in the grains was excessive and weather conditions remain supportive of stable to higher prices going into the summer.
We will return with our take on last week's events and our outlook for the near-term.
- Yamana Gold (AUY: NYSE): Buy 1000 shares at the open
- Silvercorp (SVM.To: Toronto): Buy 2000 shares on the open
- Mosaic (MOS: NYSE): Buy 300 shares on the open.
- Monsanto (MON: NYSE): Buy 100 shares on the open
- Terra Nitrogen (TNH: NYSE): Buy 100 shares on the open
- Potash Corp. (POT: NYSE): Buy 100 shares on the open
- Powershares DB Agriculture ETF (DBA: AMEX): Buy 1000 shares on the open
Silvercorp is an addition to our existing position. The company will be the most profitable silver company in the world in the months and years ahead. They already pay a dividend and if you were around for the previous metals run in the 1970s and 1980s you'll recall that there were many companies that paid healthy dividends. Silvercorp carries on that tradition. Their corporate headquarters are in Canada, and their main operations are in China. There's country risk with the position, but we believe this is minor relative to the opportunity for stellar growth.
Mosaic: We're adding a honking 300 shares to our existing position, as well as another 100 shares to our Potash Corp. holdings. Mosaic is one of the world's leading producers and marketers of concentrated phosphate and they're also a big potash producer. Prices for these fertilizer components are going to continue to rise for at least another three years, and will reach levels well above current expectations. This may be hard to believe given how strong both the commodities and the shares have performed. But the agricultural boom remains in an early stage of development. Diets in developing countries are increasing quantities of meat protein consumption, which adds demand for grains worldwide. The world's grain inventory supplies are at 40 year lows and the situation is so precarious that the CEO of Potash remarked a few weeks ago that we could see global famine if weather fails to provide perfect growing conditions for any of the world's leading grain exporting nations. Investing in the companies that boost agricultural productivity also is a back-door way to invest in water and the distribution of water. Arid countries that import grains not only boost their food stocks, but they reduce the need for domestic agricultural water use. Unfortunately, this is critical for the survival of hundreds of millions of people worldwide.
Our new position in Terra Nitrogen further increases our exposure to fertilizer stocks. As their name implies, they are a large nitrogen fertilizer producer. The corn cycle is a heavy nitrogen fertilizer user and weakness in nitrogen fertilizer producers relative to companies that focus on potash and other compounds has created a buying opportunity in the shares. We believe Terra Nitrogen will bounce back this summer as expectations for stronger nitrogen fertilizer sales across the industry come into focus.
Monsanto's seed sales should surprise to the upside, and the stock has corrected severely over the last month. This wild trading is common with Monsanto given it's high valuation. But the earnings growth story here is powerful and remains intact. Few companies have the dominating position that Monsanto controls, regardless of industry. When selecting companies that will benefit from the agricultural commodities super cycle boom, Monsanto is a logical selection.
Finally, as a way to stash some of our excess cash into non-dollar assets, we are adding 1000 shares of the Powershares ETF that holds roughly equal positions in the futures contracts of corn, sugar, wheat and soy beans. In our view, the Powershares DB family of commodities ETF deal with the potential problem of contract roll-over negative yield situations better than other ETFs, and they also track performance of underlying commodities well. The managers have a history of being able to generate respectable income distributions at the end of the year as well. At a later date, when we want to liberate some cash, we'll sell this position. But last week's sell-off in the grains was excessive and weather conditions remain supportive of stable to higher prices going into the summer.
We will return with our take on last week's events and our outlook for the near-term.
Friday, March 7, 2008
Weekend Humor: Bush Endorses McCain
Eldorado Gold Reopens Kisladag Mine - We're Getting In Before the Crowd
The conventional market has been nothing but a horror show all week. Just when it seems some good news might float to the surface - such as a realistic end-game bailout for beleaguered bond insurance company AMBAC - the demonic ticker churns out the latest balance sheet write-off and company-busting margin call. Welcome to the bear market. This wicked volatility isn't going to change anytime soon.
Where To Hide?
Investments in commodities have weathered the storm reasonably well, due in large part to the withering value of the US dollar, supply constraints for some commodities combined with reasonably robust demand, and finally, the realization among a growing number of institutional investors that accelerating inflation will prove to be a major problem as the months advance. In the near-term, avoiding bear teeth isn't going to be easy, but these supportive trends in commodities will continue and select long positions in the sector still offer protection and opportunity for profit.
The Federal Reserve's Open Market Committee will meet to cut interest rates on March 18th. Leading up to the meeting there will be days where gold will come under pressure by central bank coordinated efforts to attempt to keep the price under $1,000. The last thing market massagers want to see is gold well over $1,000 before the Fed slashes the Federal Funds rate. We're looking for a 75 basis point cut and while the impact of that cut is partly priced into the commodities markets, the situation with rising inflation in the second half of the year still has a supportive roll to play for much higher gold prices.
Stealth management of the price of gold is just as real as open and acknowledged as management of currencies. Gold is, in fact, a currency, and it traditionally has functioned as the smoke alarm for the financial system. The establishment press virtually jokes about passing around tin foil hats every time the gold management subject is aired. We will not attempt to prove the case of gold management in this essay - another time and place, perhaps. In the event you're skeptical and inclined to research, we suggest spending a few hours at GATA.org.
We will not be surprised to see gold crash $20 or $30 in a single day leading up to the Fed's meeting. But it will not be a product of fundamentals. Buying physical metal should such a pull-back occur is something we will be doing for our own accounts. Ultimately, gold will blast through $1,000. By the end of April, we expect gold to have at least traded through $1,100 per ounce, with $1,000 widely seen as a "new floor." Similarly, we would not be surprised to see silver slice through $23 with $20 seen as a new floor.
Eldorado Gold Reopens Kisladag Mine - We're Getting In Before the Crowd
In early July, Eldorado Gold appeared to be coming into it's own. Gold was trading in the mid $600 range and Eldorado was increasingly seen by the institutional investor community as a go-to firm among a select number of mid-sized gold companies with expanding reserves and low production costs. With little warning, the shares were pummeled with the announcement from a Turkish court that Eldorado's flagship Kisladag mine would have to be closed on account of inadequate environmental permitting.
Few in the know questioned the level of support among the executive and legislative bodies of the Turkish government. Furthemore, Eldorado's management was meticulous in putting the original operational plan and permitting process together. They didn't cut any corners. This was simply a case of a European NGO with a beef against the mining industry taking advantage of the Turkish court system. With the support of the federal government, the injunction that closed the mine expired and Thursday, Eldorado's management released the news that the mine will soon be back in production. Following an initial halt of trading, the shares quickly moved up to about $7.50, drifted a bit, but ultimately closed near the high.
We believe the stock is profoundly undervalued. Gold has rocketed from about $650 to almost $1,000 since last July's Eldorado stock crash, but today's price is not far from the levels Eldorodo traded at before the mine closure. Similar mid-sized producers have seen huge share price increases over the same period of time. It will take about a month for institutional investors to feel comfortable again with Eldorado's outstanding growth story, but our read of the politics on the ground convince us this re-opening is the real deal.
The Kisladag is estimated to have a mine life of 13 years and should be able to support production at an estimated 240,000 ounces of gold per year, at a cash cost of $232 per ounce. The powerful cash flow Kisladag would generate was always a supporting pillar to Eldorado's expansion plans in China, Brazil, Turkey and beyond. As confidence returns in the company's ability to resurrect its full business model, we expect the stock to rapidly close its valuation gap between its peers. Had the mine never closed the shares would likely have traded above $9 or $10 by now. A quick catch-up move to $9 in the least should happen over the coming weeks.
We will buy 2000 shares today at the opening price. It would be more ideal to "work" a buy order in real time, but that's not possible with the nature of the model portfolio we are managing, where orders need to be disclosed and set before the market open. A limit order set at $8.25 or $8.50 is an option, but we have decided a market order is the best way to go. There is a large short position in the shares and it's possible that we might not get the most ideal execution on the open (short covering on the open might lead to an initial spike). Nevertheless, we believe the shares will likely close on or near the Friday intraday high and the stock is sufficiently liquid to just cast a market order.
Please note: A 2,000 share position is a moderately aggressive size stake for the size of the model portfolio. This is warranted given that Eldorado is a top quality mid-tier gold producer and not a Jr. mining firm - and it's ridiculously undervalued. In contrast, when building exposure to Jr. mining companies, please remember it is usually wise to start with positions that represent smaller portfolio weightings and to build exposure to at least ten companies - if not MANY more, depending on your abilities to keep track of business conditions. Risk management calls for this level of diversification. It also works to the investor's advantage because when Jr. mining firms strike success, share appreciation is often massive, and easily capable of averaging out the performance of laggards.
Thank God It's Friday!
We will publish over the weekend and tie some loose ends. But rest assured, fresh air is on the docket and we hope you make ample time to get away from the markets. Say, maybe you should plan a vacation to Turkey. We can only hope their marvelous culture remains open to blending the greatness of the past with modern and environmentally conscious mining practices
Where To Hide?
Investments in commodities have weathered the storm reasonably well, due in large part to the withering value of the US dollar, supply constraints for some commodities combined with reasonably robust demand, and finally, the realization among a growing number of institutional investors that accelerating inflation will prove to be a major problem as the months advance. In the near-term, avoiding bear teeth isn't going to be easy, but these supportive trends in commodities will continue and select long positions in the sector still offer protection and opportunity for profit.
The Federal Reserve's Open Market Committee will meet to cut interest rates on March 18th. Leading up to the meeting there will be days where gold will come under pressure by central bank coordinated efforts to attempt to keep the price under $1,000. The last thing market massagers want to see is gold well over $1,000 before the Fed slashes the Federal Funds rate. We're looking for a 75 basis point cut and while the impact of that cut is partly priced into the commodities markets, the situation with rising inflation in the second half of the year still has a supportive roll to play for much higher gold prices.
Stealth management of the price of gold is just as real as open and acknowledged as management of currencies. Gold is, in fact, a currency, and it traditionally has functioned as the smoke alarm for the financial system. The establishment press virtually jokes about passing around tin foil hats every time the gold management subject is aired. We will not attempt to prove the case of gold management in this essay - another time and place, perhaps. In the event you're skeptical and inclined to research, we suggest spending a few hours at GATA.org.
We will not be surprised to see gold crash $20 or $30 in a single day leading up to the Fed's meeting. But it will not be a product of fundamentals. Buying physical metal should such a pull-back occur is something we will be doing for our own accounts. Ultimately, gold will blast through $1,000. By the end of April, we expect gold to have at least traded through $1,100 per ounce, with $1,000 widely seen as a "new floor." Similarly, we would not be surprised to see silver slice through $23 with $20 seen as a new floor.
Eldorado Gold Reopens Kisladag Mine - We're Getting In Before the Crowd
In early July, Eldorado Gold appeared to be coming into it's own. Gold was trading in the mid $600 range and Eldorado was increasingly seen by the institutional investor community as a go-to firm among a select number of mid-sized gold companies with expanding reserves and low production costs. With little warning, the shares were pummeled with the announcement from a Turkish court that Eldorado's flagship Kisladag mine would have to be closed on account of inadequate environmental permitting.
Few in the know questioned the level of support among the executive and legislative bodies of the Turkish government. Furthemore, Eldorado's management was meticulous in putting the original operational plan and permitting process together. They didn't cut any corners. This was simply a case of a European NGO with a beef against the mining industry taking advantage of the Turkish court system. With the support of the federal government, the injunction that closed the mine expired and Thursday, Eldorado's management released the news that the mine will soon be back in production. Following an initial halt of trading, the shares quickly moved up to about $7.50, drifted a bit, but ultimately closed near the high.
We believe the stock is profoundly undervalued. Gold has rocketed from about $650 to almost $1,000 since last July's Eldorado stock crash, but today's price is not far from the levels Eldorodo traded at before the mine closure. Similar mid-sized producers have seen huge share price increases over the same period of time. It will take about a month for institutional investors to feel comfortable again with Eldorado's outstanding growth story, but our read of the politics on the ground convince us this re-opening is the real deal.
The Kisladag is estimated to have a mine life of 13 years and should be able to support production at an estimated 240,000 ounces of gold per year, at a cash cost of $232 per ounce. The powerful cash flow Kisladag would generate was always a supporting pillar to Eldorado's expansion plans in China, Brazil, Turkey and beyond. As confidence returns in the company's ability to resurrect its full business model, we expect the stock to rapidly close its valuation gap between its peers. Had the mine never closed the shares would likely have traded above $9 or $10 by now. A quick catch-up move to $9 in the least should happen over the coming weeks.
We will buy 2000 shares today at the opening price. It would be more ideal to "work" a buy order in real time, but that's not possible with the nature of the model portfolio we are managing, where orders need to be disclosed and set before the market open. A limit order set at $8.25 or $8.50 is an option, but we have decided a market order is the best way to go. There is a large short position in the shares and it's possible that we might not get the most ideal execution on the open (short covering on the open might lead to an initial spike). Nevertheless, we believe the shares will likely close on or near the Friday intraday high and the stock is sufficiently liquid to just cast a market order.
Please note: A 2,000 share position is a moderately aggressive size stake for the size of the model portfolio. This is warranted given that Eldorado is a top quality mid-tier gold producer and not a Jr. mining firm - and it's ridiculously undervalued. In contrast, when building exposure to Jr. mining companies, please remember it is usually wise to start with positions that represent smaller portfolio weightings and to build exposure to at least ten companies - if not MANY more, depending on your abilities to keep track of business conditions. Risk management calls for this level of diversification. It also works to the investor's advantage because when Jr. mining firms strike success, share appreciation is often massive, and easily capable of averaging out the performance of laggards.
Thank God It's Friday!
We will publish over the weekend and tie some loose ends. But rest assured, fresh air is on the docket and we hope you make ample time to get away from the markets. Say, maybe you should plan a vacation to Turkey. We can only hope their marvelous culture remains open to blending the greatness of the past with modern and environmentally conscious mining practices
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