-- Posted Wednesday, 7 January 2009 | | Source: GoldSeek.com
2008 was a brutal, bitch of a year. Nothing like the Bold and Beautiful most housewives or closest trash junkies know and love. (I am occasionally included in this list). Based on the brutality, I decided that the four day Christmas break was a given, followed by another four day new year stretch if I jagged Friday off.
During the break I developed an insatiable thirst for knowledge and probably reassurance of some kind. I ended up buying the Weekend Financial Review (something I normally wouldn’t be caught dead doing), and browsing my fair share of internet sites. Spam could be now something worthwhile instead of being one of most recession proof and versatile foods you can buy. I did however sit down to possibly my twentieth viewing of Wall St with my partner who is a broking veteran of thirteen years. There was one scene where for the first time I noticed something that I found quite funny. You should have seen the way Bud Fox has those venetian blinds in his fancy apartment!
I openly admit to a fear of venetian blinds, shopping trolleys, inside-out umbrellas, reverse parking (before I bought a car with sensors), flat pak furniture, being asked to dance whilst sober, and the fear to end all fears baby strollers. The stock market didn’t find its way onto the list regardless of how beaten up I felt at the end of the 2008. Apart from making myself and my clients money in 2009 my aims are based on becoming a better guitarist and one day achieving what every Indian food lover dreams of and that is being able to take the lid off the butter chicken with zero spillage!
I could sit here and write the equivalent of war and peace on the economy but what is the point? All the indicators are telling us that it’s stuffed like a Thanksgiving turkey (both here and in the US and most of the world).
The economic debates on TV and in the press has gone into massive overdrive with some fund managers and industry players now spending more time in hair and makeup than they are mulling over the outstanding opportunities that have presented themselves.
During 2002-2005 I took great pleasure in perhaps being one of the most accurate forecasters of the spot gold closing price at December 31. My secret was to simply close my eyes and try to picture the price on Kitco. I liken this to spinning three blacks in a row on the roulette table. About the only thing I can accurately predict most of the time is what line comes next in a Wiggles song! Sure it felt good, I cannot quite explain the feeling due to the fact I have never touched hard drugs but to see my name mentioned in a Dow Jones newswire article alongside the likes of Ted Butler did wonders for my ego. FIGJAM is one nick name I must have come painfully close in attaining on numerous occasions but something always made me step away from the edge.
Investors need to have an understanding of a person’s motive for putting forward an extreme argument. Are they all about selling books or newsletters? Or are they on the verge of releasing the Holy Grail, the mother of all black boxes that can predict not only future stock prices, but also scan the crowd at a nightclub and suggest the best targets for a one night stand which could save many males thousands of dollars a year. (Even more for those who put an endless supply of coins down a slot machine because the girl seated next to them is kind of pretty) Anyone who has tried to pick up a lady playing a poker machine will know what I am talking about.
The world we live in has become so “derivative”. Perhaps the Hollywood B and C listers can walk around with their excessive accessory packages (small dogs included) and mutter to themselves, “You are just so damn derivative”.
Sure Diet Coke and Coke Zero have been success stories but the only time I will buy a chocolate that tastes like alcohol or wicked strawberry is when they are in the massively discounted bin or I am so hung-over I don’t know any better.
The financial crisis is also going to put a stop to the extortion I am faced with every time I take my children shopping. Disney and Pixar have for too long raided my wallet and I don’t care how cute and cuddly it may appear, the reality is that it is cheap, overpriced crap from another country carefully made into the shape of something cute to make us feel sorry for the toy or our children.
A great band such as ACDC that has provided me with years of enjoyment and toil in learning their songs is going to get my $19 out of loyalty, but all these other fly by night artists and tweens can go forth and multiply. Very rare that you can pick up two albums by the one band (Back in Black) and (Black Ice) and barely notice the amazing 27 year time gap that exists between them!
MARTY MCFLY MOMENT
I bet some out there would wish that they could step inside a Delorean and go back in time so they could load up on stocks they knew were winners. Sure the easy way out is an attractive proposition and nothing can beat a sure fire winner right? Well the current market malaise (gentle way of putting it) has created opportunities I certainly haven’t seen before. This may sound silly but when in our recent lives were we able to buy well run mining juniors with JORC resources in the ground for less than shell and cash value? Copper and zinc have been on the nose for some time now, but are they both going to hell in a hand basket or anywhere near zero? What about the gold companies that also have ounces lying around that are also being priced for total oblivion? What is stopping everyone from this once/perhaps twice in a lifetime opportunity from making an absolute killing? My view is that we are already drenched in negativity then we have some wannabes telling us the world is ending just because they want to be one of Paris Hiltons best friends!
WHERE TO FROM HERE
Australians have now probably learnt that you should hold that garage sale when you don’t want to hold a garage sale. You BUY stocks when you don’t want to and more importantly you SELL stocks when you don’t want to.
I don’t know if we will get hyperinflation, deflation, stagflation, or a new “flation” but if Peter Lynch feels that predicting the economy is futile then maybe it is. What I do know is that the market is littered with buying opportunities across a number of sectors.
Shikes if you buy a well managed company out there in search of a mine (using geology rather than where a geologist decided to take a rest stop) chances are they may find one. Perhaps the odds are 1 in 1000 or much worse, but the general population is still trying valiantly to win Powerball where your odds are only 55 million to one!
On November 26 2008 after completing a very brief study on the speculative universe I sent the following to my clients. (Please note I have removed the names of the stocks involved and replaced it with xxxx)
Dear Client,
The mining sector is in a mess. Yesterday an announcement from xxxx (merged entity of xxxx and xxxx) announced $495m in cost savings through project cuts and deferrals. Today RIO shareholders are bracing for a significant decline if the stock tracks the action in London overnight.
With all this carnage and companies ceasing operations, opportunities are going to open up for those prepared to take a leadership role in a sector that the market eventually finds attractive. I am now extremely bullish gold and in particular xxxx and xxxx) and my rationale behind this is explained below.
There is always the risk that a sector out of leftfield and not mentioned here becomes the market darling, but last time I looked I was lacking in a perm and a column in a Womens magazine with a 1900 number. The key here is to use what is available to us in the prevailing market conditions and put it towards aggressive investing as opposed to curling up in the foetal position with the light out. In English this simply means, "Doing our best"
> For the majority of the time, there is a sector of the market outperforming. For the last month in the rush to liquidity assets across the board have been dumped without any consideration of fundamentals. This is a rare event that will end and there is a hoard of cash waiting to jump on the first signs of life. Some investors I have spoken to would prefer to wait for the event to occur and are happy to give up the first 30-40% of the upside potential.
Let’s quickly look at the sectors and discuss what could be next to run (at least the candidates). Please note that this is entirely my view
IRON ORE: Sector has been savaged once the Chinese started baulking at taking on shipments. The tech sector went through a number of dead cat bounces, however it would take something spectacular for investor interest to return in a major way. Unlikely
TECH STOCKS: Doesn't seem to be much happening here after the crash in 2000. Sure Iphones, Ipods, and Itunes are huge but it has been very quiet elsewhere on the development front. We have seen Facebook, YouTube and others but these have become a part of everyday life (especially for the tweenies). What annoys me now is that companies are developing fictitious/simulation software to calculate love ratings and to spy on your loved one with the partner tracker. I was given a subscription to FHM magazine and still marvel at how many pages there are for sex lines and mobile phone videos. Just one big shearing shed at the moment. No doubt will come again but "when" is anyone’s guess.
URANIUM: Littered with shells after companies that used the magic word in their announcements went ballistic. Fundamentally there is merit in some of these, however investors are going to need more time to get over the devastation. Unlikely
PLATINUM GROUP ELEMENTS: Have been smashed along with the car industry, but there was hardly any speculative fervour whilst prices were high. Likely to see a recovery of sorts but other sectors preferred in the short-term.
POTASH/PHOSPHATE: A small number of stocks ran like a Kenyan and to numerous others, "Missed it by that much". Market conditions made this sector go splat, and despite only enjoying 15 minutes of fame, others preferred
BASE METALS: Mine closures galore with numerous projects now shelved. OZL's announcement yesterday was a short-term killer. Sector likely to see consolidation and some good numbers from those with "grade" and balance sheets to support this. A sector where confidence will eventually return but hardly anything near irrational exuberance. Not yet
RARE EARTHS: Suffered along with the uranium sector as uranium can be a by-product. I just read the Chairman's address from xxxx and all is not lost, however he is right about funds/investors and their appetite for risk. One day but others preferred short/medium-term
GEOTHERMAL: Looked the most likely just before the world got in a major muddle. Capital raisings might be difficult, however I believe this is a sector that investors are likely to warm to (pun intended). One of the favourites and the odds would shorten if oil started a major rebound.
BIOTECH: Recent developments include cholesterol pills cutting the risk of heart attack/stroke in healthy people, and a new tea (not the Peter Foster/Sam Foxx variety) that has shown fantastic results with blood pressure and general well being. Going back we have a vaccine for cervical cancer, a new test for ovarian cancer, and now work is being done on one for skin cancer. Once news is released I would expect time to get set in similar companies or the one that announced the news. The sector has been unloved for sometime now, however it might just be coming in for some greater attention. One of gold’s biggest threats because a major breakthrough could occur at any time.
LITHIUM: One of my preferred sectors based on advances in hybrid cars using vanadium-lithium batteries. There has been considerable positive press in recent times with calls that Bolivia is set to benefit from increasing demand. Another sector that is a threat to gold and based on this I have recommended that clients have exposure to xxxx
OIL/GAS: When oil was reaching for the stars around $140us per barrel, there were calls for $200 and beyond. Now the oil price has tanked (pun intended) there are now calls for OPEC to step in and cut production to support the price. Investors are faced with numerous scenarios including peak oil, a massive oversupply of oil and the development of new technology. Likely to see a recovery but you would expect investors to remain apprehensive in the short-term.
SOLAR: If you paid attention to what Arnie did in California you must rate this sector a chance, although like some of the others it probably requires a higher oil price to see renewed interest. One sector to watch, timing the issue though as solar is likely to run with a pack and not initially on its pat.
OIL SHALE: Blink and you missed it. A sector likely to lead to a boom in koala outfits and a surge in white bucket demand. Needs oil to skyrocket and politicians to make ballsy decisions.
REGIONAL BOOM: In 1996 it was the Gawler Craton then later in 2001 it was all about Prominent Hill. To find something you need to drill in the first place and with juniors struggling to even comprehend spending money there is great opportunity for someone out there to strike it lucky with the drill bit. Once the fear of missing out comes into play, then we start hearing the term near-ology. This worked a treat in 1996/2001 and just like John Farnham will make a comeback. Pantene
COAL TO LIQUID/GASES: Had a great run with a number of stocks enjoying massive gains before it smashed into the fan. particular now Always a chance this bubble might resume, but surely the market is looking for something new. A threat nevertheless.
DIAMONDS: After rough diamond prices were hanging in there, the global financial crisis saw xxxx diamond sale fail miserably in such a short period of time. I would expect that rises in both gold and oil will help diamonds, however the shape of a recovery is a tough call. Not yet but we will wait with interest on the results of xxxx’s next rough diamond sales.
GOLD AND SILVER: US drowning in liquidity, loss of confidence in currencies, banks, debt, auto makers in deep trouble, bailouts all over the place and it is looking extremely attractive for gold. Silver gets thrown in the currency, safe haven, commodity basket to suit but would be likely to follow gold and could even outperform. The conditions for gold investment in Australia look outstanding for a small number of companies.
Silver bugs have been affected by xxxx going under, and now it would appear that xxxx may come in for further attention. (I still cannot fathom why they have not changed their name to benefit from silver interest perhaps in 2009). Whilst we may not see the rises during the 1975-1980 gold bull, everything is in place for gold stocks now that most of the other miners/explorers have shut up shop. Unless there is an improvement elsewhere the money flow for a small number of opportunities would be like trying to suck an ocean through a drinking straw.
CLEAR FAVOURITE BUT HAS LET INVESTORS DOWN BADLY IN THE PAST
What has made this analysis worthwhile has been the broad based sell off and period where companies without solid fundamentals and/or management are being found out. Markets operate on fear and greed, however I am going to repeat one of my most overused phrases for your benefit.
"FEAR IS TEMPORARY, GREED IS PERPETUAL"
My Melbourne cup trifecta dream was shattered in a photo finish. In this case my top three selections are gold, geothermal and lithium with biotech the best roughie
SPECULATIVE MARKET OBSERVATIONS
Ø Strong buying in the Australian gold sector over the last two weeks and as a result some emerging or smaller producers have seen their share prices recover 50%+ (in some cases over 100%). The buyers have not been afraid to place larger bids so this indicates to me that the orders could be coming from funds, institutions and perhaps some overseas interest. There are no signs yet of a major retail rush, although in some stocks it was the Mum and Dad investors that were being hammered by the institutional sellers on a regular basis.
Ø I noted a recovery across the board on the mining and oil page. It is now much more difficult to secure large lines of stocks as sellers retreat or have become exhausted. What were extreme bargains are still bargains but those who bought in when the selling was at its most savage have been duly rewarded.
Ø Stock discussion sites have seen a noticeable increase in discussion. Just like every other boom (and future boom for that matter) we see language such as, “Blast off”, “Get on board the trains leaving the station”, “The stock is going to a certain planet”, “My chart says buy”, “Triangle pattern forming”. Luckily for all concerned I have not yet seen comments such as, “The taxi driver who picked me up from the airport with a poor command of the English language suggested I buy the following portfolio”
Ø I have often said in my articles that bear markets are periods where the authorities try to work out what went wrong and what perhaps caused the end of the bull market. From some wide reading I have noticed a major increase in shareholder action groups wanting to either roll company Directors or request financial compensation. I do not have time to go out bush and select drill targets so I “delegate” this to someone I trust in the industry. The speculative sector was shot to smithereens and a 90% fall from the peak at one point was the norm. Passion is a wonderful thing but sometimes it might be better to accept the loss or lack of fundamentals and move on. The rapid decline in base metals prices in particular caused serious mayhem and I doubt there were many that were able to forecast such devastation.
Those that have been able to accept the events of 2008 and move on could now find themselves basking in a 40%-100%+ return in some fundamentally sound stocks that have rebounded over the last month or so.
IN CONCLUSION
In early 2008 a handful of our stocks were able to rally a few hundred percent and there were decent profit opportunities for those wanting to take them. Being gold bugs and long-term supporters, excitement started to build when the $1000 US oz level was breached, however from mid to late 2008 everything regardless of fundamentals was trashed. My stock selection model would often pick up some of the best emerging mining companies around 10 to 12c, by December 2008 some were 3c-4c and friendless.
The events of 2008 are not going to deter me one iota, nor am I going to be looking elsewhere for ideas or throwing away my stock selection model that will be continually fine tuned but has not let me down in 10 years. Even if the next bubble is something completely out of left field I have been educating myself as much as possible to be able to not only spot it fairly early in the piece but also be able to deal with it as it unfolds and I am constantly reminded that, “This bubble is different and will not end in tears”. Buffett refers to “paying your dues” and anyone that thinks they can come in to the next speculative bubble and sell everything at the top is an extreme optimist or delusional.
Often I find the best source of research is in the Chairman’s address at the AGM. Whilst reading one I came across an outstanding quote, “The share price of your company is more a reflection of the financial health of our shareholders as opposed to the strength of your company”. Investors should be mindful that most of the companies whose share prices have recovered have not changed, or had a multi-million ounce gold deposit transported and buried conveniently near the surface of one of their tenements. What has changed is the confidence level of investors and the fact that some now want to buy because others are doing so and it is a great feeling (apparently) to be part of the herd.
The backdrop for some serious speculative bubbles is one of the best you could ever hope for. The world is awash with bad news, major economies have gone to the toilet (with years of reading material under the armpit), and no doubt those struggling to pay their mortgage or bills are going to be desperate to find a way out of the financial gutter. Multiply this then factor in word of mouth and the fear of missing out and it is game on. Bubbles are wonderful yet ultimately destructive events that form and end in similar fashion to previous ones. You can have as many enquiries as you like, but let’s face it the human psyche that drives them has not changed regardless of an endless supply of history lessons.
Fantastic music can still be created using guitars (with fewer pedals than a Dutch railway station), bass, drums and vocals. (Please take note Axl Rose), and an old fashioned pushbike does not require the instrument layout of an A380 to get you from A to B. All these fancy new systems, black boxes, snake oil solutions and utter nonsense should be switched off as otherwise those who have fallen victim to the lure of the film AUSTRALIA could well find themselves in Sydney Nova Scotia!
Tony Locantro
Personal Disclosure: I have personal holdings in speculative shares in gold, silver, base metals and industrial sectors and may at times liquidate or increase these holdings as I see fit. My clients have considerable investments in a number of companies and may Disclaimer: The opinions contained in this article are purely my own and any prior to any investment decision you should contact a licensed financial adviser. Speculative shares are volatile, should be considered high risk and can result in significant financial losses. I earn fees from trading and raising funds for junior resource companies.
About the Author: I am an advisor to hundreds of small to medium investors in the speculative sector of the market and have been since November 1998. In 2001 I wrote "The Green Room" A Guide to Speculating on the Australian Stock Market and have run a number of presentations. I am currently writing my second book and it should be ready for publication in early to mid 2009. I have a small number of books left and am happy to send these out to prospective clients free of charge.
If you would like further information or are interested in becoming a client I can be contacted at tldk2@bigpond.com
-- Posted Wednesday, 7 January 2009 | Digg This Article
| Source: GoldSeek.com
