By The Gold Report, on February 28th, 2011
As Casimir Capital Managing Director Wayne Atwell sees it, further political unrest in the Middle East could push gold higher while inflation risk and sovereign debt issues in Europe are longer-term price catalysts. He also shares a few up-and-coming gold juniors that Casimir covers in this exclusive interview with The Gold Report.
The Gold Report: In a recent interview with Bloomberg you said, “Gold’s gotten stronger because it’s no longer weak.” Can you explain that concept to our readers?
Wayne Atwell: Commodities and securities tend to trade on momentum. Gold had been exceptionally strong, but a lot of investors became nervous because gold appeared too strong and people started taking profits. Then the dollar strengthened and we received some more good economic news, which drove gold down again. Gold has corrected about 7% from its high late last year. Once it breaks through its support level, it could go meaningfully lower. It was in a negative technical pattern and once there is a certain technical pattern on the charts investors start dumping gold and go short. Some people don’t believe it, but many people invest based on charts and technical patterns. If enough people invest enough money, then it works.
Gold was on the verge of breaking down further when the Middle East uprisings began and investors became a bit anxious. So far, the citizens of two Arab countries have overthrown their governments. It’s been relatively peaceful, which is great, but you can envision a scenario in which it wouldn’t be peaceful. Saudi Arabia is likely to have some difficulties that may or may not result in a change of government, and now we’re hearing about protests in Iran. The probability is high that both those countries are going to have additional issues. They may not, but unrest in the Middle East has turned the gold price around.
TGR: That parallels what you’ve described in the past as an “event-driven market” for gold. Would further unrest in Arab countries push the gold price back above $1,400/oz.?
WA: I tend to think so, I guess it depends on what form that unrest takes. Obviously, the government changes in Egypt and Tunisia were relatively peaceful. But the uprising has already spread to Yemen and Saudi Arabia—and now there’s talk of revolts in Jordan and Iran. Saudi Arabia, as you’re probably aware, is responsible for about 11%–12% of global oil production. God forbid that country has a problem—that could cause a real crisis. Fighting in the Middle East is certainly an event that could push gold meaningfully higher. You will remember what happened in October 1973 when the Arabs cut off oil to the West and the oil price went through the roof. It caused massive anxiety and a very serious recession.
TGR: What are some other events that you anticipate could move the gold price this year?
WA: In terms of events, I’m worried about the sovereign debt situation in Europe. The European Union (EU) has dealt with liquidity issues for both Iceland and Greece into 2013, but it hasn’t solved the underlying problem; it’s just dealt with the short-term issue. Unless these countries start balancing their budgets, which is unlikely—come 2013, the same problem will resurface. A sovereign default in Europe is highly probable. Spain has an unemployment rate of +20%, which is just huge. That’s an issue, too.
In the U.S. a number of municipal governments are very deeply in the red. They haven’t funded their pensions and healthcare for their municipal workers. There’s a reasonably high chance that one or more of these municipalities could fail, which would cause a high degree of anxiety and force investors to dump municipal bonds, which again would result in investors’ flight to gold as a safe haven.
TGR: In an interview with BNN, you talked about the Chinese and American economies “laying the groundwork for inflation.” How are these countries doing that and what do you believe is the timeframe for dramatic inflation increases in both countries?
WA: I’ve been going to China for 30 years and I have seen a phenomenal change. I’ll just throw out a few numbers to put the country in perspective. China consumed about 3%–4% of the world’s commodities in 1985 and now consumes 35%–45% of global commodities, which is astounding. To put that in context, from 2000–2010, global steel consumption grew at a rate of 5% a year. Chinese steel consumption has grown at a compound rate of 17%. So, in 2000, China actually produced 127 million tons (Mt.) of steel; in 2010, it produced 626 Mt. of steel. Basically, the country grew its steel industry by 500 Mt. in 10 years, providing the bulk of global growth.
On average, commodity-consumption growth averages 2.5%, yet here we have steel growing at 5% over a 10-year period and China’s steel consumption growing at 17%. It’s unprecedented. That, in turn, has caused a shortage of metallurgical coal. Met coal is breaking out and will probably reach a new high shortly because China has gone from being an exporter to an importer. Iron ore is now within about $10 of its all-time high. About 10 years ago, China was about 70% self-sufficient in terms of iron ore; now it’s 30% self-sufficient, so China is driving up the iron ore price, as well.
TGR: It’s a similar story with copper.
WA: Yes, copper made a new high last week and China consumes 38% of the world’s copper; it’s only 15% self-sufficient, so 85% of its copper comes from offshore. The rapid growth in China is being driven by the need to move people from the country into the cities, and the country consumes a lot of material when it constructs new buildings, rail lines, power facilities, bridges and ports. China is transforming from an agrarian to an urban society, having moved about 15 million people per year into cities over the last 15 years. It’ll likely have to do that for another 10, maybe 20 years.
China is only 43% urban but it will likely become at least 60%, maybe even 70% urban within 20 years. This is putting a strain on the global supply of industrial materials—prices for many of which are at or close to all-time highs, which is inflationary. The mining industry has a pattern of looking for new mines and developing new properties but when you grow at a rate that’s faster than the historical norm, it puts extra strain on the industry. We’re not going to run out of these materials but we must go look in more remote locations to find the materials.
TGR: What about inflation in the U.S.?
WA: Here in the U.S., the government is out of control. Our government spending is frightening. Last year, we had a $1.6 trillion deficit. It’s coming down a bit this year, but it’s still going to be very high. The deficit is about 10% of GDP; historically, it peaked at 4%. Government spending is about 25% of GDP. We haven’t seen these numbers since the end World War II. We’re in uncharted territory—the government is spending too large a share of our GDP. The interest on our debt, as forecast by government budget office, is going to go from $350 billion this year to $900 billion within five years. Forget healthcare, social security, Medicare or Medicaid—we’re going to add +$500 billion to the interest expense. This will drive the dollar down and result in serious inflation.
In the case of China, industrial demand is pushing up commodity prices and creating inflation. As far as the U.S. is concerned, you can’t have this pattern of government spending in the reserve currency of the world without causing serious problems. There is every reason for investors to go into the gold market to put a certain percentage of their assets in gold for protection against super inflation.
TGR: Do you think these factors will push gold to an all-time nominal high in 2011?
WA: Gold made a new high late last year. It has made a new high 10 years in a row. We think it will make a new high of $1,600 this year and $2,000 within the next one to three years. We suggest buying on a correction; it probably won’t go much lower. We believe holding 5%–10% of one’s assets in gold makes sense.
TGR: Among other financial services, Casimir Capital puts together financings for companies, many of which are junior miners. Why does Casimir focus on the junior mining segment of the market?
WA: I wrote a piece on the junior gold industry recently, which makes a number of points. One is that the denominator is obviously much smaller for the gold juniors. If both Newmont Mining Corp. (NYSE:NEM) and a junior gold exploration company find a 1 million-ounce (Moz.) gold deposit, it’s going to have a much more significant impact on the junior explorer’s share price. Both Newmont and Barrick Gold Corporation (TSX:ABX; NYSE:ABX) produce 5–7 Moz. gold annually, so only about 5 out of every 100 exploration discoveries is really of interest to them because most of the very large gold properties have already been found.
It’s extremely difficult to find an exciting new gold property. So, if you’re spending money on gold exploration, the probability is you’re going to find a small gold deposit. But in many cases, the gold majors are prospecting for new exploration properties in their corporate finance department. They’re looking at and frequently buying intermediate or small gold companies with substantial gold deposits that the majors can develop themselves.
TGR: Yes, the gold majors essentially use the junior explorers as their exploration arm.
WA: Exactly. It’s like their exploration department. Gold deposits will be in production anywhere from 5–20 years. They’re generally small. Majors have to replace their depleting resources, plus people expect growth. It’s very expensive for a major to go out and find, and then develop gold properties. If, however, a junior develops a 0.5 Moz. deposit, it doesn’t have to build as much infrastructure. Developing a property as a junior is just a lot less expensive than it is as a major.
TGR: But they’re selling the gold for the same price.
WA: Exactly. The index we put together last year showed the juniors appreciated about 49% in 2010, whereas the majors were up roughly 27%.
TGR: Could you tell us about some of the companies you’ve recently helped finance? There are a number of promising gold companies on that list.
WA: Eastmain Resources Inc. (TSX:ER) is a name that we cover. None of us owns it, as it’s a banking client. The company’s located up in Canada and has 12 different deposits. It’s going to spend maybe $9 million on exploration this year. Eastmain published some data late last week on its drill results, which was exciting. The company’s been a little slow to announce new resources, but it’s due to provide an NI 43-101 here shortly. When you look at what the company’s announced and connect the dots, it’s likely that several of these deposits will turn into something pretty exciting.
Eastmain’s goal is to find a resource, start the environmental permit application process and sell; it’s not going to develop these deposits. It’ll simply define, develop and sell the property. One scenario could be that Eastmain gets acquired, spins many of its assets into another company and starts all over again.
TGR: Much like Virginia Mines Inc. (TSX:VGQ) did a few years ago when it sold the Eleonore gold deposit in north-central Quebec to Goldcorp Inc. (TSX:G; NYSE:GG).
WA: Exactly.
TGR: What are some other companies you cover?
WA: Golden Predator Corp. (TSX:GPD) is pretty interesting. Again, it’s a banking client and none of us owns it. It’s a very exciting company with a number of deposits in the Yukon, which is a rather new territory for gold exploration in the sense that the Yukon has not had the money spent on it that a lot of the places in North and Central America have. I don’t want to say it’s virgin territory but, to some extent, it’s undiscovered. In the Yukon, there’s a lot of what we refer to as “placer gold.” If you have a gold deposit and it gets worn and weathered, the flakes and pebbles roll into the creeks and rivers. Then miners and prospectors mine the gold out of the creeks.
The point is that if it’s in the streams it came from somewhere else. So, they follow the riverbeds and find out where the gold stops being attractive and chances are that’s pretty close to where it came from. A lot of deposits are being “reversed engineered” by virtue of the gold in the streams. Golden Predator has uncovered some very exciting properties but it’s early days for the company. It’s got some huge properties that have a great deal of potential. Golden Predator is a pretty exciting company.
TGR: Golden Predator has some royalties, too.
WA: Right. Golden Predator has a number of properties that it’s sold or made available to other miners on which GPD gets paid a royalty. That’s going to provide some nice value for the company, as well.
TGR: What are some other names you cover that you believe have some promise?
WA: We think Richmont Mines Inc. (TSX:RIC; NYSE.A:RIC) up in Canada is pretty interesting. It’s not a banking client; it’s an older company that’s been mining gold since the 1990s. The former management wasn’t very aggressive, so growth was modest at best. The story wasn’t too exciting. The company now has new management and some pretty interesting drill results. It has about three or four irons in the fire.
It’s just put out some numbers on one property called Wasamac that look pretty interesting. With Wasamac, we think Richmont could add meaningfully to its resource base. If it could double or triple the resource, we think it’ll put that into production. It’s a pretty small company with 85,000 oz. (Koz.) of production. With the Wasamac discoveries, there’s a reasonably good chance the company could ramp-up to 150 Koz. And Richmont’s board has set a goal of adding a 100 Koz./year acquisition. So, here’s a sleepy company that hadn’t been setting the world on fire but now has new, more aggressive management and numerous irons in the fire. We think one or two of those will turn into something pretty exciting. It’s quite a good story that hasn’t gotten a lot of attention.
TGR: Before we let you go, could you give us your outlook for gold over the next few months?
WA: Let’s go back to the event-driven motivation for moving the gold price. The events we don’t yet know about will likely determine the direction of the gold price. The underlying momentum is positive when you look at the U.S. budget, government spending and Europe’s sovereign debt problems. And the problems that governments have created will only get worse as populations age and Social Security obligations become greater—that’s certainly a problem.
We’re all aware of those slower-moving issues, but I think what drives gold in the short term are events in the Middle East and any sovereign debt default. Unless there’s a major unexpected event, we’ll probably see the gold price break out to a new high in the second quarter. We’re roughly halfway through the first quarter now, so we look for the gold price to be rangebound the next two to six weeks before breaking out in the second quarter. But it’s subject to material impact by unexpected events, which always have a way of happening.
TGR: Thank you for talking with us today, Wayne.
Mr. Atwell has more than 35 years of experience in the field of investment analysis for the metals and mining industries. He currently serves as a managing director of Casimir Capital L.P. From 1991–2006, Mr. Atwell was a managing director at Morgan Stanley where he was the Global Group Team leader in equity research and built and managed a 12-member global metal and mining team of analysts. From 1983–1991, Mr. Atwell was a VP at Goldman Sachs covering the metals and mining industries. He was also a VP and principal in the privately held Davis Skaggs, a regional research firm, from 1977–1983. And from 1969–1977, he worked for Merrill Lynch as a senior metals and mining analyst. Mr. Atwell has toured 200 mines and 300 steel mills on six continents. He was selected as one of the 10 best buy-side stock pickers by Institutional Investor magazine several times and was rated as one of the top analysts in metals and mining by Institutional Investor and Greenwich Associates for more than 20 years. Mr. Atwell graduated from Pennsylvania State University in 1969 with a degree in mineral economics. He earned his MBA from the Stern School of Business at New York University in 1974.
By Claus Vistesen, on February 28th, 2011
 As the debate between inflationistas and deflationistas appear about to rev up again, I thought that I would try to pen to virtual paper and sketch my thoughts on the matter.
The specific catalyst for looking into this is naturally in part the fact that oil looks set to do a round of catch-up with the rest of the frothy commodity space but also this piece by the Pragmatic Capitalist citing David Rosenberg on the coming deflationary shock;
David Rosenberg makes some interesting comments in his morning note regarding the price action in US Treasuries. He cites the rally as a sign that the world is concerned about the deflationary shocks from rising oil prices:
“It is also interesting to see how government bond markets are reacting to the oil price surge — by rallying, not selling off. In other words, bond market investors are treating this latest series of events overseas as a deflationary shock.”
I think Rosey has this one spot on. The risk of rising oil is not a hyper inflationary spiral, but rather a deflationary spiral. Oil price increases are cost push inflation of the worst kind and for a country still mired in a balance sheet recession that means spending gets diverted which only gives the appearance of inflation in (highly visible) gas prices while creating deflationary trends in most (less visible) other assets (have a look at today’s Case Shiller housing report for instance).
Hang on for minute then. Do you mean to tell me that we have been running around worrying about QE2 leading to bubbles all over the place while the real danger is continuing and entrenched deflation? Well, yes this exactly what this means, but note the important distinction between the US (and the OECD) and emerging markets. Greed and Fear kicks off this week with the following point [1];
(…) an oil-led commodity spike would clearly cause an intensification of the current inflation scare which has been hitting Asia of late with India the most vulnerable market. Still, as occurred in 2008, such a spike is likely to have the perverse effect of short circuiting the inflation scare in terms of duration. This is because sharply higher oil and food prices will hit current growing optimism on the US recovery. For ordinary Americans are not seeing the income growth to offset such prices increases.
This point is echoed in BCA’s chief economist Martin Barnes’ recent mischief which exactly sets out to clear up the (non)-threat of inflation in the global economy.
Despite investor angst, the above analysis paints a relatively benign inflation picture for the developed countries. The policy mix of large fiscal deficits and highly stimulative monetary policies certainly appears inflationary. However, there currently is no excess monetary growth, and the pass-through from higher commodity prices is weak given ongoing slack in the economy.
(…)
The emerging economies are in a very different position [from the OECD]. All three approaches to inflation are telling the same story: There is excess money growth and the absence of slack implies that higher commodity and energy costs will push up wages and the overall prices of goods and services. Thus far, inflation is edging higher, not spiraling out of control. Nevertheless, policymakers need to get ahead of the curve by raising rates and, where necessary, allowing exchange rates to appreciate.
A large part of Barnes’ analysis is based on the notion of slack and thus the most illusive of all macroeconomic concepts, the output gap. But the argument is really quite simple. For cost push inflation to lead to higher overall inflation there must be an inbuilt tightness in the economy for this to happen. This is to say that workers must be able to pass on rising prices to larger than expected increases in wages and firms must observe strong final demand in order to be able to pass on the increase in prices to consumers. Barnes’ argument in nutshell is then that while capacity constraints might be an issue in the emerging world it isn’t in the OECD still mired by a balance sheet/deleveraging recession.
This argument is interesting in relation to the notion of unintended consequences from low interest rates in the developed world and just what output gap central bankers should look at then. Enter James Bullard, president for the St Louis Fed and the discussion (hat tip FT Alphaville) of the global output gap vis a vis the US output gap.
The argument here combines the two point made by Barnes in the sense that while the analysis of the US economy might certainly merit low interest rates for a long time given the excess slack of the economy, Bullard explicitly mentions the potential of adverse effects from ZIRP at the Fed due to an increasingly neutral to positive global output gap. Here is the FT’s John Kemp with the gist of Bullard’s speech as he sees it;
It is the first time a senior official at the U.S. central bank has acknowledged global capacity issues rather than a narrow focus on U.S. unemployment and capacity utilisation might give a better indication of where inflation is headed.
The obvious question here is whether the US should care at all here about global capacity issues, but given my endorsement of Rosenberg’s point noted above I obviously think they should. A central bank can argue up to a point that rising headline inflation should not be a reason for assuming a rise in underlying inflation pressures, but it is evidently obvious that as if an oil price rising to 120-150 USD (even for a short while) becomes a trigger for an even strong deflationary shock, then the original argument for low interest rates become very difficult to make.
And finally, just to make sure we get all sides of the argument we should never forget that stagflation is also looming as an increasingly likely outcome in parts of the global economy (hat tip: Global Macro Monitor).
(quote from the Economist)
Historically, the margins of retailers and manufacturers have been remarkably stable, says Carsten Stendevad of Citigroup’s corporate-advisory arm. If commodity prices continue to rise, they will eventually be passed on to consumers one way or another. After years of goods getting cheaper, consumers may have to start getting used to everyday higher prices.
This highlights a crucially important issue namely, the underlying trend of inflation in the global economy. It stands to reason that if the trend of global headline inflation is up due to structural capacity issues, an increased prevalence of adverse supply shocks and low interest rates, then bouts of headline price volatility may incrementally find its way into core prices and in a deleveraging world facing the effects of a balance sheet recession it is tantamount to stagflation.
What is the take then?
If the small tour above of the informed punditry serves to set the stage for general argument what is then the important points to take away? Below I offer my suggestions.
- The stronger the meltup the stronger the correction. This is a classic dictum in the world of finance and translated into the inflation v deflation debate it means that the stronger and longer the outbreak in commodity prices last, the larger is the risk of a deflationary correction and we are then talking about a re-run of 2008. It also raises important questions regarding the policy tools used by global central banks. Bernanke and co can hardly claim, ex post after the crash, that they were right not to react to rising headline inflation when it stands to reason that the low interest rates were the main source of the commodity melt-up in the first place (and indeed will also be the source of the next meltup a couple of years from now). In this sense, it almost amounts to a self-fulfilling prophecy that as the wall of lingering inflation and stagflation rise to a zenith you also know that the time is nigh for the correction.
- Where is the capacity? Bloomberg recently ran a number of stories pushing the story that while emerging markets were the strong performers in the immediate wake of the crisis, the fortunes were now turning to the US and developed markets. On the surface, this is undoubtedly true and a rotation out of emerging markets into developed markets remain the main consensus trade at the moment. Structurally however this masks a more fundamental question of the so-called emerging economies’ ability to sustainably absorb all the excess liquidity and savings which is trying to find an outlet. The evidence from 2008 and the current melt-up suggests that while the long term story of emerging markets as the new drivers of global growth remains intact, this is not a linear process. Indeed, we are presented with some grave questions as to the collateral damage from the process of global rebalancing that is bound to take place. Some part of the immediate inflation issues could perhaps be solved by allowing a more gradual appreciation of a broad basket of EM currencies to the USD, but this then pushes the problem further towards the question of just what magnitude of external borrowing the emerging world can be expected to do to transfer growth to ailing economies in the OECD. In addition, there is a real risk that higher interest rates coupled with an open capital account would lead to an exacerbation of hot money inflows.
- Volatility around a Trend? One of the most crucial questions to answer in this debate is whether the underlying trend of prices is one of inflation or deflation in the developed world. Based on the reaction by monetary and fiscal policy makers they squarely believe in the former. But volatility has a cost independent of the trend around which it operations. Given that we seem to be looking at a re-run of 2008 it must be factored in that the volatility and speed (and subsequent decline) of commodity prices are a problem in itself. The famous loss function which must then be metaphorically minimised is the one which plots the trade-off between the cost of recurrent flares of commodity prices and the need to act as a counter trend to the destructive forces of a balance sheet recession. Here, it becomes a rather serious issue if one of the main collateral effects of providing buckets of liquidity is to engender strong commodity melt-ups with a subsequent deflationary outcome. Could it be that we are then talking about two trends here? One which is the underlying structural forces of deleveraging and the second is the structural issue of too much capital chasing too little yield proxied by the fact the growth to fight deleveraging must largely come from external sources.
- Stagflation coming to a town near you? As I am currently living in the UK I think I am as good as any to talk about the spectre of stagflation. Whether or not you agree with the BOE in its rather complacent view of inflation (given its own inflation target policy mandate) it seems to me that the UK citizens may be the first in the OECD to really experience what a hike in indirect taxes as well as rising global commodity prices mean. Again, you could of course note that if this all ends in a deflationary implosion in the end it is a matter of semantics, but these are then semantics which matter. More generally and going back to the point made by the Economist, if the general trend in global headline inflation for structural reasons is up then one would find it hard to believe how this would not act as a stagflationary trend in a world where demand pull inflation and growth are kept at bay by deleveraging. I want to see entrenched prices before I believe it and I still concur that this is playing out largely as in 2008 (with a deflationary outcome), but in some economies it might be different and the UK is a good candidate.
- Inflation today, deflation tomorrow? The extent to which we are watching a rerun of 2008 this is what we are going to see but I also think that the further we get down towards the path where low interest rates become structural parts of the macro picture the risk is that inflation expectations get entrenched. I am not talking in the global economy as such, but perhaps in individual economies and this divergence between those still stuck in deflation and those experiencing stagflation is a dangerous cocktail.
- Kill the speculators!? I remember during the heaty days of 2008 how a large part of the observed punditry slowly but surely came to the uniform opinion that high commodity prices were here to stay and that obviously speculation had no hand at all in this. Apparently, if oil prices went up 100% over the course of 6 months, then it was all a question of fundamental supply and demand. Like Fischer and his famous remark on US stocks reaching a permanent plateau it lasted until it didn’t. In short; obviously speculation plays a part. I would have thought this to be blatantly clear. Commodities of all forms and kinds have been thoroughly securitised which is exactly what allows such a melt-up in the first place. But this does not mean that the speculators should be lined up and shot let alone that they are a force of evil. I any case, what speculators are you talking about here? What about China (and other sovereigns) stockpiling commodities in turn bidding up prices? Should these be regulated and how? And if you really want to have a go at the masters of the universe of Wall Street and the City, would that really change a bit? Speculation in the form of what Sarkozy et al waffle about is a phantom menace and the real issue here is more structural. But speculation … indeed, lots of it! Finally, I should note that this time around we have had a number of concurrent and severe supply shocks to especially soft commodities which clearly have exacerbated the melt-up. Further, the extent to which adverse weather phenomenon become more prevalent it will add volatility to the commodity edifice regardless of what markets and regulators do.
Which door should you pick then to get it right on the global economy? You would not be surprised if my answer here is ambiguous. At the moment, I am leaning towards a 2008 re-run but precisely because it appears to be a re-run it raises some additional important questions. Consider then the following form one of my friends;
The underlying problem is that the Emerging Markets as a group (while many of them are long term growth positives) simply cannot withstand the short term massive funding injection without food prices getting out of control. Food prices getting out of control produces, as we are seeing, political instability, and this leads investors to withdraw.
As noted above, this is then a issue of short term capacity to add as magnets of yield as well as long term capacity to rebalance the global economy. But this is the trend then, the speed and volatility matters too as another of my friends pointed out;
I think rates of change in oil price matter a lot more than the level. People adapt, but they can’t adapt quickly. We need to watch the speed of the oil price move. If it moves quickly, that could be a huge drag on growth like 1980, 1991, 2008.
I think these two arguments combined are very, very important. I would hold lingering deflation to be a near certainty in the European periphery and Japan where it never left. I also see many of the worst affected economies in Eastern Europe suffering a deflationary outcome. In the US, we will see and in the UK stagflation is a real threat if only because inflation may soon feed into expectations on a sustained basis. For the emerging economies as a whole they will be fighting inflation for a long time to come especially as the hunt for yield continues. In the end then, picking the door may depend as much of your time frame and unit of analysis as anything else.
—
[1] – I get G&F and a few selected of BCA’s publications through a well connected network of analysts and economists, but I cannot (obviously) reprint the whole editions here for copyright reasons.
By B.P.T., on February 28th, 2011
At 8:30 AM EST, the monthly Personal Income and Outlays report for January will be released. The consensus for Personal Income is an increase of 0.4% over the previous month and the consensus Consumer Spending index change is an increase of 0.4%.
At 9:45 AM EST, the Chicago PMI Index for February will be announced. The consensus index value is 68, which is 0.8 points lower than last month, but is still well above the break-even level at 50.
At 10:00 AM EST, the value of the pending home sales index for December will be announced.
At 3:00 PM EST, the Farm Prices report for January will be released, giving investors and economists an indication of the direction of food prices in the coming months.
 Join the forum discussion on this post - (1) Posts
By The Energy Report, on February 25th, 2011
 West Texas Intermediate (WTI) oil is trading at a significant discount to Brent crude, the latter of which is used to price two-thirds of globally traded crude oil. WTI, on the other hand, is the commodity underlying Nymex futures contracts and has, more often than not, traded slightly above Brent. Although the current Brent/WTI divergence is widening, disruptions in equilibrium don’t tend to last. “True energy demand,” says Raymond James Director of Energy Research Marshall Adkins, “will ultimately bring WTI in line with global oil prices.” Marshall reveals how equity investors can profit from oil service providers in this exclusive interview with The Energy Report.
The Energy Report: At what price per barrel of oil does the economy start to suffer? I guess that’s a trickle down to the gasoline question. Consumers seem comfortable with gasoline prices close to the $3/gallon range right now; but what’s the breaking point? If you could address both the oil and gasoline, that would be great.
Marshall Adkins: There’s no set number. It’s a graduated scale that becomes more painful, and then demand suffers more as prices rise. But many other variables also go into that calculation; when new all-time highs are set, it seems more painful than revisiting old highs. In 2008, for example, we saw oil prices ramp-up to $145/barrel. As the price rose from $100–$145/bbl., we saw meaningful destruction in U.S. demand for oil and oil products. But because we’ve already been there, I wouldn’t expect to see as great a demand reduction at the same price levels we saw in 2008. So, it’s both a function of absolute price and how long it stays at that price. But, summarizing that into a more succinct answer, I would say that as we move up into the low $100s, we’ll start seeing it cramp U.S. consumption. I’m focusing just on the U.S. here because, given the devaluation of the U.S. dollar and numerous other currencies, many countries don’t actually see the same oil price increases we’re seeing here; so, you get a whole different pricing dynamic there.
Switching to gasoline, what I find interesting is that if we go back to ‘08 when gasoline prices surged to the $3/gallon range, we saw CNN and all the news networks interviewing disgruntled consumers at the gas pump who were eager to blame evil oil companies for the high prices. It was in the news every day, and people were acutely aware of gas surging to $3/gallon and the pain it inflicted upon the economy. Here we are above $3/gallon again—at roughly $3.15 depending on where you are—and nobody’s interviewing people at the gas pump. So, it just doesn’t seem as painful a situation now that we’re again pushing toward $100/bbl. crude right now.
TER: Once you’ve tested those levels, you don’t have the shock value anymore.
MA: Yes. The shock value is certainly lower, no doubt. That also brings up another important point. When we quote oil prices today, we’re quoting West Texas Intermediate, which is priced out of the Cushing hub in central Oklahoma. Currently, there’s a meaningful bottleneck of supply in the middle of North America. We have a lot of increased oil production out of Canada, the Bakken and the Permian Basin that all congregate in Cushing, Oklahoma; and at the current time, we don’t possess the ability to really move that oil out.
So, Cushing and WTI are trading at a huge discount to all other oil prices around the world. In fact, there was an unprecedented $17 discount between WTI and Brent at the February 17 close. So, you’ve got to be careful about what price we refer to today because there’s a massive disconnect from what we normally look at. Now, gasoline prices are going to be more closely related to the global price of crude, which is well over $100/bbl. right now in almost every area, and that’s driving the roughly $3.15/gallon gasoline number. It doesn’t seem to be a major impediment, yet; but in ‘08 as we went through these same levels, demand growth was already beginning to slow meaningfully due to pricing.
TER: What about arbitrage opportunities between WTI and, say, Brent? Are there opportunities like that for investors?
MA: No, because the problem is structural in nature. The average investor can’t take advantage of structural imbalance. Now, the companies involved with transporting oil will look at that price differential and ultimately react by building more takeaway capacity. However, this is very similar to the disconnect that occurred in Rocky Mountain natural gas prices 5–10 years ago where prices always traded at a huge discount in the Rockies versus Henry Hub because there wasn’t takeaway capacity. Once we built the Rocky Mountain Express Pipeline, we saw equilibration between the two. So, once you build the pipeline takeaway capacity, that arbitrage (arb) opportunity will disappear.
TER: Do rising oil prices inflict as much pain on China’s economy as they do on North American and other economies?
MA: Sure, energy is essentially a tax on the economy whether it’s U.S. or Chinese. Obviously, to the extent that China allows the yuan to appreciate versus the USD, it doesn’t see the same pressure we do in percentage terms. But, yes, it’s going to be a drag on China’s economy as prices go higher. The difference between the U.S. and China right now is that it’s seeing meaningful inflation across the board, a lot of which is driven by high energy prices.
TER: At what level do we see the price of energy putting enough pressure on the economic structure to force us into alternative sources of energy?
MA: That’s a really good question, and that’s really the most important issue. At what price can we develop solar, wind and other sources of energy to offset the high prices? As a transportation fuel, there aren’t a lot of short-term alternatives. Clearly, we’re making a push toward electric vehicles (EVs) but at the end of the day those are still a long way off from being practical substitutes for gasoline- or diesel-powered cars and trucks.
So, what are the other alternatives? Solar, at $150/bbl. oil, certainly works; wind, maybe not quite as much. But to the extent that you start to move up to the mid-$100 level, people will start to find alternatives. EVs will become more attractive, and people can afford to buy more expensive EVs and more expensive battery systems, etc. It’s the same with solar and, to a lesser degree, wind. Yes, there will be alternatives that become more attractive and that’s the way a free market economy should work. Prices will drive the rationality [of moving to alternative energy sources] and not political edicts that always seem to fail. So, there will be a solution to high oil prices—and that solution is high oil prices. It’ll crimp short-term demand and it will allow alternative sources of energy to be exploited and brought to market on a long-term basis.
TER: Did you attend the North American Prospects Expo this year?
MA: Yes. It has obviously turned into a huge industry event. The exploration and production (E&P) business in the U.S. has been transformed on an unprecedented level over the last five years. What do I mean by that? On the natural gas side, well productivities are up a staggering amount. These horizontal gas wells are 5x–10x more productive per well than they were just five years ago. We’re starting to see the same in U.S. oil formations where we’re transforming our ability to reverse what has been a 30-year decline in U.S. onshore oil production. The application of horizontal and hydraulic-fracturing (fracking) technology has enabled us to access reserves that previously weren’t accessible on an economic basis. The NAPE is just one offshoot of this larger phenomenon of a very healthy E&P business in the U.S., particularly on the oil side. That should continue unless the government creates impediments to it.
TER: Marshall, what’s the outlook for capital spending in 2011?
MA: We think it’ll be very robust on the oil side, up nicely. On the gas side, we think it’ll be down just because we brought on so much gas that gas prices are going to be relatively depressed. So, it’ll crimp the price flows on that side but oil is going to be very healthy. And we’re looking for a modest increase in capex over the next year in the high single-digit range.
TER: Regarding gas, do you expect producers to quit drilling and explorers to quit exploring when leases begin to expire?
MA: First of all, the amount of drilling associated with leasehold activities is likely overstated by a lot of people. It’s a piece—but not a very big piece—of the puzzle. What has surprised us over the last four months is the amount of drilling in dry gas areas like the Haynesville Shale, which we assumed would fall off very sharply. We’re actually seeing an increase in the percentage of wells being drilled not to hold production, but rather being built on existing acreages already held by production despite weak gas prices. This is due to a combination of factors, including high liquids content in “oily” gas plays, which makes sub-$4 gas irrelevant, the fact that some gas plays work at $4 gas and the increase in joint venture (JV) agreements and pre-funded drilling programs. So, yes, the rig count will be sticky on the way down, despite relatively low gas prices. We don’t expect a collapse in the gas rig count or gas-drilling activity.
TER: What about oilfield-service pricing? Is this a service provider’s market?
MA: We’re seeing pricing improve in anything related to horizontal drilling. Certainly, pricing has been very robust in pressure pumping and high-end land rigs are seeing solid price improvements. So, it’s a relatively healthy environment, but not across the board—it’s really more related to products and services associated with horizontal drilling activity and production.
TER: What did you think of President Obama’s State of the Union address in January? He made some comments about energy independence.
MA: Well, we’ve obviously been targeting energy independence since the Carter days and yet we’ve done nothing but become more dependent on other sources. The reality is that it’s very difficult for the government to mandate a change; change has to be backed up by financially based market incentives. Pure and simple, the energy consumer and/or producer will react when prices go up. So, leave it to the free market and this thing will solve itself over time. I think it’s going to be very difficult for the government to mandate that we switch to a certain type of EV. It has never worked in the past. It won’t work this time and it doesn’t help to demonize the oil and gas companies, as that’s where a lot of employment is coming from in a very low-employment environment.
Oil and gas are among the true natural assets we have here, and I thought Obama demonized the domestic energy business. In his State of the Union address, he noted that all of us could agree oil companies are making too much money. Since when does the president decide who makes too much money? Can we all agree that Apple makes too much money because it’s a virtual monopoly? Maybe, maybe not—but I assure you, the margins and profits in the energy business are meaningfully lower than that of Apple or Microsoft, which the administration chooses not to demonize, yet. So, I think the goal is admirable but it has to be backed up by the market wanting and needing it. When that happens, change will occur and the government won’t be able to mandate it successfully. It’ll try because oftentimes the government thinks it’s more powerful than it is; the market is the ultimate arbiter.
TER: Are there some companies that look particularly good to you now? Oilfield service, E&P, vertically integrated or whatever you’d like to discuss.
MA: I would like to stay focused on the area I cover, which is oil services. If I had to mention just one name, it would be National Oilwell Varco, Inc. (NYSE:NOV)—the world’s dominant player in building energy infrastructure for drilling and exploration. NOV provides the equipment rigs used to drill around the world. Currently, the energy business is going through a massive reinvestment phase, replacing 20- to 30-year-old rigs with new technology and capabilities—and NOV is the go-to name for most people that want to build a new rig or new rig equipment. I think we’re in the early stages of infrastructure buildout right now, and National Oilwell Varco will be the beneficiary of that buildout for many years to come. So, if I had to steer people to one, and only one, name it would probably be NOV.
TER: Are there any others you’d like to mention?
MA: We like the oil service and diversified companies—names like Halliburton Co. (NYSE:HAL), Weatherford International Ltd. (NYSE:WFT), Schlumberger Ltd. (NYSE:SLB) and Baker Hughes Inc. (NYSE:BHI). All these companies have excellent international exposure, which we see benefiting from the high oil prices around the world. We think that’s a longer-term sustainable trend. These companies are not expensive when compared to the broader market, and they should grow earnings meaningfully higher than the broader market over the next five years. So, after NOV would be the diversified oil service companies.
TER: Last question—we’ve seen some increase in merger and acquisition (M&A) activity in the energy sector. Do you expect this to pick up?
MA: I don’t know if it’ll pick up because it’s been awfully active recently, at least in the offshore drilling sector, with Ensco PLC (NYSE:ESV) buying Pride International Inc. (NYSE:PDE) and Hercules Offshore Inc.’s (NASDAQ:HERO) acquisition of Seahawk Drilling in recent weeks. Do we expect that to continue? Yes. I think we’re going to see a lot of M&A and a lot of companies raising capital to facilitate future growth.
TER: Thank you, Marshall; I’ve enjoyed meeting you.
MA: Well, thank you for the time.
Marshall Adkins focuses on oilfield services and products, in addition to leading the Raymond James energy research team. He and his group have won a number of honors for stock-picking abilities over the past 15 years and the group is also well known for its deep insight into oil and gas fundamentals. Prior to joining Raymond James in 1995, he spent 10 years in the oilfield services industry as a project manager, corporate financial analyst, sales manager and engineer. Marshall holds a B.S. degree in petroleum engineering and an MBA from the University of Texas at Austin.
By Christopher Briem, on February 25th, 2011
New PSU report on state tax implications of Marcellus Shale: http://pubs.cas.psu.edu/FreePubs/pdfs/ua468.pdf
By Ajay Shah, on February 25th, 2011
Today, on NSE, derivatives trading showed the following numbers:
| Product class |
Turnover (Billion rupees) |
| Index futures |
353 |
| Index options |
1981 |
| Stock futures |
391 |
| Stock options |
48 |
| Currency futures |
178 |
| Currency options |
30 |
| Total |
2981 |
This is really something: Rs.2.98 trillion notional rupees in a day. It’s starting to sound like a real market.
This data shows an incredible domination of Nifty futures and options. It also shows the massive success of Nifty options.
One element of the options to futures ratio with equities lies in the securities transactions tax, which has distorted the market in favour of options. In the case of currencies, this distortion is absent. Hence, the ratio of options to futures that we see there should reflect the undistorted applications of the products by the market.
Now that the NSE trading community has skills on options, the question arises: Do these skills readily port over into currency options? I believe they should: every good Nifty options trader is a good INRUSD options trader. The same options knowledge should pretty much carry over from equity stock or equity index options to currency options. In fact, with small modifications, the algorithmic trading that is being done on the equity options should readily deploy into the currency options.
So what does the evidence show? Currency options trading (INR/USD only, says the RBI) started on 29 October 2010. I have 117 trading days of data for the open interest of INRUSD options. Let’s compare the rise of open interest starting from contract launch:
The early days of currency futures trading was hard work: the open interest got up to $0.2 billion and stopped growing. In contrast, open interest with currency options has grown very fast in these 117 days. At each contract expiration, it has been much bigger than the previous one.
As a consequence, INRUSD options open interest is now bigger than INRUSD futures open interest, even though the latter has been a market that has been around for much longer:
This is consistent with the story that the Nifty options brainpower would yield a rapid establishment of the currency options market. This also tells us that not all of the domination of equity options is a distortion caused by the differential securities transaction tax.
This rise of the options and futures open interest has done a great deal for the viability of enterprise-scale economic risk management using the currency futures and options, given that the position limit is linked to the overall open interest. The limit is now looking big enough to be of interest to even the biggest Indian companies.
Some older materials that you might like to see:
 
By B.P.T., on February 25th, 2011
At 8:30 AM EST, the preliminary GDP report for the fourth quarter of 2010 will be announced. The consensus is an increase of 3.4% in real GDP and an increase of 0.3% in the GDP price index. The real GDP estimate is 0.2% higher than the advance value for the fourth quarter of 2010, and the GDP price index is the same.
At 9:55 AM EST, Consumer Sentiment for the second half of February will be announced. The consensus is that the index will be at 75.1, which is the same as the value reported in the first half of the month.
Join the forum discussion on this post - (1) Posts
By The Gold Report, on February 24th, 2011
Cranberry Capital Inc. President Paul van Eeden still favors the natural resources sector above all others because they are “absolutely central to our standard of living, our quality of life and the technological progress we’ve made.” Despite the dangers, frothiness of equities and absence of fundamentals to support current valuations, he says, “there are always opportunities in the market. . .you just have to recognize them.” Find out where Paul believes investors can find good value in the current market in this exclusive interview with The Gold Report.
The Gold Report: Paul, in January 2008, you saw the impending crash and told investors to sell everything. Three years later, what are your feelings about the economy?
Paul van Eeden: A lot has changed in three years and the recession was not as deep or severe as I had expected. Many people have been adversely affected, no doubt, although it could’ve been much worse.
I’m not an apologist for central bankers or the Federal Reserve, and I don’t believe in fiat money or that the Fed has a role to play in our economy. But in the context that they exist, and given Bernanke’s job description, I think he did a good job during the crisis. Of course, what we really need is for the system to get flushed clean. But that would be far less attractive to the majority of the population to hold much hope for its occurrence. After all, a democracy is really nothing more than mob rule; and in this case, the Fed saved the mob.
TGR: Many people believe all the Fed did was kick a larger depression down the road.
PvE: I agree that it is merely postponing the inevitable, but that is the Fed’s job. It’s nothing new—it’s what central bankers do. While central bankers are part of the banking system that debases our currency and, therefore, is partly to blame for some of our troubles, it certainly isn’t solely to blame.
Part of the blame also lies with all of us—people who buy cars and houses they can’t afford or go on shopping sprees with credit cards they cannot repay. Just because we have fiat money and people manipulating it doesn’t mean we have to live above our means. It’s very convenient to blame Bernanke for debasing our currency, banks for making us offers that sound too good to refuse and credit card companies for issuing cards to people who aren’t creditworthy. But does that mean we have to partake in those activities? No. We have to take personal responsibility for our actions. Only by taking responsibility for our actions can we figure a way out of this. Stated another way, as long as we rely on others to solve our problems and live above our means with the expectation that somehow, someone will fix it for us later, we will never get out of this mess. It will only get worse.
TGR: You mentioned that you don’t think the situation will get much worse. If it’s not much worse, what are we postponing? The recovery?
PvE: Yes. The pain could’ve been worse, and I think we avoided that. But what we really postponed is the recovery. The way I see it, the central bank robs our future living standards in exchange for a higher living standard today by debasing our currency and reducing the value of our future savings and earning capacity. We do the same thing as individuals by taking on too much debt. When you borrow, all you’re doing is spending today what you hope to earn in the future. You’re trading a higher lifestyle today for a lower quality of life in the future.
TGR: So, if we avoided even greater downside against a more prolonged recovery, on balance isn’t that better than having to dig out of an even greater depression?
PvE: No, because many problems creep in. The business cycle is like a lifecycle; you can’t change it. People make mistakes with their money during periods of euphoria and optimism in the economy. There’s malinvestment, gambling, speculation and misallocation of capital. In a depression or periods of conservatism, those misallocations of capital are corrected because those who were too speculative and perhaps took on too much debt go bankrupt. Production assets transfer from irresponsible people to more responsible people, who then build businesses back up, hire employees and increase our living standards. That’s what we need. Keeping irresponsible people in business, forgiving their loans, debasing the money supply and/or reducing interest rates so they can make loan payments keeps the assets in the hands of irresponsible people who will continue to manage those assets in a sub-optimal fashion, until one day the party really comes to an end for good. That’s not how to build wealth.
Misallocation of capital, speculation and malinvestment wastes both human and natural resources, including energy, on nonproductive enterprises. By enabling nonproductive enterprises and wasteful people to continue doing what they’re doing, the Fed, governments and policymakers are postponing our ability to be more economically productive and thus are a hindrance to improving our standard of living. It gets much worse when you factor in the wasteful nature of government make-work programs (i.e., projects, such as digging holes and filling them up again, that have no useful purpose other than to make work).
TGR: Despite all that, the market has had an incredible rebound and seems to be continuing upward.
PvE: The market’s rebound, in my opinion, is neither here nor there. We have to look at the structure of the economy to determine whether the improvement we’re seeing is sustainable. Take the unemployment rate, for example. The authorities would have you believe it is stabilizing and showing signs of improvement. But a lot of those signs are statistical anomalies because they don’t account for people who’ve abandoned their job searches. So, in reality, the labor situation hasn’t improved—it’s deteriorated. If you look at the U.S. economy fundamentally, it isn’t actually getting better. We’re just getting more used to the way it is. On that basis, the rally in equity markets perhaps has more to do with the decline in interest rates than fundamental improvements in the economy. So, I’m still very nervous and continue to see a lot of risk in both the equity markets and economy.
TGR: As an investor, how do you integrate that thinking into your investment strategies?
PvE: By being very scared. It’s healthy to be scared when you’re an investor because it helps you avoid some of the mistakes you might make otherwise. But being scared doesn’t mean you can’t be an investor and deploy capital in these markets. Despite tremendous rallies in both equity and commodity prices, every now and then I come across a business that’s selling for an attractive price. In my investment business, that’s what I’m looking for—value at an attractive price. You can still find instances of that in the market.
TGR: Even now?
PvE: They’re always there. I used to work for Rick Rule and one of the first things he tried to teach me was that opportunities are like commuter trains. If you miss one, there’s another one coming about five minutes behind it. Sometimes there are more opportunities than at other times, but there are always opportunities in the market.
TGR: So where do you find value?
PvE: If I can find a business with competent, trustworthy management at a price I would’ve paid for it in any market—good or bad—I’ll buy it. That’s where I’m focusing much more of my energy. My decision is based on the business, what I think of it and what I think it’s worth—not on what the business is trading at relative to another. I try to find those opportunities in mineral exploration. They’re there from time to time; you just have to recognize them. But the natural resource industry is very risky and, within it, mineral exploration is even more risky. I specialize in very early stage exploration, which is one of the riskiest areas of that business. It may sound a bit contradictory to say I’m a value investor at heart while investing in this high-risk area, but I think you can find good value there.
TGR: Can you share some of the companies that provide good value in the current market?
PvE: Yes. Last September, I was asked to join the Board of Miranda Gold Corp. (TSX.V:MAD). I’ve been a shareholder of Miranda on and off for the past eight years or so, and I know the company very well. It has an excellent management team and one of the best exploration teams in the business. When I agreed to become a director, I also bought shares in the company. I have confidence in Miranda’s management team; and if I’m going to be involved personally, I will take the risks and rewards alongside my fellow shareholders. I would not have agreed to become a director nor would I have bought the stock if the company had not met all my investment criteria.
I look at a stock certificate as representing fractional ownership in a business. So, if I find a business like Miranda, of which I’m very happy to be a fractional owner at an acceptable price, those are the investment opportunities I look for.
TGR: You’ve created a variety of models. Some are related to the fair value of gold, some to inflation. Are you using any of those?
PvE: My gold and inflation models are very long-timescale macroeconomic models that don’t necessarily help pick stocks. When I pick stocks, I look primarily at management. It doesn’t matter which business or industry—all businesses are about people. Do I want to do business with these people? Do I trust these individuals with my money? Things like that. Then I start looking at what I’ll be paying for the business, whether it has a proper business plan it’s capable of executing, etc. It’s a process. The more you go through the process of selecting business investments, the more accustomed you get to it.
TGR: You specialize in the riskiest area of a high-risk sector. Where’s the appeal in taking such risks?
PvE: I’ve always liked the natural resources sector. The telephones we’re talking on right now are made of plastic, which is a byproduct of the oil industry. Copper and other metals are inside this plastic, which is only possible because of mining. My computer’s full of metal and I drive a car, which uses gasoline and is made of metal and other natural resources. My clothes come from the natural resources industry—cotton from farming, metal belt buckle from mining.
What would life look like without natural resources and the extractive industries that allow us to use those resources? We’d have nothing—no buildings, cars, furniture, televisions or telecommunications. So, natural resources and mining are absolutely central to our standard of living and the technological progress we’ve made.
TGR: This brings us back to understanding the underlying economic structure. If an economy really needs these resources for daily life, and the economy is not growing, how could we expect the value of natural resource companies to increase?
PvE: Natural resource companies can increase in value for reasons other than the economy. For example, if an exploration company makes a discovery, it creates substantial and real wealth that didn’t exist before that discovery. So, it can grow and do well regardless of the economic conditions.
If you impose over the economy the speculative cycle, which just exacerbates the business cycle, you’ll find natural resource stocks are some of the most volatile stocks in the universe. If you can learn to make that volatility work for you rather than being its victim, you can do extraordinarily well in this sector. That means you have to buy when other people are afraid to buy and sell when other people are exuberant about buying, which isn’t easy.
TGR: Everyone’s buying now. Should we sell, or will we miss out on more upside by selling too early?
PvE: You can look at investing from different elevations. From a very high elevation, this is the time to sell commodities, gold, stocks and bonds. The only thing that’s likely undervalued right now—and I’m probably going to get hate mail for this—is cash. That paper money everyone’s so afraid of is likely the oversold commodity. But that’s if you’re sitting at 30,000 feet looking down—a very, very high macro view.
TGR: And moving down the ladder?
PvE: As you come closer to the ground, you look for a business that represents good value or an attractive opportunity within a sector—be it long or short term. Last year, when equities and commodities were rising, Bob Quartermain brought Pretium Resources Inc. (TSX:PVG) or “Pretivm” public at $6/share. The company owns two large gold deposits in northern BC. The IPO wasn’t inexpensive but if the market held together, the stock was sure to do well because it had huge resources to talk about, experienced management and a market cap at the low end of where the large institutions want to be. And we were in an environment where everybody and his dog wanted more gold and gold exposure. So you could’ve bought PVG for $6 at, or after, the IPO. It’s now $10, and that’s within just a couple of months.
I’m not saying you should run out and buy PVG right now. I’m saying you can sit at 30,000 feet and think you really should be selling gold, or you can come down to ground level and determine, in the context of overvalued gold and equity markets, that if things stay where they are for the next six months, a particular stock could do well.
TGR: Does that mean you are now invested in the market after selling most of your investments in 2008?
PvE: I have made a few investments over the past 18 months, but it has mostly been a very selective process. I am still very nervous about equity markets and commodity prices, so I am not heavily invested at all. What I look for are win-win opportunities, and for that you need a healthy cash reserve.
TGR: What do mean by that?
PvE: I bought Miranda stock late last year at $0.50/share. If the stock price increases, I make money—that’s a win. But if the stock price goes down, I will have an opportunity to buy more shares in a business I like for less money. I will thus be able to increase my fractional ownership in the business and reduce my average cost basis at the same time—that’s a win. As long as nothing from left field comes along and blows a hole in the company, it’s a win-win situation.
This concept of looking for win-win situations is central to how I invest. I would be nervous owning a stock if the price went down, and then I sold it immediately. I don’t wait for the price to go down to figure out whether I should sell or not.
TGR: You’ve spent more than 15 years looking at the mineral exploration sector. What do you recommend for new investors that lack such experience and time to learn about management teams and business plans? How do they find relatively undervalued companies and good businesses in which to invest?
PvE: I suggest they meet Brent Cook. I have known Brent for almost as long as I have been in the investment business. He and I used to work together at Rick Rule’s firm in Carlsbad. Over the years, Brent has helped me make bundles; but perhaps more importantly, he has saved me from making some really big mistakes. Brent is an independent geologist with more than 30 years’ experience in over 60 countries—and, not only is he a good geologist, he also understands the investment business. His research and opinions are top-notch and his Exploration Insights newsletter is the only one I read—and I always read it.
TGR: You went to the recent Cambridge House Resource Investment Conference and presumably you’ll be going to PDAC 2011 in Toronto next month. What new trends in the exploration sector appeal to you? And, on the other hand, what do you find discouraging?
PvE: One trend I think is very good is that the standards and practices that explorers and miners employ are getting much better. For example, the attention they pay to community relations and environmental concerns is really world class. The whole industry has elevated itself. I think that trend is very positive.
The discouraging trend is that the bureaucracy and bull that explorers and miners have to deal with is literally adding years to the approval process to get work done, as well as exorbitant costs to the extractive industries. This additional time and money is, in a very real way, reducing our standard of living by raising the cost of the natural resources we use in everyday life.
It’s a fine balance between nudging an industry to use best practices and pushing them over the edge. There was a time when extractive industries were abusive and deserved to get whipped. It worked and their standards and practices have improved. But now the pendulum has swung the other way and the extractive industries are being unreasonably targeted by special interest groups who don’t really have any “interests” in these industries.
TGR: Well, this was very good, Paul—but certainly not too good to be true. Thank you very much.
Paul van Eeden is president of Cranberry Capital Inc., a private Canadian holding company. He began his career in the financial and resource sectors as a stockbroker with Rick Rule’s Global Resource Investments Ltd. in 1996 and has actively financed mineral exploration companies and analyzed markets ever since. Paul is well known for his work on the interrelationship between the gold price, inflation and currency markets. He also created a measure called the Actual Money Supply (AMS) to monitor the real rate of inflation. AMS is crucial to analyzing real (inflation-adjusted) price changes and calculating the real return on investments.
By Christopher Briem, on February 24th, 2011
Many readers here know of the debate and dialogue over Chrysler’s long and expensive Super Bowl ad highlighting the auto industry and Detroit.
As cool as the Detroit version is to watch, when it comes to the core message it is trying to send, I just don’t see much different between these two industry sponsored video productions; separated by a half century they may be.
By B.P.T., on February 24th, 2011
At 8:30 AM EST, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 405,000 new jobless claims last week, which would would be 5,000 less than the number released last week.
Also at 8:30 AM EST, the Durable Goods Orders report for January will be released. The consensus is that there was an increase of 3.0% from December.
At 10:00 AM EST, the New Home Sales report for January will be released. The consensus is that 310,000 new homes were sold last month, which would be an decrease of 19,000 from last month.
Also at 10:00 AM EST, the FHFA House Price Index for December will be released, providing more information about the direction of the housing market.
At 10:30 AM EST, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 11:00 AM EST, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 4:30 PM EST, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EST, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
|
|
Most Popular Posts