By Simon Grey, on September 9th, 2011
I give up.
I have tried reading Krugman for several years but I just can’t do it. I picked up Return of Depression Economics when I was a junior in high school, but I couldn’t finish it. I use to subscribe to his blog, but I simply found him impossible to read on a daily basis. I couldn’t even finish Pop Internationalism.
The biggest problem I have with Krugman is that he gets too caught up in his own perceived brilliance, and he has a tendency to become quite smug and condescending. This usually becomes a problem because he isn’t often right, so reading him just makes me want to find him and then punch him dead in the face. Arrogance is only amusing when you’re right.
Anyhow, Pop Internationalism isn’t all bad; Krugman manages to make a couple of good points. They’re mostly contained in the first four chapters, so if you do eventually feel like reading this book, you needn’t bother reading beyond chapter five.
In the first place, Krugman is correct in noting that countries are not corporations, nor are they comparable to corporations, at least in terms of competitiveness. The idea that the United States “competes” with Japan (or Germany or Britain or etc.) is a rather strange notion, and a fallacious one to boot. Trade is not necessarily win-lose, which, come to think of it, sounds quite strange coming from Krugman. As such, trading with Japan isn’t an inherently destructive behavior. However, it is possible that trade can have negative consequences. It should simply be noted that trade is neither inherently good nor inherently bad. It can be either.
In the second place, Krugman correctly notes that, accepting the concept of competitiveness for sake of argument, a nation’s ability to compete in the global market is more closely tied to domestic production policy instead of foreign trade policy. Stated more clearly, taxes and regulations play a larger role in international competitiveness than do tariffs and trade agreements. As such, the proper policy prescription for encouraging competitiveness in the global marketplace is deregulation and corporate tax cuts.
Overall, Pop Internationalism starts with a bit of a bang, then dissolves into self-congratulatory mental masturbation. The first couple of chapters are thoughtful and thought-provoking, but everything after that is nauseatingly narcissistic. Read at your own peril.
By The Energy Report, on September 9th, 2011
 Global Resource Investments Founder and Chairman Rick Rule is a self-described energy bull. In this special Energy Report from his latest web broadcast, he highlights the global macro-trends that will drive energy prices—oil, natural gas, uranium and alternative energy—way up in the coming years.
Long-time followers of Global Resource Investments Founder and Chairman Rick Rule know he is an energy bull. He sees increasing demand as an inevitable outcome of global mathematical formulas. “Around the world, in emerging and frontier markets, 3.5 billion people aspire to your lifestyle, but haven’t been able to compete with you for the last 150 years because they haven’t had any money,” he explains in a recent webcast. “As those people become more free, they become more rich and increasingly they are able to compete with you. In the process, these 3.5 billion people will increase their per-capita consumption of energy. The demand curve in energy relative to GDP is breathtaking. As people on the bottom of the economic pyramid get more money, what they do with it is very energy-intensive. So, GDP gains at the bottom of the demographic pyramid lead to disproportionately high gains in energy consumption.”
Rick sees inverse trends on the supply side. “Energy trades on a worldwide basis are led by oil, the supply of which is declining as a function of peak oil—which is partly a scientific and partly an economic calculation—and, more importantly, by a reduction in sustaining capital expenditures by national oil companies. Mexico, Venezuela, Ecuador, Peru, Indonesia and Iran are large petroleum exporters that may not be exporting any oil at all in five years. When you have worldwide import demand growing at 1.5% or 2%, compounding a supply that is declining by 25% or 30%, the potential intersection of those two facts in the market could be explosive to the upside.” He acknowledges some possible supply variables in the world, but believes the overwhelming equation stands. “A million barrels a day of Libyan crude back on the market would provide some moderation of the supply shortfalls. And a return of Iraqi crude on the market would also be useful. But my own personal belief is that neither of those two sources of supply can mitigate the supply shortfalls that we’re going to see from the national oil companies.”
Rule’s bullish oil price outlook extends to liquefied natural gas (LNG). “LNG is, increasingly, a substitute for oil. In light of a combination of the reduction in the Japanese nuclear generating capabilities and South American supplies going off line, we expect worldwide LNG supplies to be fairly tight on a going forward basis.” That is good news, he says, for North America, which has a robust domestic natural gas industry. “The consequence of the pricing umbrella led by oil and import substitution of gas molecules will return gas to profitability in the next two years,” he predicts.
Rick is not predicting a direct ascent in natural gas prices. The theme of the webcast is volatility. That painful reality goes for the overall market as well as the energy sector. “I think gas will trade in a band between about $3.00/MMBtu on the low side and $7.00/MMBtu on the high side. Any dollar north of $5.50/MMBtu and these gas producers start making real money.”
Rule is also bullish on opportunities on the service side in the oil and gas business. “We are going to need to do an awful lot of drilling worldwide to keep up with our demand for oil and gas. Increasingly, the places that produce oil—places like Libya and Iraq—don’t have the expertise and services to develop and produce their reserves. Large service companies are beginning to act like mini-majors, providing contract services to national oil companies or multi-national oil companies. Therefore, we are bullish about some of the service companies.”
What isn’t appealing to Rick in the sector? “We wouldn’t be so attracted to companies that have large exposure to North American or Western European refining and marketing because we expect those margins to be continually constrained. But, companies that are leveraged to upside production we like a lot. We particularly like the juniors and we particularly like the Canadian juniors because Canadian institutions are on strike in terms of buying companies producing less than 5,000 barrels a day with market capitalizations less than $500 million.” Rule points to a matrix of valuation measures that changes markedly when companies get to a certain size, reevaluating them as they get larger and eventually making big companies out of them, which can yield takeover premiums. “This market cap arbitrage is going to be an important theme on a going forward basis,” he says.
Rule is beginning to see uranium stocks return to levels where he thinks they are safe to buy again. Global got into the uranium sector starting back in 1999. “We were spectacularly right,” he recalls. “Then, in 2005/2006, when the uranium sector experienced its, sorry for the pun—boom, we were out of the way.” Now he sees the tables turning again. “Uranium seems to be a four-letter word now. People’s expectations from ‘05 and ‘06 were impossibly high and as a consequence, they were disappointed. That disappointment was exasperated by the events in Japan.” Rule sees four or five uranium juniors that he thinks are quite attractive. He may not be alone. Apparently Cameco Corp. (TSX:CCO; NYSE:CCJ) agrees as evidenced by its recent hostile takeover offer for Hathor Exploration Ltd. (TSX.V:HAT). “We think this is the first of several consolidations on a worldwide basis in the uranium business,” he predicts. “Now is the time to begin to establish positions in the uranium sector.” In Rule’s crystal ball, uranium energy will contribute a growing share of worldwide electrical generation, not because people are less afraid of it, but simply because when they flip a switch, they want the light to go on. And without uranium, the light won’t go on in many parts of the world.
Rick also continues to be attracted to some alternative energy sectors—run-of-river, hydro and geothermal. “People ask me at conferences, ‘Rick, what is wrong with the geothermal sector?’ The answer is nothing. There is nothing wrong with the sector. What has been wrong with the sector’s performance is that the management teams who have entered the sector have been, let’s say, challenged—implementation-challenged.” Rick sees three issues plaguing geothermal: long lead time to production, capital-intensive preparation and implementation. Rule sees a light on the horizon for all three of these problems. A number of geothermal projects are already five years into their seven-year development cycles. That is two-thirds to three-quarters of the way to completion. At some of these companies, the capital has already been spent and they are selling at discounts to book. That suggests that the cost of capital is extraordinarily low on a going forward basis because it’s already been spent. That leaves implementation and management. After a 20-year bear market in energy, precious few alternative energy management teams were left to handle the investments that have been made in the last 10 years. “All other things considered, if you have lost faith in the sector, are disgusted and looking to exit for tax losses, I strongly suggest that you do it now. But, do it with the knowledge that I will be the buyer,” he jokes.
Regardless of the sector, Rule sees timing as one of the deciding factors in successful portfolio management. “I would encourage people who have portfolio companies with substantial losses, but other portfolio gains this year, who are going to do tax loss selling, to do it now. Beat the rush,” he advises. “The tax loss selling we are going to see in November and December of this year—particularly if we experience more volatility between now and then, which I think is inevitable—is going to be extreme. If you bought a stock for $2.00 and the stock is at $0.50 now and you think you are going to want to sell it, you might want to sell it now because you might only get $0.30 or $0.35 if you sell it later.” Of course, the inverse applies on the buy side. “If there are companies that you are attracted to that have gone down in price this year, the existing shareholders of those companies may very well be taking tax losses in November and December. So, build yourself a shopping list—or borrow our shopping list—and look for names that you would like to buy in November or December.”
Global Resource Investments (GRI) founder and CEO, Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. Rule’s company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. Last month, Rule closed a landmark deal with Eric Sprott, another famous powerhouse in the arena. With GRI now a wholly owned subsidiary, Sprott Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S. This article is based on Rule’s August 31 Global Resource Investments webcast.
By Christopher Briem, on September 9th, 2011
Yet another ranking showing the Pittsburgh region as just about the only place in the nation with increasing real estate prices year over year. See this press release: Summer’s Last Stand: Clear Capital(R) Reports U.S. Home Prices Increase 4.0%. The headline there is about some decent quarterly numbers for the nation and a lot of regions, but year over years Pittsburgh’s +3.9% stands out. The +9.5% quarter over quarter they are showing is pretty remarkable in itself. This is Pittsburgh right?
What I am more surprised nobody has noticed is something generated via RealtyTrac and spotted in passing in reporting from the WSJ. Pittsburgh ranks near the top (not in a good way) in terms of the discounts properties being resold out of foreclosure are receiving in the market. So our post-foreclosure homes drop in value a lot, and relatively more than most everywhere else. I mentioned this over on the Pittsburgh Urban Blog and connected it to some work on Real-Estate-Owned (REO) property in the city. Likely a reflection of our lower foreclosure rate and healthy real estate market overall that those properties that actually make it to foreclosure are self-selected to be among the worst properties (value wise relative to their previous sales prices) on the market. Still a big deal for local neighborhoods.
By B.P.T., on September 9th, 2011
At 10:00 AM EDT, the Wholesale Trade report will be released for July, showing inventory levels for wholesalers in the United States. The consensus is that wholesale inventories increased 0.8% in July.
By Bron Suchecki, on September 8th, 2011
The Swiss National Bank press release: “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.”
The Fofarian rephrase: “Too many people are trying to store value in our currency, which is distorting it’s role as a medium of exchange. We’d rather you save your wealth in something whose price increase won’t impact the economy because it has minimal industrial/productive use but which many people still think is valuable anyway. Hey, I know, how about gold?”
By The Gold Report, on September 8th, 2011
 With the patience of a good contrarian, Mercenary Geologist Mickey Fulp has spent the last couple of months watching for buying opportunities among fundamentally strong micro caps that have drifted down during the summer doldrums—and pouncing on a select few. Noting that precious metals have been on an almost unprecedented run, in this exclusive Gold Report interview, Mickey said that he expects a lot of the patient money sitting on the sidelines to get itchy soon, resulting in a rebound in junior resource equities that he hopes will mimic the sector’s post Labor Day rally last year.
The Gold Report: In the midst of a number of record three-digit swings in the Dow of late, the market’s just pounded some otherwise healthy precious metals stocks to a fraction of their logical commodity value. You pointed out in a July Musing that TSX junior resource valuations were down 20% from their March highs. Is this a good time to take a look at micro caps, Mickey?
Mickey Fulp: I think late summer is always a good time to take a look at our junior resource sector because of disinterest during the doldrums. At some point during the summer, stocks oftentimes drift down to their yearly lows or at least a trough.
If you looked at a chart of the Toronto Venture, you’d probably see summer troughs almost every year. Sometimes they last for a couple of months and at other times as little as a week. This year’s summer doldrums, caused by lack of liquidity and lack of buying interest, has been going on for a couple of months now and the Venture Exchange continues to drift lower. The TSX index is down 35% from its highs in early March, right before the Prospectors and Developers Association of Canada (PDAC) conference.
So, yes, I think this is a buying opportunity for some of the fundamentally strong micro caps.
TGR: Are the troughs and the opportunities more extreme this year?
MF: I think so. A couple of other things are going on as well, including the global economic unrest with European sovereign debt issues and U.S. politicos doing shenanigans with the debt ceiling. At the same time we had this nearly exponential rise in the price of gold. The gold producers with record cost margins are catching up somewhat with the gold price, but the advanced explorers continue to lag.
TGR: Have any in particular caught your eye?
MF: I’m still bullish on the same stocks, and bear in mind I’m talking my own book here. One is Avrupa Minerals Ltd. (AVU:TSX.V), which has projects of significant merit in Portugal, joint venturing with Antofagasta plc (LSE:ANTO). Another one would be Estrella Gold Corp. (EST:TSX.V), a prospect generator in Peru. Both Avrupa and Estrella are trading at or below their latest private placements, which were taken down by a group of strategic investors with plans for making these better, more boisterous and viable companies.
TGR: That leads into something you often talk about—the importance of evaluating share structure, people, projects and whether a company is undervalued. In a recent Musing, you put a newly listed company, Brazil Resources Inc. (BRI:TSX.V), to that test. The company you dubbed “the new kid on the block in Brazil” seemed to score well on the first three but at the current price of $1.11, do you consider it a good value vis-à-vis its peers?
MF: Brazil Resources is a purely speculative play in which I participated in a couple of private placements before it went public. This speculation is based mainly on the people who have formed and are running this company, including the management of Uranium Energy Corp (UEC:NYSE.A) and some Brazilian money brokers. It has a very tight share structure. Something on the order of 60% is controlled by either insiders or institutions, apart from family and friends such as me.
Brazil Resources is cash-rich with $7 million and it has a corporate plan to build a mid-tier gold producer in Brazil. As I said, it is a speculative play, but adding all that up, I was comfortable writing it up at $1.20. With the current market malaise, it is back to the $1.20 range, but it’s been as high as $1.45.
TGR: Brazil Resources investors may have to ride this stock for some period of time, because with 60% of the shares held by insiders and institutions, it sounds as if there isn’t much liquidity in that stock.
MF: You’re exactly right in that liquidity is a problem with any tightly held company. And on top of that, as we were discussing earlier, liquidity has been extremely low over the summer.
If you look at Brazil Resources’ chart, you see lots of liquidity for about a week after it went public in mid-May, then a liquidity event in mid-June, and it’s traded very low volumes ever since. So this is not what I would call a quick turnaround stock. Still, I’m convinced its corporate plan will allow me to achieve my goal of a double in 12 months or less from when I wrote it up at $1.20.
TGR: You mentioned Estrella earlier, a prospect generator in Peru, one of your favorite countries. How does Estrella measure up against your criteria?
MF: Very well. It has a tight share structure. In the last few months, it did a $4M financing at $0.65, about where it’s trading right now, and put strategic investors into the stock. I have confidence in Keith Laskowski, the president, both in his geologic ability and his ability to attract worthy JV partners. So far, Estrella has only one joint venture, but it’s with an up-and-coming, aggressive major, Cliffs Natural Resources (CLF:NYSE). We used to know it as Cleveland Cliffs, a stodgy steel producer. It has since transformed into a very aggressive, diversified mining and smelting company.
TGR: Could Estrella be a double in 12 months or less?
MF: That’s why I pick stocks. If I don’t see a double in 12 months or less, it’s not a company I’m going to pick as a sponsor of my website and put my reputation on the line. We’re 16 of 17 since publicly launching this business model in the fall of 2008.
TGR: What could spark Estrella’s double?
MF: Additional joint ventures may be the answer. One of the company’s projects with potential, located near Yanacocha and Newmont Mining Corp.’s (NEM:NYSE) mines, was recently drilled. It has a small resource, but that should increase substantially with new results. A bevy of other properties, mainly in southern Peru, is available for joint venture right now. So, another JV with a major would certainly be a catalyst.
TGR: Do you consider JVs or people the value-add part for Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) and its sister company, Tarsis Resources Ltd. (TCC:TSX.V)?
MF: Both. Again, these are two prospect generators. Almaden Minerals is arguably the flagship prospect generator operating out of Canada. The Poliquin family, which runs Almaden, has a track record of finding good projects and venturing them to other juniors. Both these companies have tight share structures. Almaden is cash-rich. But geologists and prospectors still must perform. That’s the key to a good prospect generator. They need to find meritorious prospects, and then the management must find legitimate and worthy joint venture partners.
TGR: Do you see any good joint ventures on the horizon for Almaden?
MF: Well, Almaden has significant JVs going right now, including Caballo Blanco with Goldgroup Mining Inc. (GGA:TSX.) What’s really moved its price over the last year is a discovery in Mexico called Ixtaca. It looks as if this could turn out to be a major new epithermal gold-silver district. I picked Almaden at $0.90 in July 2010 and it’s been as high as $5.46. It’s trading in the under $3 range now.
Tarsis is a very early-on prospect generator. Almaden has been in existence since 1986. Tarsis is essentially a spin-off of Almaden’s Yukon prospects and one Mexican property with some common management. Duane and Morgan Poliquin are involved in both companies.
TGR: How are prospects looking for Tarsis?
MF: Tarsis has Prospector Mountain in the Yukon, being drilled by Silver Quest Resources Ltd. (SQI:TSX.V). The company recently announced a significant gold intercept in the first hole at Ericka in southwest Mexico. It has been out there prospecting, evaluating, mapping and sampling Yukon properties this summer. Once results come in over the winter, Tarsis will find out which ones have merit and can be offered for joint venture.
TGR: Getting back to your point about expecting everything you invest in to double in no more than 12 months. . .An average investor may look at Almaden and figure that if Mickey says it can double in 12 months, that makes sense because Almaden has a 25-year track record. But with Tarsis being a newcomer with barely any history, the investor might see a lot more risk.
MF: I picked Tarsis in early January at $0.45, and it went as high as $0.95 in mid-February. So, there’s your double. When it spiked to $0.95 readers that follow my Power of Two investing philosophy took all initial money off the table by selling half. Now it’s dropped back to the price that I picked it at, but it’s already been a double and a winner. The same with Almaden. I picked Almaden at $0.90 about 13 months ago. It has gone as high as $5.46. If you didn’t take the amount of your initial investment off the table with Almaden, you’re not playing the game under the same philosophy that I write about. The play has already been successfully executed on Almaden. Now it’s a free ride. Then it graduates into the idea that you put open orders to sell tranches on the uptick so you’re continuing to take profits.
It’s up to people to trade. I give them a methodology to have free trading shares, and over a course of three years, I’ve hit on 16 of 17 that have been held at least 12 months.
TGR: Can’t argue with that track record.
MF: Let’s look at one that hasn’t doubled yet, Estrella. I first mentioned it as an idea at $0.95 in early January, its all-time high was something like $1.24 a few days later, and we formally picked it at $0.70 on June 28. We haven’t achieved our goal yet, but we have 10 months for this to become a $1.40 stock. If it does, even if for only an intraday trade, and you have an open order to sell half your position at $1.40, there’s your free ride. You’re now playing with someone else’s money. Then it’s a matter of continuing to take profits.
If I sold half at $1.40, I might sell another 5% or 10% at $1.60, and maybe another 5% at $2, depending on what I think the stock’s upside is. If there is positive news and it ramps up quickly, I’m a multi-trade seller. That’s how occasionally I will have the high trade on a stock because I have many open orders to sell that get automatically renewed every month.
You also set “profit stops” for on the way down in a bear market. For instance, if you get your double at $1.40 on Estrella and take back your investment money, you might set a stop and sell another small tranche at $1.20. Then you’re still taking money off the table with a zero-cost basis and continuing to make money even in a down market. There are no paper wins or losses in the stock market. You must execute a trade to generate a profit or a loss on the balance sheet.
So this is a programmed and very conservative way to trade a high-risk speculative market and continually generate profit. Since every junior will have a double from its low to high in any given 52-week period, the key is picking the right stock at the right time when it is undervalued.
TGR: As regards the micro-stocks, have you taken particular interest in any certain regions or sizes or types of companies over the summer?
MF: I haven’t taken an interest in very much this summer other than watching companies that continue to get beaten up. They become buying opportunities at some point, when the potential reward meets the risk that’s involved in highly speculative micro-cap stocks. That’s the purpose of stink bids, to find fundamentally strong stocks, and buy them when they’re down on their luck or the markets aren’t particularly friendly.
Area plays don’t really interest me that much. I have strong ideas about the kind of projects I’m interested in. I don’t really concentrate on areas as much as I look at individual companies.
TGR: Have any of your stink bids paid off?
MF: No, they’re stink bids and we’re in a down market right now. I’m just accumulating some stocks that I already have positions in and I see opportunities to lower my cost basis and wait for a better market. You know a contrarian view requires patience.
TGR: How many companies do you typically have in your personal portfolio, Mickey?
MF: It isn’t typical but right now I have between 35 and 40.
TGR: So you’re pretty focused.
MF: Well, that is as many as I can handle. Historically I’ve held 20 or 25, but over the course of the last year or so I’ve just found many stories that I wanted to participate in. Still, I’ve never covered more than 10 at a time. I may mention other companies in interviews but I only write about those 10.
TGR: How do you select the 10? What makes them rise to the top?
MF: Those are the best of the best. It comes down to the old criteria. Every company I put money into has the requisite share structure, people and projects. If they’re severely undervalued, I hope that is when I’m going to choose them.
TGR: The general media commentary seems to be that the money going into gold is going into physical gold. For example, we’re seeing ETF prices rise increasingly, but at the expense of juniors. Money that was expected to go into explorers is going into the ETFs instead. People are going more into the commodity than the equity.
MF: Absolutely. The gold explorers are down because money is going into gold ETFs versus the junior resource sector. The ETFs have given people another way to participate in the gold market. If you wanted to buy gold 10 years ago, you either bought bullion or played high-risk juniors. Now you can buy the gold ETF.
TGR: If the price of gold continues to go up, will it continue to dampen share prices in the junior sector?
MF: I think the fact that we’re in a time of economic turmoil worldwide is what’s dampening the share price of the juniors, because people are looking for safe haven investments and choosing gold as a safe haven. A junior resource company is 180 degrees diametrically opposed to the idea of a safe haven. So you’ll see money come back to the juniors when the markets get better overall―when we have a stronger market.
TGR: Any idea when that will be?
MF: I personally expect a stronger market after Labor Day. I think we’ll see a post-Labor Day rally like last year. If you remember, that’s when the juniors really started taking off. From Labor Day until the PDAC, we had one of the strongest bull markets for juniors in memory. Will we see that sort of rise again? I hope so, but I wouldn’t go to the bank on it.
That said, I do see similar trends. Despite the recent correction in gold, precious metals have been on a run that’s almost unprecedented. We have very strong prices for industrial metals, too. Despite economic unrest, we’re still seeing strong demand, and copper is hanging in at $4 per pound.
Much like in 2010, we’ve had these periodic short-lived panics and weeklong sell-offs in the market and, as we do every summer, low liquidity. Because of that we have little interest in buying—or selling—in the juniors.
What I see is many dollars on the sidelines. All I’ve been doing is using some of the dollars I have on the sidelines to pick away with stink bids and select private placements, but, in general, I’ve been extremely inactive in the open market this entire summer. The question becomes, “When does that patient money sitting on the sidelines get itchy?” Last year, that was right after Labor Day. We had record private placements last fall and winter.
TGR: So things could be looking up for the juniors this fall.
MF: Yes, I think and certainly hope so.
Michael S. “Mickey” Fulp is author of The Mercenary Geologist. He is a certified professional geologist with degrees in earth sciences (B.Sc. with honors from the University of Tulsa) and geology (M.Sc. from the University of New Mexico). Mickey has more than 30 years’ experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas, and water in the Americas, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 24 years, specializing in geological mapping, property evaluation and business development.
By B.P.T., on September 8th, 2011
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 408,000 new jobless claims last week, which would would be 1,000 less than the previous week.
Also at 8:30 AM EDT, the International Trade report for July will be released. The consensus is a deficit of $51.9 billion, which would be $1.2 billion less than the previous month.
At 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:00 AM EDT, the Quarterly Services Survey will be released, showing the status of the information and technology-related service industries.
At 10:30 AM EDT, 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 EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 1:00 PM EDT, Federal Reserve Chairman Ben Bernanke will speak at the Minnesota Economic Club in Minneapolis.
At 3:00 PM EDT, the Consumer Credit report for July will be released. The consensus estimate is that there will be an increase of $6.0 billion in the consumer credit available from June to July, after an increase of $15.5 billion last month.
At 4:30 PM EDT, 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 EDT, 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.
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By The Gold Report, on September 7th, 2011
 Solar and wind can’t produce power when there is no sun or turbulence in the air. That is why energy storage will be vital for offsetting and balancing use of traditional baseload power sources during peak and off-peak periods. House Mountain Partners founder Chris Berry is making a bet on the unfamiliar element vanadium, which will be required in large quantities for mass storage batteries. In an exclusive Critical Metals Report interview, Chris has identified several vanadium names that could power investor portfolios and simultaneously provide broader diversification.
The Critical Metals Report: Chris, could you discuss the uses of vanadium?
Chris Berry: Vanadium is an element that is pervasive, but a lot of people haven’t realized just how pervasive it is. Vanadium is used in varying degrees in several applications. One is as a strengthener of steel and an alloy with titanium. It is also used in the emerging field of lithium-ion batteries (LIBs) for electric vehicles (EVs), both the four-wheel or two-wheel type. I think this usage is one that shouldn’t be relied upon in the near term. Vanadium has also come to be used in what’s known as the vanadium redox battery (VRB)—a large-scale battery used for alternative energy storage.
Over 90% of vanadium produced today is used as a steel strengthener. In 2010, according to the U.S. Geological Survey (USGS), 56,000 tons of vanadium were produced globally (U.S. figures are not reported), so obviously the majority of this is used in the buildout of infrastructure that is occurring disproportionately in countries such as China. One company in particular, Denison Mines Corp. (TSX:DML; NYSE.A:DNN), which is thought of as a uranium producer, produced about 1,000 tons of vanadium last year as a coproduct of its uranium mining in the western United States. Aside from that, vanadium is mined mainly in China, Russia and South Africa.
The use of vanadium in LIBs for EVs is not significant yet, but could eventually become important as the transportation sector electrifies. One of the real challenges surrounding LIBs is settling on the most effective battery chemistry. In other words, what battery chemistry allows for the greatest number of charge recycles, depletes its charge the slowest and allows us to recharge the fastest? Today, based on my research, lithium-vanadium-phosphate batteries appear to offer the highest charge and the fastest recharge cycle. It seems that the lithium-vanadium-phosphate battery holds a great deal of promise, offering a blend of substantial power and reliability. I am watching for advances in battery chemistry here with great interest.
I am actually reading a book now titled “Bottled Lightning: Superbatteries, Electric Cars, and the New Lithium Economy” by Seth Fletcher. The debate over the “best” or “optimal” battery is not a new one and the book discusses the history of this argument well.
In our research at House Mountain, we focus on several macro themes, one being accessibility to cheap and reliable energy. It’s no secret that increasing GDP and access to cheap energy go hand-in-hand. Energy storage is going to become more and more important and this is where the VRB can play a significant role. I wouldn’t call VRBs an emerging technology because they were actually developed in the late 1980s, so the idea of using vanadium to store electricity has been around for a number of years. VRBs just haven’t been in mass, widespread use. Growing economies in countries like China and India and even in continents like South America are becoming accustomed to an increase in the quality of life. In my opinion, to maintain and increase that quality of life, you need access to energy—cheap and reliable energy. The electricity grid has been described as the only supply chain without storage capacity. VRBs can address this.
TCMR: To alleviate the stress on baseload power.
CB: Exactly. Baseload power from utilities will be generated from a number of different sources—renewables, coal, oil and gas, for example. VRBs allow for the smooth transition of electricity into the grid at times of peak demand. Renewable sources of energy such as wind turbines generate electricity that can be stored by a VRB and released at peak times. This ability to effectively store electricity and manage the flow of this electricity into the grid as the demand for electricity ebbs and flows promises to become critical and offers an additional avenue for future vanadium demand.
TCMR: You said VRB technology has been around for a while. Is this market going to grow?
CB: I think it will, based on my comments above. VRBs are being used commercially in a couple of different places, though they have not been adopted widely on a commercial scale. As demand for electricity increases, VRBs will definitely play a role. You can’t have countries like China with its emerging middle class even approach Western living standards (and the electricity demand that comes along with that) without the ability to put affordable electricity into the grid on demand. You can’t have a global population of 7 billion citizens many who want a higher quality of life—a population projected to grow to 10 billion by the year 2085 based on estimates in The Economist—without that ability. It just can’t happen.
TCMR: In a research report, you referenced Byron Capital Markets’ estimate of how much storage would be required for 1 megawatt of energy. You wrote that it would require 50,000 liters of electrolyte which equates to 10.1 tons of vanadium. But as you said, in 2010 only 57,000 tons of vanadium were produced globally. So looking at numbers like that, I’m thinking that even a small amount of growth could exponentially increase the amount of vanadium needed.
CB: That’s exactly right, and that’s the key. One of the things that I like about vanadium is that you have a couple of different, but potentially significant, demand drivers. You have the fact that vanadium is used as a steel strengthener. So that’s a play on emerging market growth. I don’t think that China is going to continue to grow at 9–10% indefinitely, but there are other countries that are experiencing significant growth rates themselves that are behind the curve. India is an example. It has a huge need for infrastructure, and increases in vanadium-based steel production will be a part of that. As another avenue of demand, renewable energy will continue to be a minority of the energy produced globally, but, again, even if a fraction of the vanadium produced had to be diverted to energy storage, you are looking at a potentially significant supply-demand imbalance.
Another significance of vanadium is that it is very rarely mined alone; it’s typically mined as a byproduct of other metals, uranium being one of them. Two of the three largest producers of vanadium in the world right now are Evraz Highveld Steel and Vanadium Ltd. (JSE:EHS), based in Russia, and Panzhihua New Steel & Vanadium Co. Ltd. (SZSE: 000629) in China. At both of these companies, vanadium is a byproduct of steel slag production. If, for whatever reason, they cannot increase capacity to produce more steel, or if steel demand slows, they would be looking at producing less vanadium. There appears to be a direct relationship between the amount of steel they produce and the amount of vanadium they produce. If there is any sort of a hiccup there, again, you could potentially be looking at an interesting supply-demand imbalance in the vanadium market. I’m not predicting that this will happen. I am just pointing out that much of the vanadium produced is dependent on production of other metals.
TCMR: Are there any producing vanadium mines in Canada or in the U.S.?
CB: The only one that I know is Denison’s White Mesa project in Utah. It is mining uranium in the U.S. and is producing about 1,000 tons of vanadium per year as a coproduct. After this, however, the question becomes, where are the near-term producers? In other words, who is next? In North and South America, there are several. The one that I have focused on most closely is American Vanadium Corp. (TSX.V:AVC). It owns the Gibellini deposit in eastern Nevada and has an NI 43-101 resource estimate of 18 million tons (Mt.) of vanadium pentoxide, grading 0.33% on the deposit. There are several other properties the company owns in the immediate vicinity of Gibellini that are not included in this resource estimate, so there exists the potential for expansion of this resource based on additional discovery. The company has a stated plan to be in production of vanadium pentoxide by 2013 and also has the potential to produce vanadium electrolyte which is used in VRBs. Producing two products provides potentially two revenue streams, which I like to see in a project.
This project is unique in that it will be an open-pit, heap-leach operation with a low capital expenditure. As I mentioned before, vanadium is usually found with other minerals, which requires metallurgical and separation expertise and can complicate the mining process and drive up costs. According to the company, only trace amounts of uranium appear in this deposit. It seems to be pretty clean. If vanadium pentoxide currently trades in the market for $7/lb., American Vanadium believes that it will be able to produce at a cost of $2.96/lb. based on an independent preliminary economic assessment the company had completed. When production really ramps up, the goal is to be producing 14 million pounds of vanadium pentoxide per year. The grade of the deposit is low, but you can do the math. If you are selling at $7/lb. and mining and producing at a cash cost of $3/lb., that is a $4/lb. margin on a resource that is growing in size.
TCMR: Any near-term catalysts?
CB: The immediate catalyst for this company will be to release an updated resource estimate and also a prefeasibility study, which I anticipate before the end of the year. They also recently announced that they have produced both vanadium pentoxide and vanadium electrolyte on a pilot scale.
TCMR: The size of the vanadium market is not easy to discern currently, is it?
CB: It’s really not and this is a challenge for all junior vanadium exploration companies. Most people default to what the USGS says on the size of the vanadium market, so we say it is 56,000 tons currently. There are a number of different end products created from vanadium ore like vanadium pentoxide, electrolyte or ferrovanadium, which cloud the true demand in this market in my opinion. The market for vanadium is currently in balance from a supply and demand perspective, but this could change on the back of increased demand from the applications we mentioned above.
Many of these minor metals like vanadium and lithium have a real issue with price transparency and hence volatility. It’s easy to look at a metal like copper or gold—where there is a futures market and a spot market—and get an accurate price, but it’s not the same with vanadium or lithium. These are all negotiated contracts between supplier and end-user. Vanadium pentoxide is worth $7/lb. currently, but this is can change more drastically than other metals based on the relatively small size of the market, fluctuations in demand from end-users and supply restrictions from other countries.
TCMR: It could be $10/lb. in one transaction and $5/lb. in another.
CB: And the price volatility, in particular with vanadium, is one thing that I think has kept more people away from the metal. Vanadium is definitely about as good as it gets as a strengthener of steel. But there are substitutes. For example, niobium has very similar qualities when alloyed with steel, but is only a viable substitute for vanadium when vanadium is at a much higher price per pound. Vanadium at $7–$8/lb. is economic, and you really get a lot of bang for the buck. However, if that spikes, then as an end-user you start looking at substitutes.
TCMR: Sounds like you are very positive on American Vanadium.
CB: I think it has a chance. For a lot of these juniors, that is all you can ask for in the tough markets we’re seeing these days. I have visited the Gibellini deposit, met with management and can see how the project could succeed. Despite the fact that the vanadium market is roughly in balance from a supply-demand perspective, and, based on my projections, it looks like for the next year or two it’s going to stay that way, I still think there is room for a company like American Vanadium as much of the supply of vanadium used in the United States comes from overseas. Based on work we’re doing in Washington D.C., it appears that our political leaders are waking up to the issues surrounding resource dependence on metals such as lithium and vanadium. American Vanadium is positioning itself to benefit from this newfound concern regarding domestic supply chains.
TCMR: Chris, are there any other vanadium companies that you are talking about?
CB: The vanadium space, such that it exists, is quite small in terms of the companies that are producing. You have Evraz, Panzhihua New Steel and Vanadium Co. and Xstrata PLC (LSE:XTA), and they control production in the vanadium market. They produce the overwhelming majority of the 57,000 tons. Another company that is particularly interesting is Largo Resources Ltd. (TSX.V:LGO). This is a Canadian company that has two different vanadium deposits in Brazil. The company’s Maracas project contains the highest grades of vanadium I’ve seen in North or South America at roughly 1.27%. It’s also a deposit of size with ample potential to expand, so here you’re combining good grades with tonnage. Another important factor I haven’t mentioned is an offtake agreement. Largo negotiated an offtake agreement with Glencore International for a term of six years. This is a huge credibility boost for Largo, in my opinion. The fact that Largo has a high-grade vanadium deposit as well as other metal deposits in the Americas makes the potential for this company quite strong going forward.
TCMR: Another one?
CB: Another one I follow is EMC Metals Corp. (TSX:EMC). It is not a pure play on vanadium. This is a company that has a couple of different assets. Its main asset is actually a scandium deposit hosted in laterite located in New South Wales, Australia. EMC is engaged in a 50/50 joint venture on the scandium deposit (called Nyngan Gilgai) with an Australian company called Jervois Mining. EMC also has a prospective vanadium deposit not terribly far from American Vanadium’s asset in Nevada called the Carlin deposit which has a resource of 25 Mt. grading 0.51% vanadium pentoxide. To be sure, there are other companies with vanadium deposits, but these are three that I’m really focused on.
So there are a number of near-term producers of vanadium, and while the market is currently balanced, I like the prospects for the metal going forward based on forecast global steel demand and potential for vanadium’s critical use in energy storage applications—two diverse sources of demand.
TCMR: I have enjoyed speaking with you very much.
CB: Thank you very much.
With a lifelong interest in geopolitics and the financial issues that emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. House Mountain firmly believes that the emerging quality-of-life cycle emanating from Asia is a “game-changer” that will affect everyone throughout the world for decades. With that in mind, the firm focuses on the intersection of three topics: 1) The evolving geopolitical relationship between emerging and developed economies; 2) The commodity space; and 3) Junior mining and resource stocks are positioned to benefit from this phenomenon. Chris spent 14 years working across various roles in sales and brokerage on Wall Street before founding House Mountain Partners. He holds an MBA in finance with an international focus from Fordham University and a BA in international studies from the Virginia Military Institute. Chris is also a member of the Canadian American Business Council. He invites readers to receive a complimentary subscription to Morning Notes, which provides analyses of emerging geopolitical, technological and economic trends. Go to www.discoveryinvesting.com.
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By Ajay Shah, on September 7th, 2011
In December 2002, the NDA made a very big move in pension reforms. They decided that from 1/1/2004 onwards, all new staff recruited into the government would be switched out of the traditional defined-benefit pension and instead placed into a new individual-account defined contribution pension system. This was one of the major achievements of the economic reforms of that period. For a conceptual picture of the New Pension System (NPS), see this article, and for a story of that period, see this article.
An essential feature of the NPS was that it was a defined contribution system. India has a long history with getting into trouble with guaranteed returns. UTI’s assured return schemes turned into a problem for the exchequer. EPS, run by EPFO, is bankrupt. When pension promises are made, they require peering into many decades into the future and arriving at estimates of longevity and asset returns. In the best of times, it is hard to make such estimates; honest mistakes are possible. In addition, when governance is weak, there are political pressures to make extravagant promises, which will look popular right now but generate staggering costs for the government in the future. As an example, rough calculations show that the implicit pension debt on account of the traditional civil servants pension in India (the one which was replaced by the NPS) stand at roughly 70% of GDP. This is a very big price to pay, for a tiny sliver of the workforce.
The NDA did the unpopular work of switching new recruits out of the defined benefit pensions. But the UPA did not follow through appropriately. At first, many years were lost in hoping that the CPI(M) would come on board the reform. After that, the legal engineering was put into place in order to get an NPS up and running without requiring the legislation. This process was slower than what one might have desired, but it has been making inexorable progress.
But now, a new existential threat seems to have come up : the Parliamentary Standing Committee on Finance seems to be saying that the fundamental idea of the NPS — defined contributions — should be scrapped. This would amount to a major reversal of India’s economic reforms.
On this subject, see:
By Claus Vistesen, on September 7th, 2011
 One of the stories that caught my attention this week was the Bloomberg piece about how banks in London and New York are starting to jump ship on the old finance hubs due to fear of effects from planned regulatory tightening.
Quote Bloomberg
Banks in Europe are exploring ways to cut costs by routing more of their trades and other business through overseas subsidiaries, a plan that may shift tax revenue away from London and loosen European regulators’ influence over the lenders.Nomura Holdings Inc., HSBC Holdings Plc (HSBA) and UBS AG (UBSN) are among lenders preparing plans to book as much business as possible through legal entities in jurisdictions where tax rates are lower and rules on capital and liquidity are less onerous, the banks and lawyers and accountants working with them say.
(…)
Banks could record as much as 30 percent of the value of their trades through Hong Kong, Singapore and other jurisdictions instead of hubs such as London and New York without running into trouble with regulators, Matten said. Such a move would hurt traditional hubs such as London because assets are treated for tax and regulatory purposes in the country where they are booked. It would also allow banks to sidestep the U.K. bank levy, introduced last year to raise 2.5 billion pounds ($4.1 billion) from lenders operating in Britain, as well as any financial transaction tax imposed by the European Union.
Perhaps this is a sign of the times in the sense that both banks and market participants seem to be looking increasingly outside the boundaries of the developed world for growth, profit and eventually prosperity. Having just moved to the Big Smoke I would not necessarily lament a downsizing of the finance sector even if it is the pond that I also do my fishing for the daily meal ticket. Perhaps, if fast moving financiers chose to go to Singapore instead of London, the residents of the latter would not have to endure paying 300.000 GBP for a studio flat in Canary Wharf [1].
Of course, it may all be a red herring but it could also be part of a number of tentative signs that the locus of global activity on a variety of fronts is moving to new epicentres. Let us hope they do not travel entirely in our foot steps.
More generally, we just put out our monthly report and the outlook is very much wishy-washy. Surely, our leading indicators are pointing down, but after the market puke in August it seems to me that the end of the world had almost been priced in as the S&P500 hit the 1100 marker. In this sense, do not be surprised to see it ticking towards 1250 even if the recent job data were abysmal, but beware. The old range has been broken and we are finding a new lower one. Market prices have a tendency to become “normal” after a period and with global economic activity visibly slowing the fundamentals are not really on the bulls’ side even if they point to the merits of chasing a counter trend rally after a 10% drawdown.
More generally as I noted before, the divergence between respectable analysts is widening which always makes me take a few steps back. On the one hand I see both buy side and sell side analysts rather stubbornly sticking to their year-end S&P500 targets of 1300-1400 while other independent analysts put the fair value of the index at 900-1000. Both will obviously have an axe (or maybe even a book) to grind, but part of my job is to synthesize the consensus into a fairly straight road map for our clients, and it is getting difficult.
I tend to side with the pessimists if only because I find it difficult to see how US corporates can continue to operate as efficiently as they have been doing so far. Gerald Minack had some excellent points on this in his latest report;
A big medium-term uncertainty for DM equity investors is the sustainability of earnings. A decade ago, the big uncertainty was whether valuations could be sustained. They weren’t . The de-rating may have further to go, but clearly valuation is less of a headwind now than at the TMT-inspired peak. Earnings, on the other hand, are very high. Profits are now near an all-time high as a share of global GDP, and the real return on equity has followed . What’s not able, however, is not the cycle rebound, but the elevated level of earnings (and real returns) over the past decade. The forward-looking issue is whether those elevated returns can be sustained. At a global level, the answer may be ‘yes’ – for the simple reason it’s now possible to make profits in places where previously it was not. What’s not clear is the sustainability of high earnings in the developed world.
In particular, I would would point to the contradiction between continuing ultra low unit labour costs and the need to now see growth moving from cost cutting to topline growth. Something does not add up.
Real unit labour costs are now at 60-year lows. This matches the decline in wage share of GDP to a 50-year low. Arithmetically, this is the most important support for high profits. As I’ve discussed in prior reports, it’s not clear how long households can support consumer spending at near 70% of GDP with labour income at multi-decade lows. That’s been possible recently due to massive transfers from the public sector, but that support appears unsustainable.
In my opinion, this is big elephant in the room in relation to the US stock market. It will be difficult for earnings (and margins) to stay at current levels going forward. It follows naturally from the fact that if all companies cut costs and this improves margins this will only work for a limited period time as there are decreasing returns if everyone follows this strategy at the same time. Now we need to see topline sales growth for margins to be sustained, but this is obviously difficult with the current macroeconomic backdrop, so something has to give.
Globally, coincident data is already slowing visibly across the globe with headline PMI readings and trade data coming in steadily lower. In that sense we are up against the wall again only so shortly after the shock of 2008/09 and this time, the ability of policy makers to respond is limited.
However, I would be weary about calling this another 2008. One of the effects of experiencing a balance sheet recession with subsequent deleveraging is that trend growth falls and thus that the economy becomes liable to more frequent recessions. This applies to the US in particular but essentially also to the whole of OECD. This means that we will see more frequent but also essentially shallower recessions. The only qualifier here is really that some parts of Europe are now stuck in a depression locked in a vice of dysfunctional institutions and a lack of willingness and political capability to deal with the problems.
As such, within Europe also lies the potential source a Lehman like shock should the crisis prompt a rapid and violent default of one or more sovereigns and/or financial institutions. Certainly, euro area banks are feeling the pinch as USD funding is getting cut off and if anything it seems to me that the EURUSD is looking a bit too strong for its own good given the backdrop of the mess in the euro zone. As cash levels at euro zone banks are drawn down the currency will adjust to fundamentals not to mention of course the fact that the ECB is slowly but steadily being pushed into full blown QE and monetisation of peripheral debt.
The latest G&F provides a good summary;
(…) The risk of a dollar rally against the euro in coming months is growing. This is because, sooner or later, the ECB will have to reverse its recent insane monetary tightening. Trichet made a start in this direction this week in his usual ponderous manner. Thus, he told the Committee on Economic and Monetary Affairs of the European Parliament in Brussels on Monday that “risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September.” The issue here is whether markets will allow Trichet to save face and not performs an abrupt U-turn before his scheduled departure from the scene on 31 October.
More generally, the recent comments from the IMF that euro zone banks need additional capital is once more a case of stating the almost obviously obvious. The transmission mechanism here is very simple. The market is now effectively pricing in a default of Greece and possibly other peripheral economies and this means that the attention must now turn to the losses that creditors will bear or, alternatively, the size of the bailout if we stick to the old mantra of no losses. As a good friend of mine pointed out recently,
All trough last month’s banking shares’ collapse, I have been thinking that perhaps, equity investors are worried that the recapitalization will be different this time, with either the taxpayer (wrong solution) or the bondholder (rightly, through a bond-for-equity swap), massively diluting the shareholder. Politicians obviously do not have the stomach, nor the muscle for new bailouts.
Or to put it differently, there are no easy solutions left. One solution is the Brady Bond plan which is currently being floated in the case of Greece. The problem as I see is that it is fudged precisely when it comes to the current valuation of the bonds. Basically, there has to be pain today for the creditors, otherwise we are just kicking the proverbial can down the road as recapitalisation is avoided today but made worse for tomorrow. A solution for recapitalising banks today would naturally be for their creditors to accept a swap for equity and thus being moved into the frontline to absorb any losses that the banks would bear on sovereign debt, but that is not popular. Essentially, being degraded to equity holder in a bank with known sovereign assets in the European periphery is equal to taking a haircut on your initial investment, but all this then leaves the inevitable question of who and when someone will step up to take the lead in the debt restructuring.
Of course, the idea of substituting debt for equity is the same principle applied in the case of Greece posting domestic assets (islands, utility companies etc) as collateral for credit. We can then think about this collateral as Greek sovereign equity and as with creditors of banks, it is all good in theory but in practice, not so well.
Elsewhere, the game of Old Maid in global currency markets continue with the SNB still in the spotlight despite already having taken desperate measures to stop the appreciation of the CHF;
Quote Bloomberg
While the Swiss National Bank has so far avoided currency purchases in its latest bid to keep a lid on the franc, it may soon have no alternative but to follow through on its threat to intervene, economists and strategists said.
But what really caught my attention was comments by Brazilian Finance Minister Guido Mantega that lowering interest rates represents an effective antidote against an appreciating currency.
Quote Bloomberg
For “the next two or three years, the conditions will be there for rates to keep falling,” Mantega told reporters in Sao Paulo today. “Falling rates are a good antidote for the gains in the real.”
Allow me to quote myself from the post linked above;
Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end of the game. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.
The easy investment advice here is naturally to buy the Old Maid which means that just as the global financial punditry searching for clues as to what lies ahead for the global economy and the looming slowdown the SNB et al may have to skint yet awhile for light at the end of the tunnel.
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[1] – No my dear reader, I am renting and I would never touch these things but they are there and they are being sold.
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