I've completed the conversion of the Enlightened-American website into a blog structure and so this blog will no longer be updated. Thanks for visiting and be sure to go to the new site:
Enlightened-American
Sunday, March 16, 2008
Friday, March 14, 2008
Good News -- No Inflation in February!
Get the details here:
Inflation Flat in February
Supposedly, this gives the Fed room to cut. I guess all that talk about inflation being a lagging indicator goes out the window when sh*t hits the fan. Of course, the bad news at Bear Stearns isn't a surprise -- Msr. Merrano of Bear Stearns had said they would need lots of help way back in October, as I noted in a previous post.
Even if this inflation number is "massaged" (and I don't trust it one bit but paranoia comes from my political background), it is a bad omen since it means that the current commodities run has not shown up in the inflation numbers and we can expect a jump in the upcoming months. The Fed's credibility is fairly shot at this point as evidenced by the huge run in oil even with the bearish inventory numbers on Wednesday. I don't pay much attention to inventory numbers but it's interesting to see the change in market behavior when the market disregards inventory numbers as well.
I'm not opening new positions in commodities right now (unless it's cheap but it's hard to find a company that hasn't run up in this space) but I expect this run may last longer than most expect, including myself. In any case, the long term case for commodities remains as strong as ever. A correction would be nothing to fear.
Inflation Flat in February
Supposedly, this gives the Fed room to cut. I guess all that talk about inflation being a lagging indicator goes out the window when sh*t hits the fan. Of course, the bad news at Bear Stearns isn't a surprise -- Msr. Merrano of Bear Stearns had said they would need lots of help way back in October, as I noted in a previous post.
Even if this inflation number is "massaged" (and I don't trust it one bit but paranoia comes from my political background), it is a bad omen since it means that the current commodities run has not shown up in the inflation numbers and we can expect a jump in the upcoming months. The Fed's credibility is fairly shot at this point as evidenced by the huge run in oil even with the bearish inventory numbers on Wednesday. I don't pay much attention to inventory numbers but it's interesting to see the change in market behavior when the market disregards inventory numbers as well.
I'm not opening new positions in commodities right now (unless it's cheap but it's hard to find a company that hasn't run up in this space) but I expect this run may last longer than most expect, including myself. In any case, the long term case for commodities remains as strong as ever. A correction would be nothing to fear.
Thursday, March 13, 2008
70 Is The New 80!
I don't know much about technical analysis, charts, heads & shoulders, double bottoms, etc. but this chart looks fugly:
It was just last August that folks were worried about the US$ index dropping below 80 with no floor in sight. Six months later and here's 70 rushing up to meet our beleaguered currency.
I don't have much of a clue as to which direction the dollar will head next in the short term. I remember some pundits from Brown Brothers Harriman and other shops suggesting that the short bet against the dollar was way too overcrowded and would lead to a rebound. That was around $1.47 to the euro. I suspect they may be closer to being right today than back then but who knows?
We are also getting closer to the point where central banks may intervene in the currency markets. Here's an article from Bloomberg showing that I'm not the only one with intervention on my mind:
Dollar's Slump Puts Morgan, Goldman on `Intervention Watch' March ...
It was just last August that folks were worried about the US$ index dropping below 80 with no floor in sight. Six months later and here's 70 rushing up to meet our beleaguered currency.
I don't have much of a clue as to which direction the dollar will head next in the short term. I remember some pundits from Brown Brothers Harriman and other shops suggesting that the short bet against the dollar was way too overcrowded and would lead to a rebound. That was around $1.47 to the euro. I suspect they may be closer to being right today than back then but who knows?
We are also getting closer to the point where central banks may intervene in the currency markets. Here's an article from Bloomberg showing that I'm not the only one with intervention on my mind:
Dollar's Slump Puts Morgan, Goldman on `Intervention Watch' March ...
Monday, March 10, 2008
Portfolio Performance: +11.5% YTD as of 03/07/2008
As always, you can view the complete portfolio here:
Enlightened-American Portfolio
Last August during the first major credit dislocation, my portfolio took a bigger hit than the broader market which really disturbed me. During that time, the gold and energy stocks sold off really hard (and bounced back even harder) and while I expect volatility in these sectors, it still wasn't a pleasant experience. At that time, I decided that I needed to focus a little on portfolio management and promptly started reading the Buffett Partnership letters.
A few ideas really stood out from those letters:
1) Buffett repeatedly sets the standard for his performance as beating the market in a down year. It almost seemed as if every other sentence warned the partners to brace themselves for perpetually lower returns in any strong bull market (of course, this was never the case -- Buffett outperformed the Dow every year during his partnerships). The true target wasn't outpacing a bull market but rather, outperforming in a down market. Once I wrapped my head around this, I had to modify my approach slightly.
2) The importance of a non-correlated asset mix. Buffett divided his investments into 3, later 4 categories: generals, "workouts" and control situations. These categories suggested that I needed to implement a multi-faceted approach to investing in order to outperform.
As far as I can tell, Buffett doesn't believe in hedging, per se, i.e. taking a position that is intrinsically inversely correlated to another open position. Basically, putting on a trade structured as a see-saw where if one side goes up, the other must go down -- say like going long a stock and then buying puts as a hedge. He seemed focused more on non-correlated assets. Workouts included merger arbitrage (including some leverage) and imminent asset conversion plays. Controls were basically going private transactions. Since reading this, I've been studying ways of building elements of these principles into my portfolio (i.e. my put writing strategy discussed a little here). I know some others have been trying to imitate Buffett's actual tactics like merger arbitrage but this seems a mistake to me -- a case of focusing so much on the specific details that the general principle is missed.
With all that said, it may be stating the obvious to say that I am pleased with results thus far, especially in context to what is happening in the broader market.
A couple of points:
* Pretty much the only thing working are commodity plays. Our energy and gold picks are powering most of the gains. Hey, I can't take much of the credit other than to say I know who the smart people are and listen to them. But even so, you'll hear often that in volatile uncertain markets, it's a stockpicker's market and that is true even in the commodity plays. If you held NEM instead of AEM or CVX in lieu of DVN, you'd be down 10% YTD. Of course, I could have picked EOG instead but hey, can't win them all.
* The stocks that are not working pay a solid dividend (in some cases, 5% and 8%) so that will mitigate some of the losses and hopefully put a floor under as well. I think that long term, this will bolster portfolio returns, especially as markets recover.
* The other short-term ("workout") component of our strategy, writing puts on undervalued stocks and collecting low-risk premiums, also worked well. This area has added 2 percentage points of return so far this year and unlike the rest of the portfolio, it's booked into cash money.
A commenter mentioned that my results thus far mean nothing without a 15 year track record and he (or she) is absolutely right. I wholly admit that my results from 2007 and YTD 2008 could be the result of blind luck or one lucky call. In fact, odds suggest this is likely to be the case and believe me, I spend a good part of everyday obsessing about this very possibility, questioning myself and working to negate this premise.
So don't get too impressed by the returns -- assess my reasoning and judge its soundness for yourself. And then do some research of your own. In the meantime, I'll let you know 13 years from now if it was luck or not.
Enlightened-American Portfolio
Last August during the first major credit dislocation, my portfolio took a bigger hit than the broader market which really disturbed me. During that time, the gold and energy stocks sold off really hard (and bounced back even harder) and while I expect volatility in these sectors, it still wasn't a pleasant experience. At that time, I decided that I needed to focus a little on portfolio management and promptly started reading the Buffett Partnership letters.
A few ideas really stood out from those letters:
1) Buffett repeatedly sets the standard for his performance as beating the market in a down year. It almost seemed as if every other sentence warned the partners to brace themselves for perpetually lower returns in any strong bull market (of course, this was never the case -- Buffett outperformed the Dow every year during his partnerships). The true target wasn't outpacing a bull market but rather, outperforming in a down market. Once I wrapped my head around this, I had to modify my approach slightly.
2) The importance of a non-correlated asset mix. Buffett divided his investments into 3, later 4 categories: generals, "workouts" and control situations. These categories suggested that I needed to implement a multi-faceted approach to investing in order to outperform.
As far as I can tell, Buffett doesn't believe in hedging, per se, i.e. taking a position that is intrinsically inversely correlated to another open position. Basically, putting on a trade structured as a see-saw where if one side goes up, the other must go down -- say like going long a stock and then buying puts as a hedge. He seemed focused more on non-correlated assets. Workouts included merger arbitrage (including some leverage) and imminent asset conversion plays. Controls were basically going private transactions. Since reading this, I've been studying ways of building elements of these principles into my portfolio (i.e. my put writing strategy discussed a little here). I know some others have been trying to imitate Buffett's actual tactics like merger arbitrage but this seems a mistake to me -- a case of focusing so much on the specific details that the general principle is missed.
With all that said, it may be stating the obvious to say that I am pleased with results thus far, especially in context to what is happening in the broader market.
A couple of points:
* Pretty much the only thing working are commodity plays. Our energy and gold picks are powering most of the gains. Hey, I can't take much of the credit other than to say I know who the smart people are and listen to them. But even so, you'll hear often that in volatile uncertain markets, it's a stockpicker's market and that is true even in the commodity plays. If you held NEM instead of AEM or CVX in lieu of DVN, you'd be down 10% YTD. Of course, I could have picked EOG instead but hey, can't win them all.
* The stocks that are not working pay a solid dividend (in some cases, 5% and 8%) so that will mitigate some of the losses and hopefully put a floor under as well. I think that long term, this will bolster portfolio returns, especially as markets recover.
* The other short-term ("workout") component of our strategy, writing puts on undervalued stocks and collecting low-risk premiums, also worked well. This area has added 2 percentage points of return so far this year and unlike the rest of the portfolio, it's booked into cash money.
A commenter mentioned that my results thus far mean nothing without a 15 year track record and he (or she) is absolutely right. I wholly admit that my results from 2007 and YTD 2008 could be the result of blind luck or one lucky call. In fact, odds suggest this is likely to be the case and believe me, I spend a good part of everyday obsessing about this very possibility, questioning myself and working to negate this premise.
So don't get too impressed by the returns -- assess my reasoning and judge its soundness for yourself. And then do some research of your own. In the meantime, I'll let you know 13 years from now if it was luck or not.
Sunday, March 9, 2008
Commodities Bubble or A Wall of Worry?
John Authers of the Financial Times penned a decent article over the weekend on the possible explanations for the commodities "bubble." It's worth popping over there and reading the whole thing but he sums up his three explanations of the commodities run-up as follows:
This article is more balanced in suggesting that we may be experiencing a bubble in commodities than other commentaries which unequivocally suggest a mania in that sphere. I'd like to add the following points.
In terms of "investor demand" and throughout the article, Authers makes no mention of the pitifully weak US dollar. Much of this "investor demand" or "speculation" is a reasonable defensive move in reaction to the debasement by the Fed. It is no surprise that other currencies like the euro and yen have moved in tandem with commodities. The move in commodity prices looks fearsome in US dollar terms but is tempered somewhat when measured in foreign currencies (though still impressive).
As a brief example, oil touched ~$50 per barrel in January 2007. It has now more than doubled since that point for a ~110% gain in US dollar terms. During that month, the euro averaged ~$1.30 so the Germans or French were paying ~38.50 euros per barrel. Today, at $105 per barrel, the European price at today's exchange rate is ~68.4 euros per barrel, roughly a 78% gain. Nothing to sneeze at but a bit below the 110% pace experienced on this side of the pond.
Of course, this holds true across many other non-pegged currencies and for other commodities as well.
Combined with the move in Treasurys, it's clear we are witnessing a flight to safety. Some may call it speculation but this is just a game in semantics. I would venture to say there is even more of a speculative frenzy in Treasurys than the commodities market currently. For some reason, instead of speculation, the move to Treasurys (yielding less than official inflation) is often called "a flight to quality."
In regards to the "supply" side, Authers makes no distinction between commodities. Not all commodities face the same supply constraints and of course, some goods are more inelastic than others in terms of supply/demand dynamics. Oil supply is much different than gold supply or corn supply. So it may be possible for some markets like wheat or soybeans to drastically pull back while others like natural gas or oil to continue moving up.
Finally, the "consumer demand" argument in relation to the emerging markets may also be influenced by the world's sloshing dollars. The US authorities have sent a clear signal that we intend to limit how others can spend and invest their excess dollars. As politicians nix more deals like CNOOC/Unocal or the recent 3Com/Bain Capital/Huawei Technologies or even the recent tanker contract with EADS/Northrup Gruman, we risk discouraging foreign investment here and ultimately encouraging flows into commodity assets. If someone like the Chinese can't use their excess dollars to buy quality assets (and clearly Treasurys are not quality assets, just ask the Pension Benefit Guaranty Fund), the logical move would be to buy commodity assets with their dollars, even at $100 per barrel or $1000 per oz. Otherwise, what else can you do with dollars -- let them depreciate away, earning 2-4% interest while domestic inflation rages over 7%?
That said, I would order Authers' three explanations in the following order of plausibility and importance:
1. Supply constraints - if money doesn't grow on trees, the inverse is also true: you can't print up food on a printing press. Bringing harvests to market, mines online and oil fields into production takes time and major capital.
2. Consumer demand - obviously the Chindia story is well known but less oft-mentioned is increasing demand in the Middle East, Latin America and eastern Europe.
3. Investor demand - I do think that capital inflows are pushing up prices. But it would be a mistake to assume this is the primary driver. Any investor demand at this point is being driven more by the Fed than by speculators, who are simply responding to the Fed's moves.
Authers, to his credit, states that the true explanation is some combination of the the three.
While commodities are always a volatile ride with a hard pullback always hiding around the corner, the intermediate to long-term outlook points strongly upward. As I mentioned in a previous post, all this hand-wringing about a commodities bubble is really a wall of worry leading to higher prices.
___________________________________________________________________
Update: No sooner than I finished this post than I see this headline pop up on Bloomberg:
Dollar Falls as Traders Start to Bet Fed Will Cut Rates to 2%
1 full percentage cut from a pretty low base as it is. Wow. No wonder people are wondering if gold will hit $1000 this week.
If the "consumer demand" explanation is right, then you should not necessarily sell commodities, as the emerging markets may "decouple". But it also suggests inflation is a real threat to the emerging markets' growth, so this still is not a safe investment for the long term.
If the "investor demand" explanation is right, then commodities are a bubble. You should get out now.
If the "supply" explanation is right, then the economy is in deep trouble and pace the 1970s, commodities offer almost the only protection against what is going to hit us.
This article is more balanced in suggesting that we may be experiencing a bubble in commodities than other commentaries which unequivocally suggest a mania in that sphere. I'd like to add the following points.
In terms of "investor demand" and throughout the article, Authers makes no mention of the pitifully weak US dollar. Much of this "investor demand" or "speculation" is a reasonable defensive move in reaction to the debasement by the Fed. It is no surprise that other currencies like the euro and yen have moved in tandem with commodities. The move in commodity prices looks fearsome in US dollar terms but is tempered somewhat when measured in foreign currencies (though still impressive).
As a brief example, oil touched ~$50 per barrel in January 2007. It has now more than doubled since that point for a ~110% gain in US dollar terms. During that month, the euro averaged ~$1.30 so the Germans or French were paying ~38.50 euros per barrel. Today, at $105 per barrel, the European price at today's exchange rate is ~68.4 euros per barrel, roughly a 78% gain. Nothing to sneeze at but a bit below the 110% pace experienced on this side of the pond.
Of course, this holds true across many other non-pegged currencies and for other commodities as well.
Combined with the move in Treasurys, it's clear we are witnessing a flight to safety. Some may call it speculation but this is just a game in semantics. I would venture to say there is even more of a speculative frenzy in Treasurys than the commodities market currently. For some reason, instead of speculation, the move to Treasurys (yielding less than official inflation) is often called "a flight to quality."
In regards to the "supply" side, Authers makes no distinction between commodities. Not all commodities face the same supply constraints and of course, some goods are more inelastic than others in terms of supply/demand dynamics. Oil supply is much different than gold supply or corn supply. So it may be possible for some markets like wheat or soybeans to drastically pull back while others like natural gas or oil to continue moving up.
Finally, the "consumer demand" argument in relation to the emerging markets may also be influenced by the world's sloshing dollars. The US authorities have sent a clear signal that we intend to limit how others can spend and invest their excess dollars. As politicians nix more deals like CNOOC/Unocal or the recent 3Com/Bain Capital/Huawei Technologies or even the recent tanker contract with EADS/Northrup Gruman, we risk discouraging foreign investment here and ultimately encouraging flows into commodity assets. If someone like the Chinese can't use their excess dollars to buy quality assets (and clearly Treasurys are not quality assets, just ask the Pension Benefit Guaranty Fund), the logical move would be to buy commodity assets with their dollars, even at $100 per barrel or $1000 per oz. Otherwise, what else can you do with dollars -- let them depreciate away, earning 2-4% interest while domestic inflation rages over 7%?
That said, I would order Authers' three explanations in the following order of plausibility and importance:
1. Supply constraints - if money doesn't grow on trees, the inverse is also true: you can't print up food on a printing press. Bringing harvests to market, mines online and oil fields into production takes time and major capital.
2. Consumer demand - obviously the Chindia story is well known but less oft-mentioned is increasing demand in the Middle East, Latin America and eastern Europe.
3. Investor demand - I do think that capital inflows are pushing up prices. But it would be a mistake to assume this is the primary driver. Any investor demand at this point is being driven more by the Fed than by speculators, who are simply responding to the Fed's moves.
Authers, to his credit, states that the true explanation is some combination of the the three.
While commodities are always a volatile ride with a hard pullback always hiding around the corner, the intermediate to long-term outlook points strongly upward. As I mentioned in a previous post, all this hand-wringing about a commodities bubble is really a wall of worry leading to higher prices.
___________________________________________________________________
Update: No sooner than I finished this post than I see this headline pop up on Bloomberg:
Dollar Falls as Traders Start to Bet Fed Will Cut Rates to 2%
1 full percentage cut from a pretty low base as it is. Wow. No wonder people are wondering if gold will hit $1000 this week.
Thursday, March 6, 2008
Minefinders (MFN) Added to Portfolio
A quick update for regular readers:
At the beginning of the year, I had mentioned missing out on Minefinders (MFN) @ < $10 even with gold at $800. Well, at the end of February, the market sent MFN back below $10 and I bought some for the portfolio at $9.95.
Normally, I type up a semi-thorough research report to crystallize the risks and rationale for my picks but am skipping it this time. If you would like a good backgrounder on Minefinders, try Seeking Alpha and pay particular attention to Mike Niehuser's informative posts. Be aware however that he may have some sell-side interests with MFN but that doesn't necessarily invalidate his research. As always, read with a skeptical eye and make your own assessments.
A few extra points below:
* I believe the reason MFN was available again under $10 despite $900+ gold was due to market disappointment with their revised Dolores economic study update. While they increased P+P reserves (+37%), lowered gold cash costs net of by-products and raised the IRR. However, they raised the underlying base metal prices +42% on the gold side and doubled the silver price to reach these estimates so in actuality, the revision to the study was negative when taking into account the elevated base case.
* They are also behind schedule on initial production which may have contributed to the decline.
* Finally, the market has not favored the junior mining stocks despite the run-up on the commodities.
RISKS TO OUR INVESTMENT:
* Minefinders has no proven track record of being able to operate a mine successfully. Even the best and biggest miners like Barrick are having trouble containing costs. There is nothing to suggest that MFN will fare any better. They are already late with their flagship Dolores project and over budget with initial capital costs (US$192M) exceeding 45% of previous forecast and sustaining capital at $50M, 72% higher than previously projected.
* Beyond Dolores, the company has no clearly defined reserves to develop, only prospects that may become reserves after further exploration and delineation. With the company focused on bringing Dolores online and then possibly adding a mill to boost recovery rates, it may be some time before management can focus on the other prospective plays.
* Once Dolores is brought online, MFN will be a one-mine company for quite some time. Any delays or major setbacks at Dolores could seriously endanger the company. $58M of long-term debt (32% debt-to-equity) sat on the balance sheet as of Q3 2007 and without Dolores, the company generates no income from operations. If Dolores is seriously impaired for any length of time, expect the stock to be drastically marked down.
* Any correction to the precious metals market that many consider frothy may delay market price appreciation on the common stock. The juniors to date have largely missed out on the run to $1000 gold. A severe correction could mean they just sit this round out.
ATTRACTIVE UPSIDE FOR MINEFINDERS:
* Based on ounces in the ground valuation, this thing is cheap. If everything goes reasonably well, Minefiners will join the rank of producing companies before the year is out and should be revalued to reflect that. My rough EV:oz au equivalent calculations shows we're paying a quarter of the multiple for Minefinders compared to, say, another one-mine producer like Agnico-Eagle (I acknowledge this isn't a clean comparison but that's ok because we own both!). This site confirms my findings though I'm not sure which numbers they are using to calculate EVPU.
* Favorable jurisdiction and economic environment. Minefinders' Dolores property (as well as their other prospects) are all located in Mexico, which is probably one of the best places to be a gold mining company in world right now. While infrastructure may be a slight problem, the country has a rich mining history and culture, good prospects that property rights will be respected for the foreseeable future, a good labor pool and an attractive currency relative to the US dollar.
* Management has acted conservatively in bringing Dolores along to production. Shares outstanding stand at 48M, reasonable compared to a serial diluter like Yamana. The management's plan to initiate production with a lower-cost open pit, heap-leach mine and use cash flows generated to upgrade to a mill demonstrates a judicious sense of strategy. And the fact that the company has managed to finance all of this without egregious amounts of debt, dilution or hedging reflects well on management.
* I'm no geologist but indications are that there is a good potential for resource upgrade at Dolores covering areas that were not included in the initial or revised feasibility study.
* Clear exploration targets in Planchas de Plata, Real Viejo, La Bolsa & El Duranzo.
I wouldn't be surprised if Minefinders encounters further delays bringing Dolores online. But if they can manage to generate positive cash flow before the year is out at a cash cost near $325-$350 per oz (compared to the company's current $297 target), I'll be a happy shareholder.
While I am excited by this addition to my portfolio, I consider this play slightly more speculative than my usual fare. As always, your mileage may vary.
*********************************************************
DISCLOSURE: Please see our portfolio page for all disclosures.
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.
The author received no compensation and is not affiliated with the company reviewed in this report with the possible exception of being a shareholder. The author reserves the right to buy or sell the stock as deemed personally prudent without further notification
At the beginning of the year, I had mentioned missing out on Minefinders (MFN) @ < $10 even with gold at $800. Well, at the end of February, the market sent MFN back below $10 and I bought some for the portfolio at $9.95.
Normally, I type up a semi-thorough research report to crystallize the risks and rationale for my picks but am skipping it this time. If you would like a good backgrounder on Minefinders, try Seeking Alpha and pay particular attention to Mike Niehuser's informative posts. Be aware however that he may have some sell-side interests with MFN but that doesn't necessarily invalidate his research. As always, read with a skeptical eye and make your own assessments.
A few extra points below:
* I believe the reason MFN was available again under $10 despite $900+ gold was due to market disappointment with their revised Dolores economic study update. While they increased P+P reserves (+37%), lowered gold cash costs net of by-products and raised the IRR. However, they raised the underlying base metal prices +42% on the gold side and doubled the silver price to reach these estimates so in actuality, the revision to the study was negative when taking into account the elevated base case.
* They are also behind schedule on initial production which may have contributed to the decline.
* Finally, the market has not favored the junior mining stocks despite the run-up on the commodities.
RISKS TO OUR INVESTMENT:
* Minefinders has no proven track record of being able to operate a mine successfully. Even the best and biggest miners like Barrick are having trouble containing costs. There is nothing to suggest that MFN will fare any better. They are already late with their flagship Dolores project and over budget with initial capital costs (US$192M) exceeding 45% of previous forecast and sustaining capital at $50M, 72% higher than previously projected.
* Beyond Dolores, the company has no clearly defined reserves to develop, only prospects that may become reserves after further exploration and delineation. With the company focused on bringing Dolores online and then possibly adding a mill to boost recovery rates, it may be some time before management can focus on the other prospective plays.
* Once Dolores is brought online, MFN will be a one-mine company for quite some time. Any delays or major setbacks at Dolores could seriously endanger the company. $58M of long-term debt (32% debt-to-equity) sat on the balance sheet as of Q3 2007 and without Dolores, the company generates no income from operations. If Dolores is seriously impaired for any length of time, expect the stock to be drastically marked down.
* Any correction to the precious metals market that many consider frothy may delay market price appreciation on the common stock. The juniors to date have largely missed out on the run to $1000 gold. A severe correction could mean they just sit this round out.
ATTRACTIVE UPSIDE FOR MINEFINDERS:
* Based on ounces in the ground valuation, this thing is cheap. If everything goes reasonably well, Minefiners will join the rank of producing companies before the year is out and should be revalued to reflect that. My rough EV:oz au equivalent calculations shows we're paying a quarter of the multiple for Minefinders compared to, say, another one-mine producer like Agnico-Eagle (I acknowledge this isn't a clean comparison but that's ok because we own both!). This site confirms my findings though I'm not sure which numbers they are using to calculate EVPU.
* Favorable jurisdiction and economic environment. Minefinders' Dolores property (as well as their other prospects) are all located in Mexico, which is probably one of the best places to be a gold mining company in world right now. While infrastructure may be a slight problem, the country has a rich mining history and culture, good prospects that property rights will be respected for the foreseeable future, a good labor pool and an attractive currency relative to the US dollar.
* Management has acted conservatively in bringing Dolores along to production. Shares outstanding stand at 48M, reasonable compared to a serial diluter like Yamana. The management's plan to initiate production with a lower-cost open pit, heap-leach mine and use cash flows generated to upgrade to a mill demonstrates a judicious sense of strategy. And the fact that the company has managed to finance all of this without egregious amounts of debt, dilution or hedging reflects well on management.
* I'm no geologist but indications are that there is a good potential for resource upgrade at Dolores covering areas that were not included in the initial or revised feasibility study.
* Clear exploration targets in Planchas de Plata, Real Viejo, La Bolsa & El Duranzo.
I wouldn't be surprised if Minefinders encounters further delays bringing Dolores online. But if they can manage to generate positive cash flow before the year is out at a cash cost near $325-$350 per oz (compared to the company's current $297 target), I'll be a happy shareholder.
While I am excited by this addition to my portfolio, I consider this play slightly more speculative than my usual fare. As always, your mileage may vary.
*********************************************************
DISCLOSURE: Please see our portfolio page for all disclosures.
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.
The author received no compensation and is not affiliated with the company reviewed in this report with the possible exception of being a shareholder. The author reserves the right to buy or sell the stock as deemed personally prudent without further notification
Wednesday, March 5, 2008
The True Wall of Worry Resides in Commodities, Not Equities
A few peculiarities I've noticed about mainstream financial media:
* Seemingly everyone is a contrarian. It doesn't matter which argument, bull or bear, is being made, it is usually prefaced by "I'm a contrarian by nature" or some variation thereof. Obviously people don't really know what that word means.
* No one is ever called on their record. Let me clarify. The perma-bulls who are wrong on a majority basis (more than 50%) are never called to account. Folks who keep calling bottoms in financials & housing come to mind.
Among one of the many recycled cliches on Wall Street is this concept that stocks climb a wall of worry to go higher, that prices usually go up while investors worry about myriad dangers to equities. And now, I'm starting to hear similar reasoning for the current market. The market is so "gloomy" and "despondent" and equities have already priced in "recession and worse" that they're a good buy right now. Sound familiar?
Meanwhile, while the major business channels are pushing that line of thinking regarding equities, it's not unusual to hear a story about record-high commodity prices accompanied by the word "bubble." Here's a few examples:
Investors Seek Haven in Commodities (WSJ $)
Gold Rush Is Overdue for Pullback (WSJ $)
Stagflation fears as commodities post strongest gains since 1970s (FT)
And of course, who can forget Goldman Sachs' infamous call -- that the best play in 2008 is shorting gold.
I bring up all of this to say that the true wall of worry is in the commodities market. Every day, another pundit goes on TV and says he or she expects the price of oil/gold/wheat/corn/soybeans/whatever to come down as these levels are not supported by the fundamentals. As I mentioned in yesterday's post, even people I respect like Frank Barbera are calling gold "overbought." I love listening to Barbera on Jim Puplava's webcast but if I had listened to his sell gold calls this year and last, I would have left a ton of money on the table.
Back in November, I posted my thoughts on the primary themes facing the market ahead, almost all of which are playing out now and which were, ahem....contrarian to the prevailing professional sentiment at the time (which was buy tech and large-cap growth were the places to be).
They say the market is a discounting mechanism. I've yet to see that truly be the case.
* Seemingly everyone is a contrarian. It doesn't matter which argument, bull or bear, is being made, it is usually prefaced by "I'm a contrarian by nature" or some variation thereof. Obviously people don't really know what that word means.
* No one is ever called on their record. Let me clarify. The perma-bulls who are wrong on a majority basis (more than 50%) are never called to account. Folks who keep calling bottoms in financials & housing come to mind.
Among one of the many recycled cliches on Wall Street is this concept that stocks climb a wall of worry to go higher, that prices usually go up while investors worry about myriad dangers to equities. And now, I'm starting to hear similar reasoning for the current market. The market is so "gloomy" and "despondent" and equities have already priced in "recession and worse" that they're a good buy right now. Sound familiar?
Meanwhile, while the major business channels are pushing that line of thinking regarding equities, it's not unusual to hear a story about record-high commodity prices accompanied by the word "bubble." Here's a few examples:
Investors Seek Haven in Commodities (WSJ $)
Gold Rush Is Overdue for Pullback (WSJ $)
Stagflation fears as commodities post strongest gains since 1970s (FT)
And of course, who can forget Goldman Sachs' infamous call -- that the best play in 2008 is shorting gold.
I bring up all of this to say that the true wall of worry is in the commodities market. Every day, another pundit goes on TV and says he or she expects the price of oil/gold/wheat/corn/soybeans/whatever to come down as these levels are not supported by the fundamentals. As I mentioned in yesterday's post, even people I respect like Frank Barbera are calling gold "overbought." I love listening to Barbera on Jim Puplava's webcast but if I had listened to his sell gold calls this year and last, I would have left a ton of money on the table.
Back in November, I posted my thoughts on the primary themes facing the market ahead, almost all of which are playing out now and which were, ahem....contrarian to the prevailing professional sentiment at the time (which was buy tech and large-cap growth were the places to be).
They say the market is a discounting mechanism. I've yet to see that truly be the case.
Tuesday, March 4, 2008
Recovering From Surgery
Still recovering from surgery so sorry for the lack of updates over the last week or so. I haven't been able to do any sustained research so mostly keeping up with the daily newspapers and reading some books.
Interesting to see the commodities market action. We constantly hear about the "wall of worry" that stock markets climb but it seems to me that the true wall of worry is being scaled by commodities. Every day, I hear some other yak claim that commodities may be in a bubble. Every week, Sue Keenan of Bloomberg talks about some survey of traders which expects lower oil prices for the following week and then, some interview with a person like Stephen Schork, who talks about how fundamentals don't support elevated prices. And I don't want to pick on Stephen Schork (who seems to be wrong an awful lot). Even people like Dennis Gartman (who I don't think is a useless pundit) or Frank Barbera (who I actually respect) put out a lot sell calls on gold, only to see it go up. Now I don't know, maybe Gartman and Barbera are telling their subscribers to buy back in right before the bounces, but my main point is that the wall of worry is in commodities. Very few people mention the insanity going on in the treasurys market.
Interesting to see the commodities market action. We constantly hear about the "wall of worry" that stock markets climb but it seems to me that the true wall of worry is being scaled by commodities. Every day, I hear some other yak claim that commodities may be in a bubble. Every week, Sue Keenan of Bloomberg talks about some survey of traders which expects lower oil prices for the following week and then, some interview with a person like Stephen Schork, who talks about how fundamentals don't support elevated prices. And I don't want to pick on Stephen Schork (who seems to be wrong an awful lot). Even people like Dennis Gartman (who I don't think is a useless pundit) or Frank Barbera (who I actually respect) put out a lot sell calls on gold, only to see it go up. Now I don't know, maybe Gartman and Barbera are telling their subscribers to buy back in right before the bounces, but my main point is that the wall of worry is in commodities. Very few people mention the insanity going on in the treasurys market.
Tuesday, February 26, 2008
No Value Added
I recently made a resolution to stop focusing so much on what delusional pundits, authorities, and the like say in the media. It's not productive (except as a gauge on sentiment), my portfolio has performed quite well ignoring their hallucinatory ramblings and I'm not sure why I should get so riled up over mass cluelessness. Perhaps it's too distressing to be confronted with evidence of the pervasiveness of mass mediocrity. Realize that these mediocre minds -- the ones who can't see housing bubbles bigger than the moon, who can't see the fall-out from bad political policies and who can't run a business -- these people are fully represented in the highest echelons of government, business and bureaucracy.
I'm listening to some Fed governor, I think Donald Kohn, but really it doesn't matter who it is and probably best not to fill your brain with the name of a a person who doesn't have a clue. His speech so far: there were problems in the subprime market, housing market needs to correct and now this is causing distress in the financial markets. No f*cking DUH! Isn't this last summer's newspaper, much less yesterday's?
He also mentioned some causes for the recent "disappointing" inflation reports, blaming it on emerging market demand, biofuels, adverse weather, EVERYTHING BUT EASY MONETARY POLICY!
Markets move on this tripe? Sometimes, the folly of humanity astounds me. If this guy says one thing worth listening too, I'll be surprised and let you know. Nouriel Roubini will comment afterward on Bloomberg.
Ooooo...."inflation expectations appear to be reasonably well-anchored" --- hahaha, good one!
I'm listening to some Fed governor, I think Donald Kohn, but really it doesn't matter who it is and probably best not to fill your brain with the name of a a person who doesn't have a clue. His speech so far: there were problems in the subprime market, housing market needs to correct and now this is causing distress in the financial markets. No f*cking DUH! Isn't this last summer's newspaper, much less yesterday's?
He also mentioned some causes for the recent "disappointing" inflation reports, blaming it on emerging market demand, biofuels, adverse weather, EVERYTHING BUT EASY MONETARY POLICY!
Markets move on this tripe? Sometimes, the folly of humanity astounds me. If this guy says one thing worth listening too, I'll be surprised and let you know. Nouriel Roubini will comment afterward on Bloomberg.
Ooooo...."inflation expectations appear to be reasonably well-anchored" --- hahaha, good one!
Monday, February 25, 2008
Selling Naked Puts: Bad for Your Portfolio?
Maybe so, according to Steven Sears of Barron's. He put out a piece last week on options strategies and how retail investors can be duped into risky strategies by shucksters. One of the strategies he implicitly poo-poohs is selling naked puts:
While I have not talked about it in the past, any reader perusing my portfolio will notice a fair amount of naked put positions. It is my assertion that a naked put component combined with a value-investing perspective and fairly rigorous research is a HIGHLY EFFECTIVE AND PROFITABLE STRATEGY which can be implemented easily by the small retail investor to smooth out the returns generated in a portfolio.
This component of my portfolio averages an annualized 30% return over a holding period of 76 days and I have not yet had a stock put to me, even when I wanted it (HRZ). There are definite risks and drawbacks to this strategy (as with anything), but considering that I implemented this strategy in Sept 2007 and the extreme market volatility (well, mostly down) since then, I have concluded that this strategy is sound if implemented with the correct attitude toward risk and with the proper research. Keep in mind, though, there are definite risks and drawbacks to this strategy (as with anything).
I will probably go into this strategy in more detail at a later date but until then, remember that what works for me might not work for you and vice versa. But don't accept blanket generalizations by supposed experts as gospel (ie. selling naked puts is bad or SPACs are fraud vehicles, etc.). Few things in life are that black & white. Consult a financial advisor if you think you need the help and as always, YMMV.
"It gets better. He said he even heard one claim a few years ago that investors could make 16% a month selling "naked options," or contracts without an associated stock.
The name of the educators that make these claims is not important..."
While I have not talked about it in the past, any reader perusing my portfolio will notice a fair amount of naked put positions. It is my assertion that a naked put component combined with a value-investing perspective and fairly rigorous research is a HIGHLY EFFECTIVE AND PROFITABLE STRATEGY which can be implemented easily by the small retail investor to smooth out the returns generated in a portfolio.
This component of my portfolio averages an annualized 30% return over a holding period of 76 days and I have not yet had a stock put to me, even when I wanted it (HRZ). There are definite risks and drawbacks to this strategy (as with anything), but considering that I implemented this strategy in Sept 2007 and the extreme market volatility (well, mostly down) since then, I have concluded that this strategy is sound if implemented with the correct attitude toward risk and with the proper research. Keep in mind, though, there are definite risks and drawbacks to this strategy (as with anything).
I will probably go into this strategy in more detail at a later date but until then, remember that what works for me might not work for you and vice versa. But don't accept blanket generalizations by supposed experts as gospel (ie. selling naked puts is bad or SPACs are fraud vehicles, etc.). Few things in life are that black & white. Consult a financial advisor if you think you need the help and as always, YMMV.
Friday, February 15, 2008
Interesting article on the US$ reserve status
Nice little UBS research note published on Barron's website discussing the dollar's resemblance to the sliding sterling in the early 20th century.
I have to agree with this article for the most part. I haven't discussed this aspect much lately but despite my bearishness regarding the US dollar, I do not expect the armageddon type event that dollar bears like Peter Schiff or Jim Rogers expect. There is no doubt that a US currency decline is structurally baked in the cake due to the unsustainable twin deficits and as a result, the greenback will continue to lose value in the intermediate to long-term.
But that doesn't mean there aren't opportunities to make money in US assets. Also, the sterling's demise as the global reserve currency was marked by a World War (II, to be specific), which viscerally demonstrated England's (and Europe's) decline -- this suggests when events of that magnitude occur, the global dislocation is jarring and massive, to say the least.
I would guess we will have to wait at least until the next decade before this risk becomes prominent and I'm sure the signs would be evident in increased geo-political tension and war. Trying to game this seems a bit ill-advised -- the truth is no one can predict the fall-out from such macro shifts and it's unclear which powers will rise to replace the US as the pre-eminent power in the world.
Moral of the story: diversify away from the dollar but don't go nutty over it. At least not yet.
I have to agree with this article for the most part. I haven't discussed this aspect much lately but despite my bearishness regarding the US dollar, I do not expect the armageddon type event that dollar bears like Peter Schiff or Jim Rogers expect. There is no doubt that a US currency decline is structurally baked in the cake due to the unsustainable twin deficits and as a result, the greenback will continue to lose value in the intermediate to long-term.
But that doesn't mean there aren't opportunities to make money in US assets. Also, the sterling's demise as the global reserve currency was marked by a World War (II, to be specific), which viscerally demonstrated England's (and Europe's) decline -- this suggests when events of that magnitude occur, the global dislocation is jarring and massive, to say the least.
I would guess we will have to wait at least until the next decade before this risk becomes prominent and I'm sure the signs would be evident in increased geo-political tension and war. Trying to game this seems a bit ill-advised -- the truth is no one can predict the fall-out from such macro shifts and it's unclear which powers will rise to replace the US as the pre-eminent power in the world.
Moral of the story: diversify away from the dollar but don't go nutty over it. At least not yet.
Thursday, February 14, 2008
Seth Klarman's Baupost Group Goes Crazy for SPACs and Sallie Mae
Quite a few money managers filed their SEC filings today. One that caught my eye was Seth Klarman's Baupost Group. Klarman's track record is legendary and frankly, after Warren Buffett, I can't think of a better investment role model to seek to emulate.
I'll post the spreadsheet to the website over the weekend but here's a quick comment. While I've noticed Klarman's (or one of his associates) affinity for the special purpose acquisition companies (SPAC), this quarter's filing is literally littered (how's that for alliteration) with new additions from this class.
I know that some of the "mainstream" pundits have poo-poo'd SPACs as speculative vehicles not fit to grace long-term investor portfolios but I'd take Klarman's example over these pundits any day. On a fundamental level, I can see some attraction behind these securities, especially for someone who is comfortable investing in alternative asset classes with managed fees, i.e. private equity funds or hedge funds. These SPACs give the investor more control, more liquidity to exit the investment and in some cases, lack of management fees (though the 20% equity/carried interest component is still present).
I haven't done much research on them but it seems to me that the overriding consideration in SPAC investment is the management. In this way, the small retail investor (i.e. me) may be disadvantaged. I would assume (but don't know for sure) that dealmakers looking to raise money through SPACs go on investment road shows to generate interest similar to other IPOs. Money managers like Klarman probably have access and insights on these management teams that folks like me just can't match. And the smart thing to do when you don't have an edge or are operating at a disadvantage is to sit it out.
Added Note -- It looks like Baupost has also put a huge bet on Sallie Mae (SLM). According to my spreadsheet, Baupost's SLM position is 25% of the total value of all securities listed in their SEC filing. Now, I don't know if they have hedged that position with instruments that wouldn't show up on these filings (like a CDS) but that position does make me sit up and take notice.
I'll post the spreadsheet to the website over the weekend but here's a quick comment. While I've noticed Klarman's (or one of his associates) affinity for the special purpose acquisition companies (SPAC), this quarter's filing is literally littered (how's that for alliteration) with new additions from this class.
I know that some of the "mainstream" pundits have poo-poo'd SPACs as speculative vehicles not fit to grace long-term investor portfolios but I'd take Klarman's example over these pundits any day. On a fundamental level, I can see some attraction behind these securities, especially for someone who is comfortable investing in alternative asset classes with managed fees, i.e. private equity funds or hedge funds. These SPACs give the investor more control, more liquidity to exit the investment and in some cases, lack of management fees (though the 20% equity/carried interest component is still present).
I haven't done much research on them but it seems to me that the overriding consideration in SPAC investment is the management. In this way, the small retail investor (i.e. me) may be disadvantaged. I would assume (but don't know for sure) that dealmakers looking to raise money through SPACs go on investment road shows to generate interest similar to other IPOs. Money managers like Klarman probably have access and insights on these management teams that folks like me just can't match. And the smart thing to do when you don't have an edge or are operating at a disadvantage is to sit it out.
Added Note -- It looks like Baupost has also put a huge bet on Sallie Mae (SLM). According to my spreadsheet, Baupost's SLM position is 25% of the total value of all securities listed in their SEC filing. Now, I don't know if they have hedged that position with instruments that wouldn't show up on these filings (like a CDS) but that position does make me sit up and take notice.
Monday, February 11, 2008
Festival of Stocks
My report on SK Telecom is included as part of this week's Festival of Stocks, hosted by Stock Market Prognosticator:
02/11/2008 - Festival of Stocks
There are always some great contributors and good ideas floating around these festivals so I'd recommend you check it out.
02/11/2008 - Festival of Stocks
There are always some great contributors and good ideas floating around these festivals so I'd recommend you check it out.
Friday, February 8, 2008
SK Telecom: Doubling Down
Yesterday, I put in an order to double down on SKT as the stock had dropped another 10% from my initial entry.
I reviewed their Q4 2007 results. An official write-up will be put up on the Enlightened-American website this weekend but long story short, the company is engaged in a market share war for 3G customers and are coming into a crucial transition period regarding their business model going forward. I'm still confident that the company's market-leading position will allow them to come out of this period in good standing but it will bear close watch.
I reviewed their Q4 2007 results. An official write-up will be put up on the Enlightened-American website this weekend but long story short, the company is engaged in a market share war for 3G customers and are coming into a crucial transition period regarding their business model going forward. I'm still confident that the company's market-leading position will allow them to come out of this period in good standing but it will bear close watch.
Wednesday, February 6, 2008
The Futility of Financial News?
Here's another humdinger: according to Bloomberg (via BTV), Rio's rejection of BHP Billiton's bid has led to speculation about other mining takeovers. The news anchor then cited the rise in other "takeover speculation" mining stocks like Barrick Gold, Newmont Mining, Goldcorp, Kinross Gold as evidence of this speculation.
Let's be clear -- BHP's bid for Rio Tinto has absolutely nothing to do with the gold mining stocks. Oh, Bloomberg, BTW the price of gold is up $15 today so that and yesterday's irrational selling may have something to do with the pickup in GOLD MINING STOCKS. Diversified miners like Teck Cominco, Lundin Mining, Vale are down to slightly up but nowhere near the bump the large gold miners are seeing.
Earlier, Kathleen Hayes on Bloomberg asked some economist from Greenwich Capital or some such place what had happened that caused everyone's economic forecasts to be so wrong? The response was that a year ago, no one foresaw the massive problems in housing and the Fed's aggressiveness in cutting rates was unexpected. This is complete and utter nonsense. Obviously, this hack was just covering his ass but this situation had been discussed quite clearly for sometime before Mr. Market finally noticed. I remember seeing the mortgage Implode-O-Meter in late 2006 when there were only 5 casualties.
A little secret: when I decided to truly take control of my finances, I originally targeted real estate. I got a whole stack of various real estate books and researched the local market. That's when I discovered that it just didn't make any sense. So real estate was nixed and now I'm in the financial markets for now.
But my point is that the housing bust and the financial fallout & Fed reaction should have been easily anticipated by anyone even half paying attention. And it was. By many people.
Maybe financial news isn't futile but you've got to read everything with a very skeptical eye. And find smart people with sound reasoning who are right most of the time and pay attention to what they say.
Let's be clear -- BHP's bid for Rio Tinto has absolutely nothing to do with the gold mining stocks. Oh, Bloomberg, BTW the price of gold is up $15 today so that and yesterday's irrational selling may have something to do with the pickup in GOLD MINING STOCKS. Diversified miners like Teck Cominco, Lundin Mining, Vale are down to slightly up but nowhere near the bump the large gold miners are seeing.
Earlier, Kathleen Hayes on Bloomberg asked some economist from Greenwich Capital or some such place what had happened that caused everyone's economic forecasts to be so wrong? The response was that a year ago, no one foresaw the massive problems in housing and the Fed's aggressiveness in cutting rates was unexpected. This is complete and utter nonsense. Obviously, this hack was just covering his ass but this situation had been discussed quite clearly for sometime before Mr. Market finally noticed. I remember seeing the mortgage Implode-O-Meter in late 2006 when there were only 5 casualties.
A little secret: when I decided to truly take control of my finances, I originally targeted real estate. I got a whole stack of various real estate books and researched the local market. That's when I discovered that it just didn't make any sense. So real estate was nixed and now I'm in the financial markets for now.
But my point is that the housing bust and the financial fallout & Fed reaction should have been easily anticipated by anyone even half paying attention. And it was. By many people.
Maybe financial news isn't futile but you've got to read everything with a very skeptical eye. And find smart people with sound reasoning who are right most of the time and pay attention to what they say.
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