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« Uranium-Stocks: Portfolio Update 01 December 2008 | Main | Uranium Spot Price Up to $53/lb! »
Wednesday
Nov262008

Lost Principles


In the mailbag this morning we received this article from Olivier Garret, Chief Executive Officer of Casey Research regarding the current economic crisis, peak oil, inflation, precious metals et al, which we hope you find enjoyable.

As the economic crisis continues to unfold, recently a sense of uncertainty has begun to pervade the market. Even dyed-in-the-wool risk takers admit that they don’t know what to think anymore. Inflation, deflation, recession or depression – there are so many vagaries that it appears to be anyone’s guess what will happen next.

Despite the current, volatile environment, though, our expert team at Casey Research maintain their core prediction: that a highly inflationary cycle is not far off. While we, along with several external experts, continuously review our assumptions and conclusions and encourage dissenting opinions and analysis to avoid biased conclusions, so far we keep returning to our views about what’s coming. That said, the hardest thing to predict is not what will happen, but when.

The way I see it, the swift, far-reaching and mostly ill-conceived reactions from most of the world’s governments under the leadership of two apprentice sorcerers (Bernanke and Paulson) have until now resulted in a widespread run for an exit to nowhere, a deep credit freeze, and total and indiscriminate mistrust in the market and all of its players.

The fact remains that in the last year, many principles that have long been rooted in the success of capitalism have been thrown out of the window.

· First, market players discovered that the longest-lasting asset bubble in recent history was made possible by poor regulations (as opposed to lack thereof), greed, and the misunderstood and misrepresented risks of credit derivatives.

· Second, we found out the real meaning of “too big to fail.” If a business is large enough and has enough clout, it doesn’t matter how poorly managed it has been, it will be bailed out at the expense of taxpayers (us) and investors (us again).

· Third, we found that the rating systems the financial markets had been relying on have been misleading investors and failing to identify some of the riskiest asset classes. As a result, investors and all other economic agents are left with no means of evaluating risk as they conduct business, hence the credit freeze and rush to cash.

· Fourth, to add to the confusion, the U.S. Fed and Treasury, followed by many other central banks, have been altering the rules of the game by the minute (buying toxic waste at face value, bailing out certain financial institutions but not others, becoming shareholders of several behemoths in the banking and insurance industry, and trumping all accepted rules of creditors’ and stakeholders’ priority, prohibiting the shorting of certain classes of assets on a moment’s notice).

· Last but not least, the U.S. presidency, weakened by almost eight years of mismanagement, has continued to show total lack of leadership. It has empowered a couple of technocrats to run the country’s finances without leadership until a new administration gets in and, hopefully quickly, figures out what to do. To make matters worse, the EU has shown its ugliest face and demonstrated a fact we all truly knew but didn’t want to recognize until recently -- that economic unity and coordination is easy in good times but almost impossible when the going gets tough.

No wonder economic actors are wreaking havoc as they race for shelter.

Add to this the fact that all natural resources have been hammered by the combination of a credit freeze and lower real and anticipated demand from most industrial nations.

Finally, junior exploration stocks – being very thinly traded and rightfully considered to be in a higher risk class -- have been hammered twice as hard as the rest of the markets (hence the performance of the TSX-V, which has lost 76% in the last year and 30% in the past 30 days alone). The fact that many hedge funds had to unwind large positions in such a small market certainly did not help values.

What does this mean for investors in this market?

We all have suffered significant losses in our portfolios, and although our choices may have reduced some of the downside, quality companies have been hit almost as hard as fly-by-night juniors with no future.

Several of our companies are trading at or below cash value and get no goodwill for the significant assets and outstanding management teams they have assembled.

Although there is no way to tell when we will hit a bottom in these markets, we believe that once tax-loss selling season is over and reality settles in, we will see the beginning of a slow recovery process for the best of the juniors. Investors who have the ability to stay the course and are invested in the highest-quality juniors will recover from their losses and benefit from what will eventually be another bull market in commodities.

Precious metals and agriculture, followed by certain segments of the energy sector, will lead the way to widespread price increases across the range of commodities. While we can’t predict the exact timing of this run, the fundamentals are in place once the world economies take a turn for the better or at least stabilize somewhat.

Here is why:

· The current crisis is taking tremendous amounts of needed capacity off the supply pipeline. Whether it be energy, base metals, or agricultural goods, projects to bring online expensive oilfields and alternative fuel sources are being shelved and will take years to get back on track. Mines are closing and projects are being canceled, thereby removing much of the supply; the credit squeeze is cutting down on agricultural investment, and working capital constraints will dramatically limit supply.

· The world’s demographics are not changing, nor are the aspirations of a hard-working, fast-growing middle class in emerging economies. The changes that drove commodity markets up for the last few years are long lasting and real.

· Peak Oil and peak-everything. There is limited supply for many commodities, and although there are alternatives (curbing consumption and finding alternative sources of energy), it takes large investments to do so. In current markets, many of these investments are going to be put aside until the next crisis/shortage hits – at which point we will have years of a commodities bull run before an equilibrium is reached.

· We anticipate that China, Russia, and India will take advantage of low commodity prices to secure very large, long-term supply commitments while the Western world licks its wounds and tries to recover. By the time we do, an even larger portion of the world’s available resources may no longer be available on the markets, for example oil and gas.

In the last edition of Casey Energy Opportunities, Marin Katusa pondered how the U.S. is going to replace the supply of uranium when the HEU program with Russia is set to expire in 2013. The answer is that the U.S. will struggle to replace 40% of its needs, and this will benefit a handful of U.S. suppliers with proven reserves. Currently shares of these companies, which have the cash to develop resources or are already producing with positive cash flows, are incredibly cheap – a win-win situation. Eventually similar opportunities will come from copper and strategic metals.

· We can expect the world to continue to be a very unstable place, where regional conflicts can quickly spread and spin out of control, with obvious impact on the smooth supply of key commodities (Gulf region, Nigeria, former Soviet republics, to name a few). In fact, a widespread financial crisis could precipitate those events as conflicts are often linked to economic hardship.

· The unprecedented deficits, a wave of bailouts, and growth in the money creation by central banks in the Western world will eventually lead to massive inflation. In the U.S. alone, the monetary supply has increased by 50% since early September. This will unequivocally reverse the current short-term deflationary pressures and lead to a steep devaluation of the dollar and other major currencies. At that point, precious metals and all tangible assets are poised for a strong recovery.

So, if you ask me if I am still bullish on the resource sector, my answer yes, now more than ever. Juniors are juniors, and when things go wrong, they get beaten down. The strong ones with great teams and lots of cash will survive and prosper, the others will disappear. When commodities come back with a vengeance, there will be fewer companies, almost all with good projects… and those who are invested in these few companies will see a very sizeable appreciation of their capital as the broader public returns.

It’s very hard to be a contrarian investor, especially when all forces seem to be against you, but one thing the markets have taught me is that memory on the Street is unbelievably short, and they will come back.

***

Not only is the economy presently going haywire, there’s also still the boogeyman of Peak Oil looming on the horizon. While oil prices are at a low not seen for a while, it is all but certain that this sweet relief for motorists won’t last very long.

When oil prices come roaring back, the energy market will virtually explode… and, if you are safely positioned in the right stocks by then, your bank account will too. Learn more about how being a contrarian investor can earn you a fortune – click here.

Got a comment – then let us have it!

If you are new to investment in the precious metals sector then you may wish to subscribe of our FREE newsletters regarding gold stocks, silver stocks and uranium stocks, please click on the links.

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Reader Comments (8)

I was wondering if anyone knew who these companies where that he is refering too:

"The answer is that the U.S. will struggle to replace 40% of its needs, and this will benefit a handful of U.S. suppliers with proven reserves. Currently shares of these companies, which have the cash to develop resources or are already producing with positive cash flows, are incredibly cheap "

Anyone????

Nick.

November 26, 2008 | Unregistered CommenterNick Outram

Well Nick, since you have read this far maybe you should get something for your efforts...
I have long subscribed to the Casey Energy Report and two of the companies he might be referring to are URE Energy and IEC both on the Toronto. Go to their websites and do your due dilligence. Both are near term producers and both have cash on hand. Ure is near term uranium and IEC is near term copper and silver with very little stock outstanding and both are in the USA. Good luck and a year from now you might be glad you bought some at these levels.
Leon

November 27, 2008 | Unregistered CommenterLeon

The dollar will have someday have the value of bubble gum wrapping and will be replace by a new curency called the umero. A combination of canandian and mexican and u.s. curencies just like the euro. All put into one basket.
The U.S. gave away Its soverighty to the U.N. in 1992 thanks to Bush seniors vision for a new world order.
The major economic crisis is the all part of the Greater plan for the Central Banks of Europe and Asia and the U.S. to bring all people closer to one world banking and one world goverment.
The North American Alliance,The NAFTA treaty and Gatt are all designed to to usher in new policies toward this goal
Why do you think Greenspan plays dumb to the policies he made during his tenure. It was his job to create the crisis.
Plain and simple.
You may call me a conspiracy theorist and I have no actual factual evidence at hand but The N.A.A. agreement is proof enough for the statments I am making.
Any comment would be appreciated since it seems everyone in the media and the goverment is pretending this is not happening.

November 27, 2008 | Unregistered CommenterDoug

Perhaps "Powertech" will be one of these.
They have two mines to start production in mid/end 2010, you find a serious looking presentation of their projects there: http://www.powertechuranium.com/i/pdf/Presentation-Feb2008.pdf.

Their share price is ridiculouly low, as in other juniors.
If my assesment is right, the share price in 2011 (with u3O8 at 70 $/lib) should develop as this:

Powertech
Aktien Kurs/Share price: (aktuell) Euro 0,20
Zahl der Aktien/Number of shares: 55.400.000
Marktkapitalisierung/Market cap: Euro 11.080.000
Resources: lib 26.000.000
Kapital prolib/Price per lib U3O8: Euro 0,43
Geschätzter Produktions Start/ Estimated production start: 2010
Estimated production output in 2011: /rising to 3-4 Mio lib) 2.000.000
Geschätzter Umsatz/Estimated revenue 2011 (U3O8 = aktueller Preis/spotprice) 110.236.220
Geschätzte Produktions Kosten/Estimated production costs $ per lb: 30
Geschätzter Gewinn/Estimated profit 2011: € 62.992.126
Kursziel bei KGV /Price target 2011 at p/e 10 11,37EURO!!!

Give me your thoughts on it!

November 27, 2008 | Unregistered CommenterPeter Schober

Could anyone give me an opinion or two on Pinetreee Capital (PNP.TO) Althouh I am down considerably on this stock it seems like there is value there w/ their many investments in junior stocks, (Gold, Energy, Uranium etc.)

I would like to buy more but am concerned w/ a reverse split if the commodities continue to fade.

Any opinions or info would be appreciated.

November 27, 2008 | Unregistered CommenterMike Lee

pinetree capital yeah i used to own that.....through a letter right? if i recall pinetree took a huge dive....want SOUND advice? buy cameco and/or denison...these are HUGE producers and i feel will double by next years end maybe sooner...plus these stocks trade on BOTH the major american exchanges and canadian exchanges....which is a HUGE PLUS! more exposure to buyers plus for stocks to be on a major usa echange the companies have to have more requirements than to be just on a canadian exchange...cameco and denison are HUGELY undervalued right now just like to many usa and canadian stocks...why not FIRST buy stocks that meet certain criteria to be on the major usa exchanges and are also on the canadian exchange??????

November 28, 2008 | Unregistered Commenterwil

Well Forsys (Toronto), has been offered $7 a share and as a near term producer with big reserves it looks like a no brainer at these prices. Every cycle has it's ups and lows so buy low and sell high.

November 29, 2008 | Unregistered Commenterdaveydog

Guys,

thanks for the tips I'll have a look at these.

The likes of Cameco are not going away and should probably form a core part of the Uranium-part of a portfolio.

I do hope to pick up a few ten-baggers and am sure that they exist but what concerns me about the smaller 'more exciting' companies is they will simply not exist by the time their share price is expected to rally to ten-bagger+ level. So in these cases the debt / financing aspect is absolutley crucial... I'm afraid 'Serious looking presentations' are ten a penny these days -I make them myself! :o) ...

Nick.

December 1, 2008 | Unregistered CommenterNick Outram

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