On Tuesday Oct 25, 2010 a 5-year US Treasury TIPS (Treasury Inflation-Protected Security) bond was sold to the public at a yield below 0%. In other words, the investor is paying the difference between the negative yield and 0% (this happens via the purchase price) for the privilege of getting his or her money back. How could this be, and what are they thinking?
First, there is no way such a yield could occur in normal markets. In this case the manipulation is being carried out as one part of a 2-prong tactic by the US Treasury. The reason we care, is that Treasury these actions get translated throughout world markets. These translations, or effects, involve (a) interest rates charged within various countries and (b) impact the relative value of currencies in relation to the USD.
Let's take as an example the pump price of gasoline at the present time in Ontario. With minor location variations it has already risen above $1/L. There is no scarcity of physical supply. North American and European economies are weak. The summer driving season is at an end. New vehicles get better mileage. So the current demand outlook is not a source of pressure.
Since the US Treasury began suppressing interest rates and at the same time introduced "quantitative easing" (QE1, flooding the banks with cash but ensuring by regulatory changes that bank lending to most individual and business customers cannot be easily expanded) the US dollar has lost about 20% of its relative value when compared to proxies for the US dollar, such things as oil (energy), gold or copper. The basic prices for these things are denominated in US dollars.
A foreign exchange effect occurs when countries with strong positive trade balances with the US see their currencies rise in terms of the US dollar. China's own intervention in currency markets has put a braking effect on its rate of increase. If the RMB were to rise as quickly as the dollar has fallen is seen as a threat to social stability within China.
Canada should be in a pretty good place. Its strength but also its Achilles heel, is its geography, its location on the planet. Our trade patterns have lead to deep integration with American business and consumers. But unfortunately, our export firms get paid primarily in US dollars rather than for example, RMB. It is very difficult to create massive substitute demand, at competitive prices, from elsewhere in the world - especially in the complete absence of any strategic Canadian plan to do so. The National Oil Policy was attacked and tanked years ago.
The public often feels pleased when the Loonie moves toward par. Great to visit Buffalo. But since the US dollar has been sinking at a high rate, the reality is that the Loonie's purchasing power of products or commodities whose values are in process of de-linking from the US, is higher prices here. Welcome to $1.04 gas.
The second phase of quantitative easing, QE2, is about to begin as quietly as possible. What is the end-game of this strategy? Certainly not the same thing as any government public policy statements. The US is far beyond its ability to pay back money it has borrowed from the rest of the world (retire its debt as it matures). This especially true when it needs to restructure its internal and individual state financial problems.
An interest rate increase on debt sold abroad would seriously worsen the problem. Super-low domestic rates forces those dependent on investment income to look elsewhere - invest in stocks or (hopefully) in real estate sufficient to arrest its slide. The proof of this is that many stocks now have yields higher than the bonds of the same companies. Without market manipulation this could never happen.
At this point it becomes clear that the chosen method of reducing US external debt is to export inflation worldwide. The object is to pay external debt obligations (which are not inflation-protected) in electronic dollars of greatly reduced value. If the US dollar were not the principal world reserve currency, the US would be forced to default as in the case of Argentina. Canada cannot simply let its own currency appreciate to the point that the US sources elsewhere.
The Treasury maintains that when the world, and especially the US recovers from its balance sheet and related domestic employment crisis, it will quickly switch gears and rein in the ensuing inflation. Failure to do so would risk hyperinflation.
Easy to say, but no modern major industrial country has ever done it, regardless of the effort.
Tuesday, October 26, 2010
Tuesday, September 21, 2010
The Final "Tell"
Today the FOMC's (Federal Open Market Committee) comments following its notice not to change US interest rates, marked the point at which it would not step onto the path of a harder currency in the way they so strongly urged the EU countries to do. It is also politically opposite to the effect implicit in Tea Party people talk - I say 'effect' instead of 'policy' because I do not believe the TP actually has a policy or understands the implications of what it says.
Regardless, the FOMC comments opened the way for an imminent return to QE2, or the second coming of the Quantitative Easing experiment. When this happens, it will be a point of no return. The Bernanke-Geitner duo will speak and it will happen. As I said in an earlier blog, this was first tried years ago by Japan and is given prominence for that country's economic "lost decade".
As a backdrop, the predominent recent US guru wisdom has been that there would be no "double dip" in GDP, just slow but steady growth. By Sept 20 a wrench seemed to be thrown into that scenario when the Fed announced that the decline had ended a year ago! As Obama was politely asked that same day on TV by some of his most supportive public, to be told now that this was a year of recovery after bailouts, QE1, etc was scarcely credible.
Whispers had been saying the amounts deployed were not big enough. Now the result was clear. Even the slightest future downtick would put "double dip" in play. And as we have said before, the only tool left to the Fed and Treasury would be QE2.
The anointed god of bonds, Bill Gross of PIMCO, was already standing by on CNBC. Within a minute after release of the FOMC statement, Gross said it could only mean a decline in the dollar*. Almost simultaneously, charts of spot gold spiked to a new current high approaching $1,290/oz, while the US dollar abruptly commenced a renewed stage of its fall. Stock markets rose in unison. However, before the day's close at 4pm, the market began to reassess the consequences. By 5pm, Larry Summers, Director of the Obama Council of Economic Advisors had announced his resignation.
If QE2 does happen, new consequences being unleashed by the "solution" will eventually have to be fixed. An important part of those problems will occur in non-indexed public and private pensions as yields disappear and fixed incomes progressively fall. The fix is unlikely to be pretty. When rates rise - which will happen again at some point - bond values and pension assets will be crushed.
Whatever policyspeak may sound like, investors should instead take what it says on the cop cars as the greater reality -"Deeds Speak".
* His unspoken message (known as "talking your book"): Get out of your weak cash and into the safety of US Treasuries. He may not tell those same potential investors when to get out, until PIMCO has already vacated stage left at a profit. PIMCO is the world's largest bond investor.
James Carville, Bill Clinton's famed campaign manager is reputed to have joked "Once when I was asked what I would want to be if could have all the power in the world I would have said "God" - now I would say a bond fund".
Regardless, the FOMC comments opened the way for an imminent return to QE2, or the second coming of the Quantitative Easing experiment. When this happens, it will be a point of no return. The Bernanke-Geitner duo will speak and it will happen. As I said in an earlier blog, this was first tried years ago by Japan and is given prominence for that country's economic "lost decade".
As a backdrop, the predominent recent US guru wisdom has been that there would be no "double dip" in GDP, just slow but steady growth. By Sept 20 a wrench seemed to be thrown into that scenario when the Fed announced that the decline had ended a year ago! As Obama was politely asked that same day on TV by some of his most supportive public, to be told now that this was a year of recovery after bailouts, QE1, etc was scarcely credible.
Whispers had been saying the amounts deployed were not big enough. Now the result was clear. Even the slightest future downtick would put "double dip" in play. And as we have said before, the only tool left to the Fed and Treasury would be QE2.
The anointed god of bonds, Bill Gross of PIMCO, was already standing by on CNBC. Within a minute after release of the FOMC statement, Gross said it could only mean a decline in the dollar*. Almost simultaneously, charts of spot gold spiked to a new current high approaching $1,290/oz, while the US dollar abruptly commenced a renewed stage of its fall. Stock markets rose in unison. However, before the day's close at 4pm, the market began to reassess the consequences. By 5pm, Larry Summers, Director of the Obama Council of Economic Advisors had announced his resignation.
If QE2 does happen, new consequences being unleashed by the "solution" will eventually have to be fixed. An important part of those problems will occur in non-indexed public and private pensions as yields disappear and fixed incomes progressively fall. The fix is unlikely to be pretty. When rates rise - which will happen again at some point - bond values and pension assets will be crushed.
Whatever policyspeak may sound like, investors should instead take what it says on the cop cars as the greater reality -"Deeds Speak".
* His unspoken message (known as "talking your book"): Get out of your weak cash and into the safety of US Treasuries. He may not tell those same potential investors when to get out, until PIMCO has already vacated stage left at a profit. PIMCO is the world's largest bond investor.
James Carville, Bill Clinton's famed campaign manager is reputed to have joked "Once when I was asked what I would want to be if could have all the power in the world I would have said "God" - now I would say a bond fund".
Tuesday, September 14, 2010
The Gold Conundrum
The combination of unusually contradictory economic signals plus political and social crosswinds have meant extraordinary volatility and confusion in debt and equity markets. Expectations and explanations for the action in gold are no exception. As the spot market rose to new highs today, September 14, disbelief appears extremely high. What is going on?
"Gold bugs" have always been derided. This has made it pretty hard for investors that are already involved or considering that section of the market to believe in their rationale, lest they have been unwittingly infected by "the bug" or considered part of the tinfoil hat crowd.
For the moment, let's set aside thoughts about Indian jewellery demand, absence of industrial use and the repeated view that it is a relic of an earlier order of international settlements that eventually outlived its reason for existence until the Nixon era. The first is too small to have anything other than seasonal effect; it's true, there really is no industrial demand on the horizon and the prospect of the IMF or other bodies adopting some widespread form of gold-related standard among nations appears unlikely any time soon. Then there is is the debate that we are more likely entering a deflationary period (declining aggregate prices) than an inflationary - even hyper-inflationary - one.
In this writer's view, at present the monetary issue is the key. Observations that the current environment has deflationary characteristics have supportable evidence, but a lot of it - not all - involves the rear-view mirror. The public perception of well-being typified by the seemingly permanent decline in Walmart pricing is ending as originating and transportation costs rise. US consumers are struggling with personal balance sheets by curbing consumption and paying down debts. For now, Canadians are busily going in the opposite direction, increasing their debt. The divergence will not be permanent.
Areas of future influence where governments have the least control, such as worldwide food prices, are much more inflationary than those such as interest rates that are under vigorous, ongoing government suppression. US rates and the value of the US dollar relative to other currencies are the most significant influencing factors in the gold price.
Since US rates are the lowest in the world (the Japanese yen is not a currency for international settlement), the US treasury bonds that must be sold to fund the US trade deficit, increasingly cannot be sold in sufficient quantity to foreigners. The shortfall in purchases therfore has to come from the US government itself. This puts it in the position of being both the seller and a buyer. The result affects the US government's own balance sheet. The combination of these policies, when extended over an unusually long period of time such as is the case today, comes with an unavoidable delayed cost. Due to the nature of its markets, gold is an erratic but inexorable measure of these effects, when measured in US dollars.
Historically the international mechanism compensating for these effects occurs through differences in interest rates between nations. Debtor nations, of which the US is by far the world's largest, will usually have the highest rates. The problem is that simultaneously, as issuer of a currency that in better times was accorded the status of reserve currency, meaning the one that all other settlements can be paid with, there is a huge conflict.
As a current core aspect of US government policy, the American interest rate shock absorber has been disabled. Throughout the exercise, official salesmanship says US policy is one of "maintaining a strong dollar." In the short term it is a situation with no political prospect of change. As a result, gold gradually and unofficially resumes the role of adjustment mechanism.
Notice that official US talk dismissing a rising gold price as meaningless, is completely consistent with its misleading "strong dollar" sales pitch. The key to the gold price conundrum is that for the remainder of this policy period - for whatever time it continues - the effect of these policies is the true driver of the gold price and the market is the enabler.
Of course in the world of global politics and international hegemony, it cannot be ignored that the US's single biggest creditor, China, has now become the world's largest gold producer. China is now putting in place its own policy of allowing gold to become a more important component of its currency policy. Part of this is being done by changing internal Chinese regulations to ecourage wider domestic investment in the metal but especially wider opportunity for Chinese citizens to invest in gold-related stocks.
Among these planned market vehicles, certain of them are identifiable as "dragon's head" national champions in which elements of the Chinese government itself has a stake. It will be interesting to see if this policy will induce some level of switch by investors to Chinese gold stocks from Chinese real estate. Not only are real estate prices viewed as unsustainable, but there have been calls for real estate prices to be moderated in the Chinese market for social reasons.
On the other hand, as well as providing a new investment alternative, such a directed capital reallocation should avoid pushing funds into and thereby exerting pressure on other domestic prices to feed inflation. For China, gold investment opportunities may achieve that goal.
At the same time, success for investors would increase the "wealth effect" for a growing middle class. This is needed to pick up slack in export demand and shifting it internally. In turn it also mitigates the otherwise negative effect from a trade standpoint from the resulting higher value that will take place in the Chinese yuan.
Such an increase in the relative value of the Chinese currency has been loudly demanded in US political circles for several years. China appears now in the process of putting this demand into effect as a change in its economic policy. I expect it could be evident by Q2 2011.
There is a saying, "watch what you wish for", because unintended consequences abound.
Disclosure: long CGG-T
"Gold bugs" have always been derided. This has made it pretty hard for investors that are already involved or considering that section of the market to believe in their rationale, lest they have been unwittingly infected by "the bug" or considered part of the tinfoil hat crowd.
For the moment, let's set aside thoughts about Indian jewellery demand, absence of industrial use and the repeated view that it is a relic of an earlier order of international settlements that eventually outlived its reason for existence until the Nixon era. The first is too small to have anything other than seasonal effect; it's true, there really is no industrial demand on the horizon and the prospect of the IMF or other bodies adopting some widespread form of gold-related standard among nations appears unlikely any time soon. Then there is is the debate that we are more likely entering a deflationary period (declining aggregate prices) than an inflationary - even hyper-inflationary - one.
In this writer's view, at present the monetary issue is the key. Observations that the current environment has deflationary characteristics have supportable evidence, but a lot of it - not all - involves the rear-view mirror. The public perception of well-being typified by the seemingly permanent decline in Walmart pricing is ending as originating and transportation costs rise. US consumers are struggling with personal balance sheets by curbing consumption and paying down debts. For now, Canadians are busily going in the opposite direction, increasing their debt. The divergence will not be permanent.
Areas of future influence where governments have the least control, such as worldwide food prices, are much more inflationary than those such as interest rates that are under vigorous, ongoing government suppression. US rates and the value of the US dollar relative to other currencies are the most significant influencing factors in the gold price.
Since US rates are the lowest in the world (the Japanese yen is not a currency for international settlement), the US treasury bonds that must be sold to fund the US trade deficit, increasingly cannot be sold in sufficient quantity to foreigners. The shortfall in purchases therfore has to come from the US government itself. This puts it in the position of being both the seller and a buyer. The result affects the US government's own balance sheet. The combination of these policies, when extended over an unusually long period of time such as is the case today, comes with an unavoidable delayed cost. Due to the nature of its markets, gold is an erratic but inexorable measure of these effects, when measured in US dollars.
Historically the international mechanism compensating for these effects occurs through differences in interest rates between nations. Debtor nations, of which the US is by far the world's largest, will usually have the highest rates. The problem is that simultaneously, as issuer of a currency that in better times was accorded the status of reserve currency, meaning the one that all other settlements can be paid with, there is a huge conflict.
As a current core aspect of US government policy, the American interest rate shock absorber has been disabled. Throughout the exercise, official salesmanship says US policy is one of "maintaining a strong dollar." In the short term it is a situation with no political prospect of change. As a result, gold gradually and unofficially resumes the role of adjustment mechanism.
Notice that official US talk dismissing a rising gold price as meaningless, is completely consistent with its misleading "strong dollar" sales pitch. The key to the gold price conundrum is that for the remainder of this policy period - for whatever time it continues - the effect of these policies is the true driver of the gold price and the market is the enabler.
Of course in the world of global politics and international hegemony, it cannot be ignored that the US's single biggest creditor, China, has now become the world's largest gold producer. China is now putting in place its own policy of allowing gold to become a more important component of its currency policy. Part of this is being done by changing internal Chinese regulations to ecourage wider domestic investment in the metal but especially wider opportunity for Chinese citizens to invest in gold-related stocks.
Among these planned market vehicles, certain of them are identifiable as "dragon's head" national champions in which elements of the Chinese government itself has a stake. It will be interesting to see if this policy will induce some level of switch by investors to Chinese gold stocks from Chinese real estate. Not only are real estate prices viewed as unsustainable, but there have been calls for real estate prices to be moderated in the Chinese market for social reasons.
On the other hand, as well as providing a new investment alternative, such a directed capital reallocation should avoid pushing funds into and thereby exerting pressure on other domestic prices to feed inflation. For China, gold investment opportunities may achieve that goal.
At the same time, success for investors would increase the "wealth effect" for a growing middle class. This is needed to pick up slack in export demand and shifting it internally. In turn it also mitigates the otherwise negative effect from a trade standpoint from the resulting higher value that will take place in the Chinese yuan.
Such an increase in the relative value of the Chinese currency has been loudly demanded in US political circles for several years. China appears now in the process of putting this demand into effect as a change in its economic policy. I expect it could be evident by Q2 2011.
There is a saying, "watch what you wish for", because unintended consequences abound.
Disclosure: long CGG-T
Wednesday, August 25, 2010
Bummed Out by the Confusion
It's all been said endlessly, in newspapers, CNN, CNBC and the financial blogosphere - there has never been a time of such conflicting data and opinion. People are genuinely being turned off North American equity markets. The tone of US political bickering is discouraging and uninformative. Canadian politics seem designed to put the electorate to sleep and if they wake up, they shut the shop. Out of all this, people are advocating "throw them all out", which is understandable but seem at the same instant to embrace radical positions that if actually enacted, would worsen their own situations, which is not.
On top of this, we have cries of 'treasury bubble', 'gold bubble', scary Hindenburg Omens, what-if "W" scenarios, deflation-inducing de-leverage, closed-door credit, persistent unemployment, flatlined incomes, debt and pension crises, 'I'm OK so far' housing here, debacles elsewhere. No wonder equity investment is declining and people are easily stampeded into bonds at non-existent interest rates, just in the hope of preserving original capital. Theories abound for an imminent further drop in US markets. None, except for general contrarians, call for an advance.
The actions being talked up in America and Europe, if actually pursued to their conclusions will mean at least 2 or 3 years of considerable difficulty for most citizens. In Europe they are already in place. In the US they are not. I believe they will not be enacted there before the Nov. 11 elections and even less so afterwards, despite current claims to the contrary.
Many large corporations have quite decent balance sheets. But the US government, whose actions in conjunction with the US Federal Reserve affect us all, does not. Add to this state revenue shortfalls and the competition to sell bonds by governments to somebody that is NOT the government (unless its foreign), will be intense.
Most recent government financing has been into the short-term market. That means - as a certainty - that in order to raise new money, simultaneously all of the short-term debt has to be rolled over (re-sold) also.
We see that in the short term the economy will be weak and unemployment persistent, so tax revenues will be poor. The new debt numbers will therefore be monumental. If the debt is not sold - and the need will be such as to guarantee fierce competition - it is exceedingly unlikely that rates can be held down. The repeated periods before each major issue will seem like mini-crises.
This not irrational scenario will put huge pressures on North American and European currencies. Commodity sales will help Canada but our currency cannot get so far separated from the USD as to collapse our industrial sector.
Currency changes exist in relation to other things. The best of energy and gold stocks would survive. If as an alternative you want the most secure and liquid direct gold participation, I have previously suggested looking at the Sprott PHYS ETF of Canadian-held physical gold. It trades in USD. Don't switch currencies until you are ready.
Position: Long ARNA-Q, CGG-T, VET.UN-T
On top of this, we have cries of 'treasury bubble', 'gold bubble', scary Hindenburg Omens, what-if "W" scenarios, deflation-inducing de-leverage, closed-door credit, persistent unemployment, flatlined incomes, debt and pension crises, 'I'm OK so far' housing here, debacles elsewhere. No wonder equity investment is declining and people are easily stampeded into bonds at non-existent interest rates, just in the hope of preserving original capital. Theories abound for an imminent further drop in US markets. None, except for general contrarians, call for an advance.
The actions being talked up in America and Europe, if actually pursued to their conclusions will mean at least 2 or 3 years of considerable difficulty for most citizens. In Europe they are already in place. In the US they are not. I believe they will not be enacted there before the Nov. 11 elections and even less so afterwards, despite current claims to the contrary.
Many large corporations have quite decent balance sheets. But the US government, whose actions in conjunction with the US Federal Reserve affect us all, does not. Add to this state revenue shortfalls and the competition to sell bonds by governments to somebody that is NOT the government (unless its foreign), will be intense.
Most recent government financing has been into the short-term market. That means - as a certainty - that in order to raise new money, simultaneously all of the short-term debt has to be rolled over (re-sold) also.
We see that in the short term the economy will be weak and unemployment persistent, so tax revenues will be poor. The new debt numbers will therefore be monumental. If the debt is not sold - and the need will be such as to guarantee fierce competition - it is exceedingly unlikely that rates can be held down. The repeated periods before each major issue will seem like mini-crises.
This not irrational scenario will put huge pressures on North American and European currencies. Commodity sales will help Canada but our currency cannot get so far separated from the USD as to collapse our industrial sector.
Currency changes exist in relation to other things. The best of energy and gold stocks would survive. If as an alternative you want the most secure and liquid direct gold participation, I have previously suggested looking at the Sprott PHYS ETF of Canadian-held physical gold. It trades in USD. Don't switch currencies until you are ready.
Position: Long ARNA-Q, CGG-T, VET.UN-T
Thursday, August 12, 2010
Confirmation of a View
With a stay in the hospital happening within a market period with plenty of weekly volatility but very little new substance behind it, I have been keeping up but not writing. Events make it time for another post.
A few weeks ago, everything focussed on the demise of Euro sovereign debt and a corresponding media barrage supporting future strength in the USD. While large US corporations and banks were (and are) doing fine and many manufacturers were finding an improved export edge due the previously lower dollar, nothing that the US government or the Fed had done suggested that they had changed their position of allowing the dollar follow its own course. That this course is downward has no connection with the permanent official line of support for "king dollar".
On Tues Aug 10, the message from the Fed Open Market Committee (FOMC) was that it was leaving rates alone. It did not mention deflation but stressed the economy was weak and indicators unusually mixed. This caused an immediate general selloff that swept across Asia overnight. Strangely to some of us, gold dropped in lockstep with the market. Since "everyone knew" that the Obama administration had been forced to stop anything resembling a further bailout or economic support - very dirty populist words - prior to the November 8 elections, it could make sense.
However, the real reason was because commentators had not looked closely enough at the Fed's additional statement that capital recoveries on their previous purchase of "toxic" mortgage debt (to save the real estate industry, mortgage holders and those in Congress up for re-election), the proceeds would be reinvested in US long Treasury bonds. Since all those mortgages could not be a total writeoff, the plan was that any capital recovery would drop off and reduce the debit side of the Treasury's balance sheet. A day later, markets grasped that this previous potential reduction would now be used to monetize new US Treasury debt. The semantics if not the theory being, no new money would be involved! The USD sank and gold recovered.
In a nutshell, this validates our position that there is insufficient political will in any currently visible US Administration to do what Europe at least officially stated it would do; that is, put hard decisions into actual effect to improve their sovereign debt positions. Of course by its very actions, the Fed has made it much more difficult for those that are trying to put their houses in order, to do so. The Canadian economy, which had been remarkably strong, started to look weaker as the BC and Ontario HST kicked in and manufacturers felt their prices rising in the US market as the US dollar fell. Recent hikes in Canadian interest rates only added to the discrepancy and make the timing look inappropriately hasty.
Our investment outlook is unchanged for the time being. We have re-expanded our long position in China Gold International Resources (CGG), formerly Jinshan Mines (JIN). We have also expanded our position in the well-managed and geographically diversified Vermilion Energy Trust (VET.UN), which will soon be converted to a normal corporation. There is a possibility that in due course Vermilion may seek to expand its listing (and therefore its market capital potential) to include the NY NASDAQ. We initiated a modest speculative position in Arena Pharmaceuticals (ARNA). The US FDA will review its unusually promising diet and weight control product, Locaserin, in mid-September.
Much has been made of a current gold bubble. There are vested interests who wish to maximize this view. It can be argued that a much larger bubble is occurring in long-dated (10 year is the bellweather) US federal, state and municipal debt. An eventual decline there will affect debt markets everywhere. Whether the Euro zone recovers will depend upon the ability of the weaker countries to govern in the months immediately ahead as the effect of tough policies bite pocketbooks and retirement.
I came on this jewel recently, written by Ambrose Brice circa 1880. Brice was an American essayist and social critic.
"... politics is a strife of interests masquerading as a contest of principles...the conduct of public affairs for private advantage."
A few weeks ago, everything focussed on the demise of Euro sovereign debt and a corresponding media barrage supporting future strength in the USD. While large US corporations and banks were (and are) doing fine and many manufacturers were finding an improved export edge due the previously lower dollar, nothing that the US government or the Fed had done suggested that they had changed their position of allowing the dollar follow its own course. That this course is downward has no connection with the permanent official line of support for "king dollar".
On Tues Aug 10, the message from the Fed Open Market Committee (FOMC) was that it was leaving rates alone. It did not mention deflation but stressed the economy was weak and indicators unusually mixed. This caused an immediate general selloff that swept across Asia overnight. Strangely to some of us, gold dropped in lockstep with the market. Since "everyone knew" that the Obama administration had been forced to stop anything resembling a further bailout or economic support - very dirty populist words - prior to the November 8 elections, it could make sense.
However, the real reason was because commentators had not looked closely enough at the Fed's additional statement that capital recoveries on their previous purchase of "toxic" mortgage debt (to save the real estate industry, mortgage holders and those in Congress up for re-election), the proceeds would be reinvested in US long Treasury bonds. Since all those mortgages could not be a total writeoff, the plan was that any capital recovery would drop off and reduce the debit side of the Treasury's balance sheet. A day later, markets grasped that this previous potential reduction would now be used to monetize new US Treasury debt. The semantics if not the theory being, no new money would be involved! The USD sank and gold recovered.
In a nutshell, this validates our position that there is insufficient political will in any currently visible US Administration to do what Europe at least officially stated it would do; that is, put hard decisions into actual effect to improve their sovereign debt positions. Of course by its very actions, the Fed has made it much more difficult for those that are trying to put their houses in order, to do so. The Canadian economy, which had been remarkably strong, started to look weaker as the BC and Ontario HST kicked in and manufacturers felt their prices rising in the US market as the US dollar fell. Recent hikes in Canadian interest rates only added to the discrepancy and make the timing look inappropriately hasty.
Our investment outlook is unchanged for the time being. We have re-expanded our long position in China Gold International Resources (CGG), formerly Jinshan Mines (JIN). We have also expanded our position in the well-managed and geographically diversified Vermilion Energy Trust (VET.UN), which will soon be converted to a normal corporation. There is a possibility that in due course Vermilion may seek to expand its listing (and therefore its market capital potential) to include the NY NASDAQ. We initiated a modest speculative position in Arena Pharmaceuticals (ARNA). The US FDA will review its unusually promising diet and weight control product, Locaserin, in mid-September.
Much has been made of a current gold bubble. There are vested interests who wish to maximize this view. It can be argued that a much larger bubble is occurring in long-dated (10 year is the bellweather) US federal, state and municipal debt. An eventual decline there will affect debt markets everywhere. Whether the Euro zone recovers will depend upon the ability of the weaker countries to govern in the months immediately ahead as the effect of tough policies bite pocketbooks and retirement.
I came on this jewel recently, written by Ambrose Brice circa 1880. Brice was an American essayist and social critic.
"... politics is a strife of interests masquerading as a contest of principles...the conduct of public affairs for private advantage."
Monday, July 5, 2010
When Did the Game Change?
Did you see that? A few days ago, Europe, the Euro and European sovereign debt problems were pulling markets down. Thank goodness the US was coming to the rescue with its strong dollar. But in a blink after the TV channels were were changed from the FIFA World Cup, we find that Europe looks OK, but the US is falling apart! Are you kidding? What happened over the weekend?
Like we said in an earlier post, the Euro was looking bad only when it was playing catchup in the downward currency slide already led by the US dollar. Suddenly, northern European competitiveness is looking vastly enhanced. Europe was apparently not only talking tough fiscally but looked like it might actually do something about it.
Rather inconveniently, figures confirmed that the typical American consumer is absolutely mired in a negative personal balance sheet disaster, but also that employment - already officially overstated - was plunging no matter what rosy spin was put on the numbers. The combination is utterly toxic and short of faith-based economics, is beyond structural fixing in the near term.
The European central banks are only charged with keeping inflation under control. The US Fed has the extra official burden of maintaining employment. Congress wants both but jobs talk loudest. What they say is 'this time is special, so roll the presses'. Did I mention that the US wants to wind down its military presence overseas but at the moment the are no extra jobs waiting, as was promised, for returnees?
That's one side of the dilemma. The other is that China now owns one-half of the US external debt and makes the stuff that US consumers want to spend their not so available money on. If money is relatively unavailable, that would make rates go up, right? Interest rates must be held down at home or the time bomb of external American interest payments will blow everything else it tries to do out of the water. Never mind entitlement expenditures. Interest rates are the 800-pound gorilla that's too scary to talk about.
We are now entering an end-game period when the curtain will be lifted on just how much the US dollar, the world's reserve currency, is going to have to be inflated to keep Americans working at the same time as it attempts to diminish the external value of American debt repayment. The Japanese have a huge debt to GDP ratio. The thing about Japanese debt is that, by far, most of it is owned in Japan. So, other people's currencies getting stronger; official reserve currency getting weaker. Expect international rhetoric and protests to get very strident and hope for nothing worse.
For the Fed to fix that one painlessly, the trick will be to shift the pain elsewhere. Elsewhere may not be happy at the prospect.
Like we said in an earlier post, the Euro was looking bad only when it was playing catchup in the downward currency slide already led by the US dollar. Suddenly, northern European competitiveness is looking vastly enhanced. Europe was apparently not only talking tough fiscally but looked like it might actually do something about it.
Rather inconveniently, figures confirmed that the typical American consumer is absolutely mired in a negative personal balance sheet disaster, but also that employment - already officially overstated - was plunging no matter what rosy spin was put on the numbers. The combination is utterly toxic and short of faith-based economics, is beyond structural fixing in the near term.
The European central banks are only charged with keeping inflation under control. The US Fed has the extra official burden of maintaining employment. Congress wants both but jobs talk loudest. What they say is 'this time is special, so roll the presses'. Did I mention that the US wants to wind down its military presence overseas but at the moment the are no extra jobs waiting, as was promised, for returnees?
That's one side of the dilemma. The other is that China now owns one-half of the US external debt and makes the stuff that US consumers want to spend their not so available money on. If money is relatively unavailable, that would make rates go up, right? Interest rates must be held down at home or the time bomb of external American interest payments will blow everything else it tries to do out of the water. Never mind entitlement expenditures. Interest rates are the 800-pound gorilla that's too scary to talk about.
We are now entering an end-game period when the curtain will be lifted on just how much the US dollar, the world's reserve currency, is going to have to be inflated to keep Americans working at the same time as it attempts to diminish the external value of American debt repayment. The Japanese have a huge debt to GDP ratio. The thing about Japanese debt is that, by far, most of it is owned in Japan. So, other people's currencies getting stronger; official reserve currency getting weaker. Expect international rhetoric and protests to get very strident and hope for nothing worse.
For the Fed to fix that one painlessly, the trick will be to shift the pain elsewhere. Elsewhere may not be happy at the prospect.
Monday, June 21, 2010
An Intellectual and Tactical Challenge
Financial and investment markets at mid 2010 have rarely presented an equivalent challenge.
The growing concensus in early May of a V-shaped recovery abruptly shattered by June against the morphing of the international crisis of housing and banking into a sovereign debt crisis. This materialized with the exposure of the unsustainability of southern European national finance and social policy through their negative impact on the Euro. The outcome briefly made it appear that the US dollar was inherently strong. But it soon became apparent that the effect was only one of relationships, during which the Euro's decline simply accelerated to catch up with a decline that had already occurred in the US dollar.
Muddied over by the ongoing news coverage of the gulf of Mexico ecological disaster, the dawning understanding that the US housing debacle's effect had not yet played out occurred just as the inability of the federal government to continue its monetary stimulus made the dreaded W-recovery (or double-dip) loom as the more likely outcome. US consumers appeared to be spending on current needs by ceasing mortgage payments on houses in which they had no equity and from which they were unlikely to be evicted. State and municipal tax revenues continue to plunge.
New financial regulations (the so-called FINREG bill) may become within the US are expected imminently. However, the investment community feels that as presently constructed, they will serve banking interests far more than consumer interests as originally proposed.
While that works its way along, there is the realization that the post-2008 monetary easing is for the first time occurring within a fully engaged and therefore essentially closed global system, which now needs to be priced into international debt and equity markets. During the leadup to the Toronto G20 meeting, increasing angst and ink was spent on the relationship between the US dollar, the Chinese yuan (RMB) and gold. Gold morphed from an inflation play to a fiat currency issue and reached new current (non inflation-adjusted) highs. Saudi Arabia disclosed a major proportionate increase in gold among its reserve holdings. Already the largest producer, China continued to lock up more non-Chinese gold properties throughout the world by commercial deals, at the same time stating it saw no reason to buy more on the open market, such as from the IMF. Its latest currency adjustment makes gold cheaper within the domestic market.
The slow decline policy of the yuan from its former US peg as newly revealed this past weekend will allow elasticity for consumer demand in the US and elsewhere to remain more intact than it would have been with the major one-off revision the US had pushed for. Since wages are rising in China and domestic demand there will be stimulated, any success of the revised Chinese export policy will mean the rest of the world will pay for the rise in the Chinese standard of living without being able to correct their own trade deficit issues. The sovereign debt issue will persist.
The relative rise in the dollar over the last month helped the US Treasury successfully sell more debt to income-starved investors around the world at ultra-low rates of return. As economic historian and Harvard professor Niall Ferguson stated in a CNBC interview today (June 21), a realization among investors is bound to arise - within 2 to 4 years at best, sooner at worst - that rates must rise. The outcome, when translated into the billowing aggregate global debt, will be that debt maintenance - let alone reduction - will have already moved beyond reach. If and when that day arrives, bond values will plunge as demand for higher yields force them down. The impact on many ordinary and institutional investors - especially the more conservative ones - will be disastrous.
The challenge right now is serious. Many mature investors will be hard pressed to survive with their lifestyle intact and with a recovery doubtful for them in a meaningful time frame, while most younger ones appear to be carelessly texting and tweeting into their financial fate. Collectively, it is not clear if the various national publics affected, from Greece to Britain and the US, will be willing to accept the necessary fiscal medicine as politically palatable, in view of the high economic price that, with hyperinflation the other option, needs to be paid.
The growing concensus in early May of a V-shaped recovery abruptly shattered by June against the morphing of the international crisis of housing and banking into a sovereign debt crisis. This materialized with the exposure of the unsustainability of southern European national finance and social policy through their negative impact on the Euro. The outcome briefly made it appear that the US dollar was inherently strong. But it soon became apparent that the effect was only one of relationships, during which the Euro's decline simply accelerated to catch up with a decline that had already occurred in the US dollar.
Muddied over by the ongoing news coverage of the gulf of Mexico ecological disaster, the dawning understanding that the US housing debacle's effect had not yet played out occurred just as the inability of the federal government to continue its monetary stimulus made the dreaded W-recovery (or double-dip) loom as the more likely outcome. US consumers appeared to be spending on current needs by ceasing mortgage payments on houses in which they had no equity and from which they were unlikely to be evicted. State and municipal tax revenues continue to plunge.
New financial regulations (the so-called FINREG bill) may become within the US are expected imminently. However, the investment community feels that as presently constructed, they will serve banking interests far more than consumer interests as originally proposed.
While that works its way along, there is the realization that the post-2008 monetary easing is for the first time occurring within a fully engaged and therefore essentially closed global system, which now needs to be priced into international debt and equity markets. During the leadup to the Toronto G20 meeting, increasing angst and ink was spent on the relationship between the US dollar, the Chinese yuan (RMB) and gold. Gold morphed from an inflation play to a fiat currency issue and reached new current (non inflation-adjusted) highs. Saudi Arabia disclosed a major proportionate increase in gold among its reserve holdings. Already the largest producer, China continued to lock up more non-Chinese gold properties throughout the world by commercial deals, at the same time stating it saw no reason to buy more on the open market, such as from the IMF. Its latest currency adjustment makes gold cheaper within the domestic market.
The slow decline policy of the yuan from its former US peg as newly revealed this past weekend will allow elasticity for consumer demand in the US and elsewhere to remain more intact than it would have been with the major one-off revision the US had pushed for. Since wages are rising in China and domestic demand there will be stimulated, any success of the revised Chinese export policy will mean the rest of the world will pay for the rise in the Chinese standard of living without being able to correct their own trade deficit issues. The sovereign debt issue will persist.
The relative rise in the dollar over the last month helped the US Treasury successfully sell more debt to income-starved investors around the world at ultra-low rates of return. As economic historian and Harvard professor Niall Ferguson stated in a CNBC interview today (June 21), a realization among investors is bound to arise - within 2 to 4 years at best, sooner at worst - that rates must rise. The outcome, when translated into the billowing aggregate global debt, will be that debt maintenance - let alone reduction - will have already moved beyond reach. If and when that day arrives, bond values will plunge as demand for higher yields force them down. The impact on many ordinary and institutional investors - especially the more conservative ones - will be disastrous.
The challenge right now is serious. Many mature investors will be hard pressed to survive with their lifestyle intact and with a recovery doubtful for them in a meaningful time frame, while most younger ones appear to be carelessly texting and tweeting into their financial fate. Collectively, it is not clear if the various national publics affected, from Greece to Britain and the US, will be willing to accept the necessary fiscal medicine as politically palatable, in view of the high economic price that, with hyperinflation the other option, needs to be paid.
Wednesday, June 9, 2010
Further Notes on Precious Metals ETFs
Last week I mentioned the US-dollar denominated Exchange-Traded Funds, the gold SPDR listed as GLD, whose custodian is JP Morgan, and the iShares silver ETF listed as SLV, whose custodian is HSBC Bank. As a cautionary note, these 2 banks are known as respectively among the largest gold and silver short traders in the market. This position is arguably not congruent with the interest of the investors purchasing these ETFs as investments in the metals themselves.
It has also been repeatedly noted that within the lengthy prospectuses of these two ETFs, important factors such as transparent disclosure concerning how much bullion is actually held and the changes in these holdings over time (they should be rising if net new investment is rising), is not disclosed by their prospectus and cannot be determined. As a result, though commonly recommended by many advisors, the shares should rightly be regarded as mere proxies for the metals, not certificates representing ownership of actual redeemable gold or silver. In a flash panic such as affected several ETFs recently or some other extreme event, knowing exactly what you own is important.
On the other hand, the recently-launched Canadian-managed (2010, by Sprott) US-denominated physical gold ETF listed as PHYS discloses its actual gold holdings, which are held and sequestered by the Bank of Canada. While its short market history and smaller comparative size make the shares of PHYS more thinly traded at present, for the more capital-protective and self-protective investor, the crucial aspect of actual ownership may be more important than its trading volume.
Disclosure: No positions
It has also been repeatedly noted that within the lengthy prospectuses of these two ETFs, important factors such as transparent disclosure concerning how much bullion is actually held and the changes in these holdings over time (they should be rising if net new investment is rising), is not disclosed by their prospectus and cannot be determined. As a result, though commonly recommended by many advisors, the shares should rightly be regarded as mere proxies for the metals, not certificates representing ownership of actual redeemable gold or silver. In a flash panic such as affected several ETFs recently or some other extreme event, knowing exactly what you own is important.
On the other hand, the recently-launched Canadian-managed (2010, by Sprott) US-denominated physical gold ETF listed as PHYS discloses its actual gold holdings, which are held and sequestered by the Bank of Canada. While its short market history and smaller comparative size make the shares of PHYS more thinly traded at present, for the more capital-protective and self-protective investor, the crucial aspect of actual ownership may be more important than its trading volume.
Disclosure: No positions
Tuesday, June 8, 2010
Currency, Sovereign Debt and the "Gold Bubble"
The following valuable perspective is acknowledged from the respected Calafia Beach Pundit blog of June 7, 2010. The issues of sovereign debt, currency movements and the inflation/deflation question are aspects of the economic machinery that the global gold price reflects in the present cycle stage we may come to call the Keynsian end-game.
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"The euro (as the extension of the DM) and the dollar have been moving pretty closely together relative to gold. That is to say, both have depreciated by almost the same amount since 1978, with the dollar for the most part leading the way. You might say the euro's current weakness is more in the nature of "catch up" to the dollar than anything else. Recently, the euro was trading at a nice premium to the dollar, but that premium is no longer justifiable given eurozone credit concerns and the bailout of Greece.
"The euro - relative to its purchasing power parity vis a vis the dollar - has not changed much at all since 1978. It was slightly overvalued then as it is now. In other words, relative to 1978, one euro today will buy you about the same basket of goods and services in Europe as it would in the US. So the message is that both the euro and the dollar have fallen by more or less the same amount relative to gold. The yen is the only currency that is worth more today, in terms of gold, that it was in 1980.
"Regardless, the movements of all major currencies relative to each other are now dwarfed by the movement of all currencies relative to gold. ...If gold is still the timeless standard against which to measure currrencies as it has been for centuries, then today it can be said that the relative valuation of one major currency relative to another is an order of magnitude less important than the relative valuation of all currencies relative to gold.
"If all major currencies are losing value relative to gold, that is a good sign that the world's supply of money exceeds the demand for it, and that is a necessary precursor to rising inflation. We should expect to see inflation rising in just about every country, and it ought to show up first in lesser-developed countries, since their economies are generally more exposed to international trade and have a lot less inflation "inertia" than the US economy.
"I continue to believe that it makes a lot more sense to worry about inflation than it does to worry about deflation, given the significant rise in gold over the past 10 years."
..................................................................
For investors, physical gold can be held through the US ETF PHYS and more popularly but perhaps less securely in the US ETF GLD. Gold stocks on whatever market vary in quality from investment grade (primarily based on proven reserves) to speculative (unproven or proximity to proven reserves) but are generally seen as being more responsive (leveraged) to gold price movements than the metal itself.
Disclosure: long Jinshan Mines (JIN), soon to be renamed China Gold International Resources.
...............................................................................
"The euro (as the extension of the DM) and the dollar have been moving pretty closely together relative to gold. That is to say, both have depreciated by almost the same amount since 1978, with the dollar for the most part leading the way. You might say the euro's current weakness is more in the nature of "catch up" to the dollar than anything else. Recently, the euro was trading at a nice premium to the dollar, but that premium is no longer justifiable given eurozone credit concerns and the bailout of Greece.
"The euro - relative to its purchasing power parity vis a vis the dollar - has not changed much at all since 1978. It was slightly overvalued then as it is now. In other words, relative to 1978, one euro today will buy you about the same basket of goods and services in Europe as it would in the US. So the message is that both the euro and the dollar have fallen by more or less the same amount relative to gold. The yen is the only currency that is worth more today, in terms of gold, that it was in 1980.
"Regardless, the movements of all major currencies relative to each other are now dwarfed by the movement of all currencies relative to gold. ...If gold is still the timeless standard against which to measure currrencies as it has been for centuries, then today it can be said that the relative valuation of one major currency relative to another is an order of magnitude less important than the relative valuation of all currencies relative to gold.
"If all major currencies are losing value relative to gold, that is a good sign that the world's supply of money exceeds the demand for it, and that is a necessary precursor to rising inflation. We should expect to see inflation rising in just about every country, and it ought to show up first in lesser-developed countries, since their economies are generally more exposed to international trade and have a lot less inflation "inertia" than the US economy.
"I continue to believe that it makes a lot more sense to worry about inflation than it does to worry about deflation, given the significant rise in gold over the past 10 years."
..................................................................
For investors, physical gold can be held through the US ETF PHYS and more popularly but perhaps less securely in the US ETF GLD. Gold stocks on whatever market vary in quality from investment grade (primarily based on proven reserves) to speculative (unproven or proximity to proven reserves) but are generally seen as being more responsive (leveraged) to gold price movements than the metal itself.
Disclosure: long Jinshan Mines (JIN), soon to be renamed China Gold International Resources.
Thursday, May 6, 2010
A Day for the History Books
One For the Books:
If you traded through today, Thursday May 6, 2011, you will have done so through a day that will go down in financial history: the biggest 1-day drop in the history of the Dow-Jones index; the day that the Euro zone truly started its future slow disintegration or at least transformation; the day that gold began its return from Keynes' "archaic relic of the past" to an active component of sovereign (and mainstream) wealth and a change in the underpinning of some currencies; and the day that disclosed the true impact - and the danger of that impact - of the rise of machine-driven "high frequency" trading if it is left totally uncontrolled.
Gold, Chinese Real Estate and the Renminbi:
Here are set of developments that I think have profound relationships. The US had been increasing public pressure on China for months to abandon the tie that has existed for the last couple of years between the USD and the Chinese yuan, or renminbi. A few weeks ago, the pressure suddenly relented as China announced a weakening in its latest trade figures and stated in effect that whatever changes might occur may be seen by June, the date of the US Treasury Department's decision to delay. Eventually we will see the actual figures.
Within that short span of time, the Greece crisis, the outcome of which had been visible for some time beforehand to those who looked carefully, caused its now well-known panic and and ongoing damage to the Euro as a prospective credible alternative to the USD as a reserve currrency. China has never been observed to be supportive of the Euro as a reserve concept.
Also in this time Enoch Fung, chief Asia economist for Goldman Sachs, held a conference outlining a vision to internationalise the RMB through allowing Hong Kong to initiate international financial transactions in RMB in addition to the Hong Kong dollar. This would be consistent with the way the former British colony has been the medium for other far-reaching changes in mainland Chinese economic policy. Hong Kong is an important center for, among other things, Asian IPO's. If this occurs, it will be the start of the RMB alternative. China has already established numerous non-USD bi-national trade deals with countries as distant as Brazil.
Many western analysts have lately been calling for a watch on the imminent collapse of the Chinese real estate market. Fundamental differences in land ownership (as distinct from the ownership of properties) which is an important peculiarity of the Chinese market, are rarely noted. This week the important Shanghai-based funds consultancy, Z-Ben Advisors, has written that the international global crisis actually had little effect on Chinese markets - they had already declined by 20% - and proposes the contrarian view they could begin a rebound within weeks. In the absence of comprehensive social security, most Chinese mainland individuals rely on stocks and property for their future income.
The bond market is as yet inadequately developed at the retail level. Investors have few alternative outlets. Chinese national stockpiling or source control of many key industrial materials such as copper - a standing policy - have long put pressure on international commodities pricing. To allow investable Chinese domestic funds to freely expand its trade in these markets would not be helpful in controlling internal inflation.
However, China has also become the largest gold producer in the world. Allowing, in fact encouraging stock investment in go;ld producers (which often produce other industrial metals in addition) would be an outlet for savings that would not have that particular negative effect. In fact, an individual savings aspect would be maintained while at the same time, since the government purchases all output, adds to the strength of the Chinese currency and minimizes the degree to which currency relationships need to be renegotiated, by allowing the marketplace itself to discover value.
In view of these powerful long-term forces, it would seem reasonable to expect that an internationally-traded, Chinese-controlled equity vehicle of this type would meet good reception by both international, as well as a potentially wider domestic Chinese participation. We could see the beginning of this process during 2010.
If you traded through today, Thursday May 6, 2011, you will have done so through a day that will go down in financial history: the biggest 1-day drop in the history of the Dow-Jones index; the day that the Euro zone truly started its future slow disintegration or at least transformation; the day that gold began its return from Keynes' "archaic relic of the past" to an active component of sovereign (and mainstream) wealth and a change in the underpinning of some currencies; and the day that disclosed the true impact - and the danger of that impact - of the rise of machine-driven "high frequency" trading if it is left totally uncontrolled.
Gold, Chinese Real Estate and the Renminbi:
Here are set of developments that I think have profound relationships. The US had been increasing public pressure on China for months to abandon the tie that has existed for the last couple of years between the USD and the Chinese yuan, or renminbi. A few weeks ago, the pressure suddenly relented as China announced a weakening in its latest trade figures and stated in effect that whatever changes might occur may be seen by June, the date of the US Treasury Department's decision to delay. Eventually we will see the actual figures.
Within that short span of time, the Greece crisis, the outcome of which had been visible for some time beforehand to those who looked carefully, caused its now well-known panic and and ongoing damage to the Euro as a prospective credible alternative to the USD as a reserve currrency. China has never been observed to be supportive of the Euro as a reserve concept.
Also in this time Enoch Fung, chief Asia economist for Goldman Sachs, held a conference outlining a vision to internationalise the RMB through allowing Hong Kong to initiate international financial transactions in RMB in addition to the Hong Kong dollar. This would be consistent with the way the former British colony has been the medium for other far-reaching changes in mainland Chinese economic policy. Hong Kong is an important center for, among other things, Asian IPO's. If this occurs, it will be the start of the RMB alternative. China has already established numerous non-USD bi-national trade deals with countries as distant as Brazil.
Many western analysts have lately been calling for a watch on the imminent collapse of the Chinese real estate market. Fundamental differences in land ownership (as distinct from the ownership of properties) which is an important peculiarity of the Chinese market, are rarely noted. This week the important Shanghai-based funds consultancy, Z-Ben Advisors, has written that the international global crisis actually had little effect on Chinese markets - they had already declined by 20% - and proposes the contrarian view they could begin a rebound within weeks. In the absence of comprehensive social security, most Chinese mainland individuals rely on stocks and property for their future income.
The bond market is as yet inadequately developed at the retail level. Investors have few alternative outlets. Chinese national stockpiling or source control of many key industrial materials such as copper - a standing policy - have long put pressure on international commodities pricing. To allow investable Chinese domestic funds to freely expand its trade in these markets would not be helpful in controlling internal inflation.
However, China has also become the largest gold producer in the world. Allowing, in fact encouraging stock investment in go;ld producers (which often produce other industrial metals in addition) would be an outlet for savings that would not have that particular negative effect. In fact, an individual savings aspect would be maintained while at the same time, since the government purchases all output, adds to the strength of the Chinese currency and minimizes the degree to which currency relationships need to be renegotiated, by allowing the marketplace itself to discover value.
In view of these powerful long-term forces, it would seem reasonable to expect that an internationally-traded, Chinese-controlled equity vehicle of this type would meet good reception by both international, as well as a potentially wider domestic Chinese participation. We could see the beginning of this process during 2010.
Wednesday, May 5, 2010
May Trauma
Going away always seems to land me back directly into the midst of major market turmoil, and the week of May 3, 2010 is certainly no exception and very uncomfortable. The Greek sovereign debt problem was visible some time ago. The outcome seemed pretty obvious then (a debt bailout requiring Germany's agreement). That in itself has not changed. What is different is that it is clear that the German public does not want to agree to pay for Greek profligacy - although in the end, it may - coupled with investor realization that the Greek public is not willing to pay the price in taxes and clawbacks, regardless. That is what the riots are about. In fact - and this is the immovable rock - even if the bailout goes ahead, Greece will actually never be able to repay. The solution to their massive debt cannot be more debt.
The resultant Euro-zone induced turmoil - exacerbated by the possibility of no governing majority coming out of the UK elections, also this week - has spooked investors worldwide. Really good stocks unconnected to the problem (maybe the best single example is Apple (AAPL) which just announced blowout earnings and a dramatically good outlook) is among the many that were hit. Precious metals and related stocks were also - and even more dramatically pounded, despite the fact that in months ahead their performance is likely to do well.
Part of the reason for their hit may be that when people are in sudden trouble and get bank margin calls, the immediate reaction is to sell those shares that have a profit. Another aspect is the deflationary scenario put forward by those that hold the view that deficit reduction and fiscal restraint worldwide - for which the Greek problem is the current poster-child, is at hand.
However, I think we are way past that. If sovereign debt can't be forgiven (written off) and the debtor can't issue its own currency (as in Greece or California) and can't raise taxes enough to borrow on its own, the more likely eventual real-world response is an extension into Europe by the ECB of the massive monetary expansion ("quantitative easing") already having been used since late 2008 by the US Fed. France and Germany are against this on principle. It also holds interest rates below levels that would occur in an otherwise unmanipulated market.
One result will be apparent strength in the US dollar, but the strength will only be relative to weak currencies. Although tough on their exporters, harder asset-backed currencies such as the Canadian and Australian dollars will attract investment attention - and hard currency proxies like gold and gold ETFs are likely to resume their upward trends.
In the case of Exchange Traded Funds, the most well-known and largest precious metal ETF - it is not a gold mining stock fund - is the US Spider "GLD". However, while vast sums have been invested in it, its actual holdings of physical gold are secret and transactions are completely non-transparent - where have we heard this before? A new ETF by legendary Canadian manager Eric Sprott (US listed and quoted) holds all its physical gold in the Canadian mint, its holdings are reported and so avoids this questionable aspect of the GLD. The Sprott ETF is called PHYS.
I hold none of the above but continue with a position in the Canadian-Chinese gold miner JIN-T. This junior producer has more inherent leverage than an ETF, which can make it a less appropriate vehicle for conservative investors who wish lower volatility, or market participants (other than traders) with a shorter time horizon than 3 to 5 years. I have been a purchaser on declines, including the decline this week.
The resultant Euro-zone induced turmoil - exacerbated by the possibility of no governing majority coming out of the UK elections, also this week - has spooked investors worldwide. Really good stocks unconnected to the problem (maybe the best single example is Apple (AAPL) which just announced blowout earnings and a dramatically good outlook) is among the many that were hit. Precious metals and related stocks were also - and even more dramatically pounded, despite the fact that in months ahead their performance is likely to do well.
Part of the reason for their hit may be that when people are in sudden trouble and get bank margin calls, the immediate reaction is to sell those shares that have a profit. Another aspect is the deflationary scenario put forward by those that hold the view that deficit reduction and fiscal restraint worldwide - for which the Greek problem is the current poster-child, is at hand.
However, I think we are way past that. If sovereign debt can't be forgiven (written off) and the debtor can't issue its own currency (as in Greece or California) and can't raise taxes enough to borrow on its own, the more likely eventual real-world response is an extension into Europe by the ECB of the massive monetary expansion ("quantitative easing") already having been used since late 2008 by the US Fed. France and Germany are against this on principle. It also holds interest rates below levels that would occur in an otherwise unmanipulated market.
One result will be apparent strength in the US dollar, but the strength will only be relative to weak currencies. Although tough on their exporters, harder asset-backed currencies such as the Canadian and Australian dollars will attract investment attention - and hard currency proxies like gold and gold ETFs are likely to resume their upward trends.
In the case of Exchange Traded Funds, the most well-known and largest precious metal ETF - it is not a gold mining stock fund - is the US Spider "GLD". However, while vast sums have been invested in it, its actual holdings of physical gold are secret and transactions are completely non-transparent - where have we heard this before? A new ETF by legendary Canadian manager Eric Sprott (US listed and quoted) holds all its physical gold in the Canadian mint, its holdings are reported and so avoids this questionable aspect of the GLD. The Sprott ETF is called PHYS.
I hold none of the above but continue with a position in the Canadian-Chinese gold miner JIN-T. This junior producer has more inherent leverage than an ETF, which can make it a less appropriate vehicle for conservative investors who wish lower volatility, or market participants (other than traders) with a shorter time horizon than 3 to 5 years. I have been a purchaser on declines, including the decline this week.
Wednesday, April 7, 2010
Speculating on "injection" Candidates for JIN
A takeover candidate referred to me by reader Zhiwen Shen, and referenced in the Tibet huatarDragon Mining Development Chinese-language web site, is the A M mine, known as Jaima in Chinese. This is a Tibetan Chinese copper-moly mine, originally expected to ramp up to full production by the end of 1Q10. It has provided technical support to the Jinshan CSH mine site. A relationship already exists.
Acquisition concepts include something called "injection". An interesting link is to Ivanhoe Mines' massive Oyu Tolgoi copper-gold project in neighbouring Mongolia, where Jinshan has a significant Mongolian acquisition and development partner. As reported (see Toronto Star April 7/10), the Canadian company appears to be preparing for a possible takeover bid. The key share block that secured China Gold's control of Jinshan originally came from Ivanhoe and the proceeds were reported at the time to be importantly used to support Ivanhoe's Oyu Tolgoi development. It will be interesting to see if CNG could be involved in such a takeover bid and attempt to close the Oyu Tolgoi/Jinshan circle.
Further in the strategic background is the Pakistani gold property (referred to in an earlier blog) originally being prepared for development by Canadian giant Barrick Gold with a latin-American partner. In January, Barrick's rights to this property were reported to be reconsidered or suspended. Chinese sources already active in the area were believed to be discussing the matter with the Pakistani state officials involved. The partially-developed property, on which as much as US$200 million may have been spent, could be seen as a fit into CNG's (and therefore Jinshan's) international mandate.
At first glance, these large projects are of greater scale than a company like Jinshan might hope to achieve. But the future China International Gold & Metals (a guess at the upcoming new name) has an impressive board, management team and partners with deep pockets. Until more of the story unfolds, I would not automatically rule out any of the above.
Acquisition concepts include something called "injection". An interesting link is to Ivanhoe Mines' massive Oyu Tolgoi copper-gold project in neighbouring Mongolia, where Jinshan has a significant Mongolian acquisition and development partner. As reported (see Toronto Star April 7/10), the Canadian company appears to be preparing for a possible takeover bid. The key share block that secured China Gold's control of Jinshan originally came from Ivanhoe and the proceeds were reported at the time to be importantly used to support Ivanhoe's Oyu Tolgoi development. It will be interesting to see if CNG could be involved in such a takeover bid and attempt to close the Oyu Tolgoi/Jinshan circle.
Further in the strategic background is the Pakistani gold property (referred to in an earlier blog) originally being prepared for development by Canadian giant Barrick Gold with a latin-American partner. In January, Barrick's rights to this property were reported to be reconsidered or suspended. Chinese sources already active in the area were believed to be discussing the matter with the Pakistani state officials involved. The partially-developed property, on which as much as US$200 million may have been spent, could be seen as a fit into CNG's (and therefore Jinshan's) international mandate.
At first glance, these large projects are of greater scale than a company like Jinshan might hope to achieve. But the future China International Gold & Metals (a guess at the upcoming new name) has an impressive board, management team and partners with deep pockets. Until more of the story unfolds, I would not automatically rule out any of the above.
Monday, April 5, 2010
More on JIN
In the wake of the Khandaker list, the market moved up abruptly and may even have been helped by some short covering on today's Easter Monday AM spike. We scaled out modestly starting at $6.20 through to $6.50. At midday writing, it had left a new high of $6.60. We have since replaced the portion sold earlier in the day just over $6.00.
Because there are at least a couple of announcements in the pipeline, coupled with the renewed strength in gold that we expected but finally set up Saturday Apr 3 with the clever 2-step process to defuse the China-US dispute over pricing the yuan, we are not changing our present stategy. The US does not interfere with China policy on Taiwan and Tibet, China helps with Russia and Iran, so by June we will see a new currency policy in place that leaves both sides with face intact.
In our view risk remains to the upside which explains why we are trading around a position, but not changing the position itself at this stage. The stock is now set for very strong support action as announcements arrive on name change, property acquistion, production success and wider stock listing. These are among the early preparations for a pricing level when a secondary offering is made in conjunction with that listing.
Since what I write is merely my analysis, not knowledge, the sequence and timing of events remains unknown. However, the course has been set, the wind is filling the sail and the ship is now moving forward.
Because there are at least a couple of announcements in the pipeline, coupled with the renewed strength in gold that we expected but finally set up Saturday Apr 3 with the clever 2-step process to defuse the China-US dispute over pricing the yuan, we are not changing our present stategy. The US does not interfere with China policy on Taiwan and Tibet, China helps with Russia and Iran, so by June we will see a new currency policy in place that leaves both sides with face intact.
In our view risk remains to the upside which explains why we are trading around a position, but not changing the position itself at this stage. The stock is now set for very strong support action as announcements arrive on name change, property acquistion, production success and wider stock listing. These are among the early preparations for a pricing level when a secondary offering is made in conjunction with that listing.
Since what I write is merely my analysis, not knowledge, the sequence and timing of events remains unknown. However, the course has been set, the wind is filling the sail and the ship is now moving forward.
Tuesday, March 30, 2010
The End of Q1 2010
I didn't realize quite how fast the last few weeks were going by. Markets generally have been following a rather uncommon "melt up" - in which judging by low ETF, mutual fund and retirement contributions on the equity side indicates the public and no doubt many professional investors have missed out on a major rise, to their great dismay.
This tenacious negative sentiment seems mainly due to having concentrated overly on how much the market had gone up from its March 9, 2009 lows rather than considering just how overdone and wildly end-of-the-world that bottom was. Not to say that serious corrections won't happen again, but the principal error of most investors through 2009 and into 2010 was paralysis through fear. Add in the mass of liquidity pumped into the system for those that could take advantage of it - a serious qualification for a lot of people - and you have the makings of a major reverse surprise: a melt-up.
We are now right at the start of a long-term price decline in the fixed-income portion of the same portfolios, just when the majority had moved there for stability and yield (ugh). This kind of position provides scant wherewithal for opportunities ahead and is likely the foretaste of further investment damage. Sheer unprecedented volume of new government financings will push others borrowers aside and there will be only one way for existing debt prices to go: down, with a chance of major whiplash for group followers. Strong earnings coupled with good dividend policy will make stocks having such characteristics, including some preferreds, better performers. Otherwise it will continue to be a stock-picker's or strategic investor's market.
JIN moved to a new all-time high today (March 30) with follow-up on its moves to change early from GAAP accounting to international IFRS, the method for all public companies in future and especially for all new issuers in China. I now consider the prospect of listing in China beyond speculation. This will probably be accompanied or followed shortly by a secondary stock offering to broaden the trading liquidity in the stock. Trading is too thin (low in volume) for many professional managers yet, but is rising rapidly to over a million shares a day. A similar time scenario will occur for changing the present name to something like China International Gold and Metals.
All of these factors will bring additional interest in the shares, just as moving through the $5.00 barrier makes the stock investable for some institutions which are barred from putting money into the "penny" (under $5.00) market. Concurrently, gold price action has been in a low consolidation phase for some months. The longer this continues, those waiting for the widely trumpeted collapse in the price are running the risk of the opposite happening. Structural weakness in the Euro is often spoken of to account for the recent relative strength of the the USD. A different view and set of events could emerge when, rather than if, the US dollar resumes its decline. Its strength looks best when compared to the weakest.
We were able to sell 85% of our JIN position close to its recent initial breakthrough high. We repurchased the entire position at lower levels and as a result have an aggressive stance plus significantly more cash on hand (without any external contribution) available to be deployed when a tactical opportunity presents itself. Before the last peak we were flat of cash, so did not have that additional flexibility.
This tenacious negative sentiment seems mainly due to having concentrated overly on how much the market had gone up from its March 9, 2009 lows rather than considering just how overdone and wildly end-of-the-world that bottom was. Not to say that serious corrections won't happen again, but the principal error of most investors through 2009 and into 2010 was paralysis through fear. Add in the mass of liquidity pumped into the system for those that could take advantage of it - a serious qualification for a lot of people - and you have the makings of a major reverse surprise: a melt-up.
We are now right at the start of a long-term price decline in the fixed-income portion of the same portfolios, just when the majority had moved there for stability and yield (ugh). This kind of position provides scant wherewithal for opportunities ahead and is likely the foretaste of further investment damage. Sheer unprecedented volume of new government financings will push others borrowers aside and there will be only one way for existing debt prices to go: down, with a chance of major whiplash for group followers. Strong earnings coupled with good dividend policy will make stocks having such characteristics, including some preferreds, better performers. Otherwise it will continue to be a stock-picker's or strategic investor's market.
JIN moved to a new all-time high today (March 30) with follow-up on its moves to change early from GAAP accounting to international IFRS, the method for all public companies in future and especially for all new issuers in China. I now consider the prospect of listing in China beyond speculation. This will probably be accompanied or followed shortly by a secondary stock offering to broaden the trading liquidity in the stock. Trading is too thin (low in volume) for many professional managers yet, but is rising rapidly to over a million shares a day. A similar time scenario will occur for changing the present name to something like China International Gold and Metals.
All of these factors will bring additional interest in the shares, just as moving through the $5.00 barrier makes the stock investable for some institutions which are barred from putting money into the "penny" (under $5.00) market. Concurrently, gold price action has been in a low consolidation phase for some months. The longer this continues, those waiting for the widely trumpeted collapse in the price are running the risk of the opposite happening. Structural weakness in the Euro is often spoken of to account for the recent relative strength of the the USD. A different view and set of events could emerge when, rather than if, the US dollar resumes its decline. Its strength looks best when compared to the weakest.
We were able to sell 85% of our JIN position close to its recent initial breakthrough high. We repurchased the entire position at lower levels and as a result have an aggressive stance plus significantly more cash on hand (without any external contribution) available to be deployed when a tactical opportunity presents itself. Before the last peak we were flat of cash, so did not have that additional flexibility.
Tuesday, March 9, 2010
after the meeting
Tues March 9, 2010
The invitation-only reception by JIN Beijing-based management at the Intercontinental Hotel in Toronto Sunday evening was interesting. It was held prior to the commencement of the annual Prospectors & Developers Mining Conference, which is the biggest in the world. No announcements were made in light of the formal release last Thursday, but questioning executives provided some insights. In the press release I had been especially taken aback by by the 5-year gold price projections (which would absolutely impact earnings per share, based on actual production in those future years at actual prices, vs those projections). I stated that I found the figures surprising, as being too low, and asked if they were provided by themselves or China National Gold as government expectations. The answer: the figures were primarily an average provided by US banks. I commented that the figures could then be considered partly as political statements, to which he replied "we would prefer always to be conservative in our estimates." (Xinhua News Agency was taking notes.) This is an important future guideline as the entire 5 years of projections are below the current international market price for gold.
There was also an indirect confirmation that at or after the planned company name change - expected shortly - a listing on the Hong Kong market is likely. This will likely take the form of a secondary offering from the treasury and probably from management options as well (my words). According to the Toronto Star, on Monday (yesterday) a presentation was made at the conference by KC Chan, Hong Kong's secretary for financial services. It described his audience as consisting of Canadian executives considering listing on the HKSE. Such an event would be a significant stimulus to the stock by increasing the depth of the market due to the greatly increased number of investor participants. I would expect that at higher prices, the stock could attract some new institutional and fund investors whose rules prevent them from participating in the stock at present.
The stock performed very well in the current new week, actually stronger than my expectations and set new portfolio records. I lightened my position slightly, rebalancing towards the more conservative and revenue-generating Vermilion Energy Trust (VET.UN). In our seconday account, I had recently sold most VET, using the proceeds to buy JIN. Monday afternoon I reversed the process, sold all JIN, and replaced the proceeds with a larger position in VET on a dip than had just been sold. This was be accomplished with no net addition of cash. VET has continued to move up today, magnified by the larger position than was held last week.
I am now referring to the investment technique I am developing during this experiment as "Focused Wave". Today, March 9, is the first anniversary of the financial panic low of 2009. The combined portfolio has grown 634% in that time.
The invitation-only reception by JIN Beijing-based management at the Intercontinental Hotel in Toronto Sunday evening was interesting. It was held prior to the commencement of the annual Prospectors & Developers Mining Conference, which is the biggest in the world. No announcements were made in light of the formal release last Thursday, but questioning executives provided some insights. In the press release I had been especially taken aback by by the 5-year gold price projections (which would absolutely impact earnings per share, based on actual production in those future years at actual prices, vs those projections). I stated that I found the figures surprising, as being too low, and asked if they were provided by themselves or China National Gold as government expectations. The answer: the figures were primarily an average provided by US banks. I commented that the figures could then be considered partly as political statements, to which he replied "we would prefer always to be conservative in our estimates." (Xinhua News Agency was taking notes.) This is an important future guideline as the entire 5 years of projections are below the current international market price for gold.
There was also an indirect confirmation that at or after the planned company name change - expected shortly - a listing on the Hong Kong market is likely. This will likely take the form of a secondary offering from the treasury and probably from management options as well (my words). According to the Toronto Star, on Monday (yesterday) a presentation was made at the conference by KC Chan, Hong Kong's secretary for financial services. It described his audience as consisting of Canadian executives considering listing on the HKSE. Such an event would be a significant stimulus to the stock by increasing the depth of the market due to the greatly increased number of investor participants. I would expect that at higher prices, the stock could attract some new institutional and fund investors whose rules prevent them from participating in the stock at present.
The stock performed very well in the current new week, actually stronger than my expectations and set new portfolio records. I lightened my position slightly, rebalancing towards the more conservative and revenue-generating Vermilion Energy Trust (VET.UN). In our seconday account, I had recently sold most VET, using the proceeds to buy JIN. Monday afternoon I reversed the process, sold all JIN, and replaced the proceeds with a larger position in VET on a dip than had just been sold. This was be accomplished with no net addition of cash. VET has continued to move up today, magnified by the larger position than was held last week.
I am now referring to the investment technique I am developing during this experiment as "Focused Wave". Today, March 9, is the first anniversary of the financial panic low of 2009. The combined portfolio has grown 634% in that time.
Thursday, March 4, 2010
market data vs market scenarios
March 4, 2010
For the moment sticking with stocks as the investment concept (as distinct from bonds or stock derivatives, etc) for the investor of course at first, basic decisions have to be made. These basics would include, especially for a Canadian, what currency to use - typically Cdn or US depending on the relative outlook between the two - and from that, which market and what individual company from among those thousands you choose - which sector, what characteristics it has that you have been looking for. Where to look and what to look for, we can touch on another time. There are lots of important subset characterisitics here. In the end, you narrow it to a few and make your choice. Now you consider an entry point, begin to act and ultimately develop your position. OK, so here we are.
If it wasn't thought out beforehand, at least at this point we might need to do more than hope it goes up, remembering that hope is never to be mistaken for a plan. We need to develop a scenario for the destination it needs to reach in order to fulfil your requirements. Lets say that the research that led to the choice suggested that over the next 3 to 4 years if things worked out reasonably for the company, for its industry or the economic sector that it depends upon or works within tp succeed -for instance, consumers for retail; transportation and industry for energy; housing, credit cards and autos for finance; sovereign debt, currencies and savings for gold) doubling looks achievable.
This presupposes you have now become pretty familiar with the analytical tools, charts and how to read them (I prefer the Japanese candlestick type), that are currently available to D0-It-Yourself investors. Even if it turns out to actually reach your goal, you can't see an actionable path in detail from here. What's happening in your life and what are you prepared or interested in enough to do? Do you sit like Warren Buffet back when he was 40? Do you have some investable funds coming in every month to buy with on dips along the way? Maybe you don't have decades to coast. Worst would be no long-term horizon together with no further money coming in.
These differences all change how you will look at that imaginary trend line (OK, you can draw it in so its a real line, but its still not a reality). What you DO know for sure is, it will not get there in a straight line. And within that certainty lies both opportunity and danger.
So lets call that "macro" line an initial price scenario. Again, there should be some concept as to why it ends where it does both in price and the date. At this point, the more aggressive (needy?) of our investors will start to think about how they could optimize the returns along the way - and in the process help achieve the overall target if not improve on it. Recognize that starting up this micro or short-term management path working around a core position, will also mean putting in more time to do the work. In a period of activity this could resemble day-trading, but is not. A true day trader will always close out and be flat at the end of the day and picks stocks using different primary or initiating criteria than those above (usually a momentum player).
OK so now our charts, plus real corporate news cycle expectations, may call for a trading exit from some part of our holding at a certain calculated price point (time to event is less distinct or important unless you're expert in market cycles). What percent should be sold will depend on your judgement of how much time the stock will spend at the price (are you shooting for the maximum expected or a reasonable average close to that expectation?), the liquidity of the stock (is the amount you will want to sell significant in terms of the number of shares typically traded in a few minutes, hours or need to be spread over a longer time frame) and are you looking for a specific sum. Typically the amount will be related to the expected cost of buying back a larger position at a lower cost than where it was sold. If it works out that getting more stock becomes risky, settle for the same number of shares plus an improved cash balance. How great is the volatility in a typical trading day? The more the volatility the faster execution you may need and the price of accuracy will be really important. Do you think the pullback will be adequate in price and time to realistically be worth the round-trip risk?
For our purposes here, we are ignoring the concept of stop-loss positions below the market. That needs some blog space of its own. However, in this scenario I have often used several orders, scaled progressively up in price and share size placed ahead of the market. Even if modifying the price of an existing order while in play, a faster execution will often occur compared with a new order placed at the same time. The same technique can be used below the market, particularly during the buy-back of a vacated position when speed at reversals can be really important.
Having this kind of stuff in your head can help when new information comes unexpectedly. Yesterday, a stock already up but still a definite core hold, slipped more noticably on its watch chart than normal for the time the change took. I went directly to my newslines and found a 2-hour old quarterly results notice I had not been expecting yet, released just after the open. The news was rather neutral for the strength of the previous price action. That enabled me to judge that although the stock was sharply off from its high of the previous close, the price range I could execute in would provide a very satisfactory return above the mean trend and my cost. I immediately sold 60% of the core position, an amount I had previously decided. The market clearly reacted poorly to the news - largely due to a generally weak attitude in the natural gas sector - and the stock continued to slide afterwards. With 2/3 now in cash, a high base level had been protected. From a well-purchased position, selling on good news is often - but not always - a temporary good move.
This morning the reverse happened. I had been expecting some kind of constructive announcement by this company before the open next Monday, but not beforehand. However, while checking as usual for late-breaking news on my holdings, moments before the open I found 2 identical wire service briefs that were quite positive. Within seconds I moved cash and placed a buy just as the market opened. I could see seconds later that it had not executed. I had underpriced my bid by 1c. I immediately adjusted and re-sent. The order executed at the revised price during the moment it took to bring up the results screen. In mid-afternoon an official e-mail announcement arrived from the company that was fuller and even more constructive. The stock closed at a new high 15 minutes ago. This positive result would not have happened had there not been a plan of what to do already in place. Actual data modifies action and always trumps the plan.
For the moment sticking with stocks as the investment concept (as distinct from bonds or stock derivatives, etc) for the investor of course at first, basic decisions have to be made. These basics would include, especially for a Canadian, what currency to use - typically Cdn or US depending on the relative outlook between the two - and from that, which market and what individual company from among those thousands you choose - which sector, what characteristics it has that you have been looking for. Where to look and what to look for, we can touch on another time. There are lots of important subset characterisitics here. In the end, you narrow it to a few and make your choice. Now you consider an entry point, begin to act and ultimately develop your position. OK, so here we are.
If it wasn't thought out beforehand, at least at this point we might need to do more than hope it goes up, remembering that hope is never to be mistaken for a plan. We need to develop a scenario for the destination it needs to reach in order to fulfil your requirements. Lets say that the research that led to the choice suggested that over the next 3 to 4 years if things worked out reasonably for the company, for its industry or the economic sector that it depends upon or works within tp succeed -for instance, consumers for retail; transportation and industry for energy; housing, credit cards and autos for finance; sovereign debt, currencies and savings for gold) doubling looks achievable.
This presupposes you have now become pretty familiar with the analytical tools, charts and how to read them (I prefer the Japanese candlestick type), that are currently available to D0-It-Yourself investors. Even if it turns out to actually reach your goal, you can't see an actionable path in detail from here. What's happening in your life and what are you prepared or interested in enough to do? Do you sit like Warren Buffet back when he was 40? Do you have some investable funds coming in every month to buy with on dips along the way? Maybe you don't have decades to coast. Worst would be no long-term horizon together with no further money coming in.
These differences all change how you will look at that imaginary trend line (OK, you can draw it in so its a real line, but its still not a reality). What you DO know for sure is, it will not get there in a straight line. And within that certainty lies both opportunity and danger.
So lets call that "macro" line an initial price scenario. Again, there should be some concept as to why it ends where it does both in price and the date. At this point, the more aggressive (needy?) of our investors will start to think about how they could optimize the returns along the way - and in the process help achieve the overall target if not improve on it. Recognize that starting up this micro or short-term management path working around a core position, will also mean putting in more time to do the work. In a period of activity this could resemble day-trading, but is not. A true day trader will always close out and be flat at the end of the day and picks stocks using different primary or initiating criteria than those above (usually a momentum player).
OK so now our charts, plus real corporate news cycle expectations, may call for a trading exit from some part of our holding at a certain calculated price point (time to event is less distinct or important unless you're expert in market cycles). What percent should be sold will depend on your judgement of how much time the stock will spend at the price (are you shooting for the maximum expected or a reasonable average close to that expectation?), the liquidity of the stock (is the amount you will want to sell significant in terms of the number of shares typically traded in a few minutes, hours or need to be spread over a longer time frame) and are you looking for a specific sum. Typically the amount will be related to the expected cost of buying back a larger position at a lower cost than where it was sold. If it works out that getting more stock becomes risky, settle for the same number of shares plus an improved cash balance. How great is the volatility in a typical trading day? The more the volatility the faster execution you may need and the price of accuracy will be really important. Do you think the pullback will be adequate in price and time to realistically be worth the round-trip risk?
For our purposes here, we are ignoring the concept of stop-loss positions below the market. That needs some blog space of its own. However, in this scenario I have often used several orders, scaled progressively up in price and share size placed ahead of the market. Even if modifying the price of an existing order while in play, a faster execution will often occur compared with a new order placed at the same time. The same technique can be used below the market, particularly during the buy-back of a vacated position when speed at reversals can be really important.
Having this kind of stuff in your head can help when new information comes unexpectedly. Yesterday, a stock already up but still a definite core hold, slipped more noticably on its watch chart than normal for the time the change took. I went directly to my newslines and found a 2-hour old quarterly results notice I had not been expecting yet, released just after the open. The news was rather neutral for the strength of the previous price action. That enabled me to judge that although the stock was sharply off from its high of the previous close, the price range I could execute in would provide a very satisfactory return above the mean trend and my cost. I immediately sold 60% of the core position, an amount I had previously decided. The market clearly reacted poorly to the news - largely due to a generally weak attitude in the natural gas sector - and the stock continued to slide afterwards. With 2/3 now in cash, a high base level had been protected. From a well-purchased position, selling on good news is often - but not always - a temporary good move.
This morning the reverse happened. I had been expecting some kind of constructive announcement by this company before the open next Monday, but not beforehand. However, while checking as usual for late-breaking news on my holdings, moments before the open I found 2 identical wire service briefs that were quite positive. Within seconds I moved cash and placed a buy just as the market opened. I could see seconds later that it had not executed. I had underpriced my bid by 1c. I immediately adjusted and re-sent. The order executed at the revised price during the moment it took to bring up the results screen. In mid-afternoon an official e-mail announcement arrived from the company that was fuller and even more constructive. The stock closed at a new high 15 minutes ago. This positive result would not have happened had there not been a plan of what to do already in place. Actual data modifies action and always trumps the plan.
Monday, March 1, 2010
California Dreamin'
March 1, 2010
Last week I made a parallel between Greece in the Euro Zone with the situation in the state of California (as well as others) vis-a-vis the US Fed (neither can issue currency on their own). Today I see that at the annual meeting of JP Morgan last Thursday, its CEO Jamie Dimon - ranked among peers as the best big bank chief in the US - said the bank could handle a Greek problem, but investors should be more concerned with California. So I'm in good company.
It is hard to see any way out for California if you're not smoking one of their biggest agricultural products (which it would love to legalize, then levy a tax like on cigarettes). At the same time, it highlights the bind that the US Fed is in, because to support California any further would make it impossible not to do the same for at least a half-dozen other US states. The US central government can print as much as it wants, but the resulting negative potential for the USD is obvious. As it is, it is becoming hard to tell whether the Fed, in some of it's most recent bond auctions, is not "buying" (read that to mean 'failing to sell'[) some of its own issue, disguising the transactions as those of some other unnamed government in order to prevent market rates from rising. That would kill the US economy and re-kindle all sorts of bank and real estate mayhem.
Also less obvious is how the simultaneous effect of the Greek-inspired symbiotic pressure on the UK pound is currently masking USD weakness. Here we have, simultanously, talking heads pontificating about how vulnerable gold is to being in a current bubble, citing technical grounds. This certainly sounds like shilling for the Fed, since USD strength is associated with a price decline in gold. Lou Dobbs, the economist and long-term commentator who was pushed out of CNN late last year for his various non-mainstream economic and social positions, coined a phrase I love: "faith-based economics" with regard to people, including officials, pushing opinions on government economic policies that had no other possibility of success. As with any pullback in a rising market, the drop - if continued - would be bad.
So far gold's chart is intact. A gold bubble might make more sense if it were racing uncontrollably into new high territory. However, it has been moving sideways for quite a while and really not looking much like a comet in the process of consuming itself. Of course in an imperfect world anything could happen. But at present, the resumption of a downward trajectory of the USD still looks much more like reality. I think the money currently moving into the Cdn and Aussie dollars thinks so too.
At the same time, the US continues to jawbone China about it's "unfair" unofficial peg to the USD (although knowing that every Walmart customer would pay more at the checkout on any rise in the yuan/dollar ratio). But at least it would still be China's fault. One way the Chinese could move, would be to increase the percentage of gold they hold as official reserves in relation to that portion held in US Treasury bills, which is quite low. Since China is now the world's largest producer and is about to launch its new international gold vehicle imminently - which by the way earns in yuan (or renmimbi or RMB), I think I will stick with my present position.
Last week I made a parallel between Greece in the Euro Zone with the situation in the state of California (as well as others) vis-a-vis the US Fed (neither can issue currency on their own). Today I see that at the annual meeting of JP Morgan last Thursday, its CEO Jamie Dimon - ranked among peers as the best big bank chief in the US - said the bank could handle a Greek problem, but investors should be more concerned with California. So I'm in good company.
It is hard to see any way out for California if you're not smoking one of their biggest agricultural products (which it would love to legalize, then levy a tax like on cigarettes). At the same time, it highlights the bind that the US Fed is in, because to support California any further would make it impossible not to do the same for at least a half-dozen other US states. The US central government can print as much as it wants, but the resulting negative potential for the USD is obvious. As it is, it is becoming hard to tell whether the Fed, in some of it's most recent bond auctions, is not "buying" (read that to mean 'failing to sell'[) some of its own issue, disguising the transactions as those of some other unnamed government in order to prevent market rates from rising. That would kill the US economy and re-kindle all sorts of bank and real estate mayhem.
Also less obvious is how the simultaneous effect of the Greek-inspired symbiotic pressure on the UK pound is currently masking USD weakness. Here we have, simultanously, talking heads pontificating about how vulnerable gold is to being in a current bubble, citing technical grounds. This certainly sounds like shilling for the Fed, since USD strength is associated with a price decline in gold. Lou Dobbs, the economist and long-term commentator who was pushed out of CNN late last year for his various non-mainstream economic and social positions, coined a phrase I love: "faith-based economics" with regard to people, including officials, pushing opinions on government economic policies that had no other possibility of success. As with any pullback in a rising market, the drop - if continued - would be bad.
So far gold's chart is intact. A gold bubble might make more sense if it were racing uncontrollably into new high territory. However, it has been moving sideways for quite a while and really not looking much like a comet in the process of consuming itself. Of course in an imperfect world anything could happen. But at present, the resumption of a downward trajectory of the USD still looks much more like reality. I think the money currently moving into the Cdn and Aussie dollars thinks so too.
At the same time, the US continues to jawbone China about it's "unfair" unofficial peg to the USD (although knowing that every Walmart customer would pay more at the checkout on any rise in the yuan/dollar ratio). But at least it would still be China's fault. One way the Chinese could move, would be to increase the percentage of gold they hold as official reserves in relation to that portion held in US Treasury bills, which is quite low. Since China is now the world's largest producer and is about to launch its new international gold vehicle imminently - which by the way earns in yuan (or renmimbi or RMB), I think I will stick with my present position.
Thursday, February 25, 2010
Management vs Activity
Feb 25, 2010
I haven't kept up in recent days - not that there wasn't anything going on, what with financial pillaging and misdeeds in Greece being exposed (March 16 should tell all or at least most, in terms of international financial impact), economic stats from the US being all over the place, stock and commodity indexes hanging over a precipice, etc.
What is a boy to do? Players with positions are sitting pat. Players without positions are sitting pat. Both situations have rational support. I have a fairly complete position in place and for now I am taking no action. No activity in a situation like this is definitely not the same as no or passive management despite looking like a duck. This is a time for hyper vigilance, continuously reviewing every possible piece of relevant information available in order to reasses the decision "take no action". In this case the decision is essentially bullish even though my next plan of actual action is to be a short-term, and temporary, seller.
Because I have so tightly focussed my primary position during this time phase I am capable of being affected by US dollar/gold action; any major change in perception as to the immediate future direction of the US economy; good or bad news re my particular holding, mostly influenced by short-term events and to a lesser degree longer-term events.
Technically, most analysts feel that a major drop in gold is closer than a resumption of its secular uptrend. This is tied to their view that an increase in the value of the US dollar in the short run will for a while reverse its continuing slide downward. Charts from 1937 abound in an effort to support the gold decline thesis. I am prepared to wait and watch, but with my track shoes on in case data starts to make the odds of their outlook strengthen.
Economic data has seemed better but looks unreliable and on shaky ground and will mean dollar weakness. Problems in Greece (if they worsen) will have a destabilizing affect on Spain and the Euro, which could have the opposite effect and move funds from the Euro into the USD. In fact if it is resolved next month there are troublesome dominos behind it. On the other hand, it will also cause some governments and funds to move into gold. Whether China will buy at current prices the balance of the IMF gold now for sale, the likelihood becomes much higher in the event of a temporary price drop. There is an unlimited supply of dollars, but not of gold. I expect that in the end this differential will continue to move the price of gold upward towards the end of a long cycle. This will end in its own gold bubble and before that one blows up, everybody will know and want in before its over.
Corporately, good news for JIN will become public on March 8. We were pleased to be officially invited to attend their announcement affair at the Intercontinental Hotel in Toronto on the evening of March 7. The stock's individual price performance relative to the market generally, as measured by its Relative Strength Index (RSI) has been terrific, a positive indicator.
There are a range of news possibilities I expect for 2010. Selling on good news (normally a best results action in cases like this) will have to be carefully assessed, depending entirely on the scope the actual release may have, as well as whether positive commentary on the outlook is also offered. I have price targets selected now, but not etched in stone. The question will be, on initial news to what degree will it appear worthwhile to exit, to adjust or wait through the time gap until release 2, 3 etc. This will depend on the actual market reaction, the character of the broader market background, how quickly the next release might come and how easy or difficult will it be to replace a position advantageously, once sold.
So knowledgeable consideration of appropriate factors represents real portfolio management, not the volume of transactions themselves. Correct interpretation coupled with good tactical execution will yield positive results. Equal effort with wrong conclusions or poor execution will do the opposite. In an account that is not being day-traded as a technique, activity in itself could just represent churning. In a broker-managed account, this can point to a manager creating commisions for himself. In a self-managed case it could at best mean indecision and uncertainty, and at worst, inexperience and ill-considered emotional plunging.
Drawing on the logic above and further illustrated by the chart, an aspect I will consider for later and if the right circumstances materialize, will be to borrow Euros in order to buy JIN. I think this strategy would be better than doing the same thing but with the the gold spyder GLD, which is denominated in US funds. I can see why the latter would be of interest to an institutional investor who couldn't use JIN as having too small a market cap for their scale of action.
I haven't kept up in recent days - not that there wasn't anything going on, what with financial pillaging and misdeeds in Greece being exposed (March 16 should tell all or at least most, in terms of international financial impact), economic stats from the US being all over the place, stock and commodity indexes hanging over a precipice, etc.
What is a boy to do? Players with positions are sitting pat. Players without positions are sitting pat. Both situations have rational support. I have a fairly complete position in place and for now I am taking no action. No activity in a situation like this is definitely not the same as no or passive management despite looking like a duck. This is a time for hyper vigilance, continuously reviewing every possible piece of relevant information available in order to reasses the decision "take no action". In this case the decision is essentially bullish even though my next plan of actual action is to be a short-term, and temporary, seller.
Because I have so tightly focussed my primary position during this time phase I am capable of being affected by US dollar/gold action; any major change in perception as to the immediate future direction of the US economy; good or bad news re my particular holding, mostly influenced by short-term events and to a lesser degree longer-term events.
Technically, most analysts feel that a major drop in gold is closer than a resumption of its secular uptrend. This is tied to their view that an increase in the value of the US dollar in the short run will for a while reverse its continuing slide downward. Charts from 1937 abound in an effort to support the gold decline thesis. I am prepared to wait and watch, but with my track shoes on in case data starts to make the odds of their outlook strengthen.
Economic data has seemed better but looks unreliable and on shaky ground and will mean dollar weakness. Problems in Greece (if they worsen) will have a destabilizing affect on Spain and the Euro, which could have the opposite effect and move funds from the Euro into the USD. In fact if it is resolved next month there are troublesome dominos behind it. On the other hand, it will also cause some governments and funds to move into gold. Whether China will buy at current prices the balance of the IMF gold now for sale, the likelihood becomes much higher in the event of a temporary price drop. There is an unlimited supply of dollars, but not of gold. I expect that in the end this differential will continue to move the price of gold upward towards the end of a long cycle. This will end in its own gold bubble and before that one blows up, everybody will know and want in before its over.
Corporately, good news for JIN will become public on March 8. We were pleased to be officially invited to attend their announcement affair at the Intercontinental Hotel in Toronto on the evening of March 7. The stock's individual price performance relative to the market generally, as measured by its Relative Strength Index (RSI) has been terrific, a positive indicator.
There are a range of news possibilities I expect for 2010. Selling on good news (normally a best results action in cases like this) will have to be carefully assessed, depending entirely on the scope the actual release may have, as well as whether positive commentary on the outlook is also offered. I have price targets selected now, but not etched in stone. The question will be, on initial news to what degree will it appear worthwhile to exit, to adjust or wait through the time gap until release 2, 3 etc. This will depend on the actual market reaction, the character of the broader market background, how quickly the next release might come and how easy or difficult will it be to replace a position advantageously, once sold.
So knowledgeable consideration of appropriate factors represents real portfolio management, not the volume of transactions themselves. Correct interpretation coupled with good tactical execution will yield positive results. Equal effort with wrong conclusions or poor execution will do the opposite. In an account that is not being day-traded as a technique, activity in itself could just represent churning. In a broker-managed account, this can point to a manager creating commisions for himself. In a self-managed case it could at best mean indecision and uncertainty, and at worst, inexperience and ill-considered emotional plunging.
Drawing on the logic above and further illustrated by the chart, an aspect I will consider for later and if the right circumstances materialize, will be to borrow Euros in order to buy JIN. I think this strategy would be better than doing the same thing but with the the gold spyder GLD, which is denominated in US funds. I can see why the latter would be of interest to an institutional investor who couldn't use JIN as having too small a market cap for their scale of action.
Friday, February 19, 2010
A Key Point of Concern
Feb 19, 2010
This excellent commentary http://www.theglobeandmail.com/blogs/bruce-anderson/money-talk-will-become-deeply-divisive/article1474175/relates to why I decided a few years ago to return to the market. When I made that choice, this is what I thought might be coming. Now it is a fact, with its uncomfortable implications.
When I was a child, a series of relatives came into my life and into our house who were elderly and could no longer support themselves. This left an indelible imprint. There was no social safety net. That was yet to be created in the socially-conscious (although politically incorrect) Father Knows Best and Mad Men aftermath of WWII. The reference in the article about another generation possibly becoming dependent upon their children was what actually galvanized me into action, especially when adding in the big surprise of how much longer generations were living.
For those inclined to look ahead, more than ever the best option continues to be to obtain a government pension, preferably double-dipping and at a senior level, if it can be arranged. The alternative amount of capital needed on a personal basis, what with today's government debt and actuarial tables, is quite startling. If that doesn't seem in the cards, be prepared to do some heavy lifting because somebody is going to have to pay for those benefits, even if they are not coming to you. In Greece, the public is about to find out. Consider that an outlier of what can happen elsewhere.
This excellent commentary http://www.theglobeandmail.com/blogs/bruce-anderson/money-talk-will-become-deeply-divisive/article1474175/relates to why I decided a few years ago to return to the market. When I made that choice, this is what I thought might be coming. Now it is a fact, with its uncomfortable implications.
When I was a child, a series of relatives came into my life and into our house who were elderly and could no longer support themselves. This left an indelible imprint. There was no social safety net. That was yet to be created in the socially-conscious (although politically incorrect) Father Knows Best and Mad Men aftermath of WWII. The reference in the article about another generation possibly becoming dependent upon their children was what actually galvanized me into action, especially when adding in the big surprise of how much longer generations were living.
For those inclined to look ahead, more than ever the best option continues to be to obtain a government pension, preferably double-dipping and at a senior level, if it can be arranged. The alternative amount of capital needed on a personal basis, what with today's government debt and actuarial tables, is quite startling. If that doesn't seem in the cards, be prepared to do some heavy lifting because somebody is going to have to pay for those benefits, even if they are not coming to you. In Greece, the public is about to find out. Consider that an outlier of what can happen elsewhere.
Wednesday, February 17, 2010
Zero Percent
Feb 17 2010
At lunch with Phil Thompson last Thursday, the subject of interest rates and cars came up. I had occasionally been thinking about the possibility that for the next couple of years we may be looking at a range-bound market (ie, a nominally flat, non-directional trading-range market contained between identifiable upper and lower bands), in which the principal remaining consumer economic stimulus were the current 0% automobile bank loans. These unnatural loans might last a calendar quarter or two, but that would be about it. If this were to be the case, such a market would probably remain highly volatile and be a stock-picker's, rather than an invest-and-hold period.
It had already crossed my mind that inasmuch as we actually needed a new car to replace a 10-year old one, I could set up a project for the purpose but got sidetracked with travel plans. Later, that lunch became the spark for action. On the weekend, we found and bought a suitable vehicle, 0% down and every penny financed. In the past for this kind of purchase I would write a check on a bank account or draw on our home equity line of credit (HELOC) that was available waiting for the day when I was prepared to use leverage (borrowed money) to go overweight in stocks.
That would cost x% and reduce either cash or available credit. By using the unprecedented (and probably never again to be seen) 0% financing, I did neither. Because this offer contains more opportunity than no cost for the money to buy a car. It also provides the possibility of no cost for the car itself.
Tuesday am (Monday was a holiday) I put the cash purchase value of the car into a particular stock that I already held and was thoroughly researched. This took about a minute for the online cash transfer from a bank account to a trading account, plus perhaps one minute to complete the market execution. Although merged as an asset, I set up separate spreadsheet tracking for the purpose. At the market close today, 1 day later - and we have not even picked up the car - the investment was up the equivalent of 14.4 actual monthly payments. It could be sold now in 60 seconds and paid out to the bank tomorrow morning - returning the original capital in full to myself - but I have 60 months available.
In this experiment, I believe I can reasonably expect not only to get the car, net for free, but to continue to benefit in excess of its contract payout until such time as I choose to sell the stock. The point of all this is that capital, used opportunistically, can achieve specific goals in ways impossible in the past. This is because of the structure of today's financial system and the tools that are now available to anyone who chooses to learn how to use them and who has the personal capacity to manage the "animal spirits" that will join in along the way. Of course, it could all go wrong. However, this is a case where odds are it won't. And never without a plan that goes past the beginning, through to the end.
24 hours later
The US Fed, in its first step towards its unwinding of low rates and super-easy credit, just lowerd its rates by 0.25%. The surprising part is that it was done a half hour after the market close, adding drama. I watched gold start a fast drop in Australia and I expect JIN, which closed at a new high, to sell off first thing Friday morning. Despite this, nothing has really changed that had not already been telegraphed to the market. The nervousness is that by making a move when it is difficult for the market to respond, people may wonder what is coming next. Rates on mortgage backed securities are now starting to push up.
This should not turn the trend in the market. Cool heads should quickly prevail, but a trading sale and quick repurchase might be OK to try in the morning. Lows on news like this usually hit Toronto around 10:30am when the bulk of traders get the news, but it makes the opportunity look pretty tight and easy to wind up on the wrong side. In the AM we'll see how gold and the Euro is doing in London plus the pre-market on JIN in Toronto to decide on trading action if any. In addition, although Chinese New Year was this past Sunday, government officials and key executives will not be back until Monday (Sunday afternoon here). If by chance any positive corporate news was timed for release then, an overzealous trader could easily be caught out of position with no time to act on Monday morning, our time.
Friday Feb 19 2010 9:50am
Attitudes to the Fed rate move last night are tempered. Even when added to the IMF announcement Wed night of more possible gold sales, JIN was only off 17c at the initial low this morning and have recovered to down 1c. A bit of consolidation now would actually be useful and from the market's perspective, the minor effect actually looks pretty positive, especially for a Friday. This means that from a US Treasury perspective the move is likely a failure. Its early, but the event may be a sign that their actions are losing their intended effect.
Could it be? A possible and rare Canadian Government display of backbone:
The WSJ this morning says Jim Flaherty will announce, perhaps today, against the US-sponsored global bank tax concept, instead pushing for better supervision using properly applied existing rules rather than the distortions to which such a tax would undoubtedly lead.
Hard to believe but Canada could actually derail the proposal. This would not endear Canada to politicians (it would eliminate a brand new source of revenue), especially Obama and Brown of the UK, but will likely be applauded by conservative and libertarian economists. If this happens it will be positive for bank stocks across the board.
At lunch with Phil Thompson last Thursday, the subject of interest rates and cars came up. I had occasionally been thinking about the possibility that for the next couple of years we may be looking at a range-bound market (ie, a nominally flat, non-directional trading-range market contained between identifiable upper and lower bands), in which the principal remaining consumer economic stimulus were the current 0% automobile bank loans. These unnatural loans might last a calendar quarter or two, but that would be about it. If this were to be the case, such a market would probably remain highly volatile and be a stock-picker's, rather than an invest-and-hold period.
It had already crossed my mind that inasmuch as we actually needed a new car to replace a 10-year old one, I could set up a project for the purpose but got sidetracked with travel plans. Later, that lunch became the spark for action. On the weekend, we found and bought a suitable vehicle, 0% down and every penny financed. In the past for this kind of purchase I would write a check on a bank account or draw on our home equity line of credit (HELOC) that was available waiting for the day when I was prepared to use leverage (borrowed money) to go overweight in stocks.
That would cost x% and reduce either cash or available credit. By using the unprecedented (and probably never again to be seen) 0% financing, I did neither. Because this offer contains more opportunity than no cost for the money to buy a car. It also provides the possibility of no cost for the car itself.
Tuesday am (Monday was a holiday) I put the cash purchase value of the car into a particular stock that I already held and was thoroughly researched. This took about a minute for the online cash transfer from a bank account to a trading account, plus perhaps one minute to complete the market execution. Although merged as an asset, I set up separate spreadsheet tracking for the purpose. At the market close today, 1 day later - and we have not even picked up the car - the investment was up the equivalent of 14.4 actual monthly payments. It could be sold now in 60 seconds and paid out to the bank tomorrow morning - returning the original capital in full to myself - but I have 60 months available.
In this experiment, I believe I can reasonably expect not only to get the car, net for free, but to continue to benefit in excess of its contract payout until such time as I choose to sell the stock. The point of all this is that capital, used opportunistically, can achieve specific goals in ways impossible in the past. This is because of the structure of today's financial system and the tools that are now available to anyone who chooses to learn how to use them and who has the personal capacity to manage the "animal spirits" that will join in along the way. Of course, it could all go wrong. However, this is a case where odds are it won't. And never without a plan that goes past the beginning, through to the end.
24 hours later
The US Fed, in its first step towards its unwinding of low rates and super-easy credit, just lowerd its rates by 0.25%. The surprising part is that it was done a half hour after the market close, adding drama. I watched gold start a fast drop in Australia and I expect JIN, which closed at a new high, to sell off first thing Friday morning. Despite this, nothing has really changed that had not already been telegraphed to the market. The nervousness is that by making a move when it is difficult for the market to respond, people may wonder what is coming next. Rates on mortgage backed securities are now starting to push up.
This should not turn the trend in the market. Cool heads should quickly prevail, but a trading sale and quick repurchase might be OK to try in the morning. Lows on news like this usually hit Toronto around 10:30am when the bulk of traders get the news, but it makes the opportunity look pretty tight and easy to wind up on the wrong side. In the AM we'll see how gold and the Euro is doing in London plus the pre-market on JIN in Toronto to decide on trading action if any. In addition, although Chinese New Year was this past Sunday, government officials and key executives will not be back until Monday (Sunday afternoon here). If by chance any positive corporate news was timed for release then, an overzealous trader could easily be caught out of position with no time to act on Monday morning, our time.
Friday Feb 19 2010 9:50am
Attitudes to the Fed rate move last night are tempered. Even when added to the IMF announcement Wed night of more possible gold sales, JIN was only off 17c at the initial low this morning and have recovered to down 1c. A bit of consolidation now would actually be useful and from the market's perspective, the minor effect actually looks pretty positive, especially for a Friday. This means that from a US Treasury perspective the move is likely a failure. Its early, but the event may be a sign that their actions are losing their intended effect.
Could it be? A possible and rare Canadian Government display of backbone:
The WSJ this morning says Jim Flaherty will announce, perhaps today, against the US-sponsored global bank tax concept, instead pushing for better supervision using properly applied existing rules rather than the distortions to which such a tax would undoubtedly lead.
Hard to believe but Canada could actually derail the proposal. This would not endear Canada to politicians (it would eliminate a brand new source of revenue), especially Obama and Brown of the UK, but will likely be applauded by conservative and libertarian economists. If this happens it will be positive for bank stocks across the board.
Tuesday, February 16, 2010
Day One of the Tiger
Tues Feb 16, 2010
When things work out in the direction of a plan, it doesn't mean that the wait wasn't just as hard, just that the relief is a bit more heady. After the nearly worldwide long weekend, the Year of the Tiger has begun. Right on cue, talking heads are reviving the reflation trade. JIN returned to its all-time high in good time for the return of the Chinese political elite back to work on Mon Feb 22 upcoming. I would expect some positively-slanted news.
Also on the news front, I had already noticed that at least 2 months had gone by without a word from Vermilion (VET.UN). The stock had been flat and I had been very anxious to reverse my pairs trade and reinstate the somewhat larger VET position the trade paid for, before something broke and the stock ran away. I got the execution. Today VET reported very positive drilling results in Holland (4 succesful mainland wells from 4 spuds). Added revenues are expected very fast - by Q2 2010 and a decent production life. The stock moved up with some conviction. I would think there will be positive talk on the new gas field off the coast of Ireland soon. If so, an increase in the monthly tax-free distribution to shareholders would make sense, perhaps as early as Q3 this year. Even so, at $34 the stock is far below the $50 level it reached before the 2008 market break.
A lot of people are very nervous today that the market has not yet collapsed as expected, so they sold into the very strong buying today. I think many of these are likely the same people that did not buy into the 2009 massive upward until very late in the game and most of the benefit was over. BUT, it is very easy to be complacent as soon as things go well. A concern, but getting frightened on Day 1 seems a bit too weak-kneed. So I recalculated where I should sell, first on a 2-week to 2-month change scenario, then also on a 3-month to 6-month case. My long-line (1 year to 3 years) scenario remains unchanged. But with those baselines laid down, I can look at unfolding data over time in order to have a flexible but coherent plan as to how to achieve my goals. I can talk about conceptualizing goals and reality checks and modifications along the way.
There are some events coming out there that will be very unsettling. One of these may be the Chinese reaction to Obama's upcoming meeting with the Dalai Lama. People mistakenly believe the Chinese position on Tibet has something to do with religion or minority discrimination. That superficiality is trumpeted by the media as a reason for Western counter-action. Nothing is further from the underlying reality, which like Kashmir, is all about upstream water. It is sufficiently important that the Chinese military is starting to speak out.
If the meeting goes ahead (and it will), it may result in China intervening in the announced sale by the US of very valuable aircraft contracts to Taiwan. This is a US mid-term election year. If such a scenario occurs, all hell will break loose in Washington and against Obama. He will not be able to take the implied recognition back - implied recognition both of Tibetan independence but also of Taiwanese independence, in a single incident. The Chinese now have a high-tech bluewater navy. The South China sea in now a Chinese lake. No US aircraft carrier will ever go to Taiwan. It is denouement, the recognition of shocking new realtities and the adjustments they require that most unsettle markets. One such market would be currencies.
When things work out in the direction of a plan, it doesn't mean that the wait wasn't just as hard, just that the relief is a bit more heady. After the nearly worldwide long weekend, the Year of the Tiger has begun. Right on cue, talking heads are reviving the reflation trade. JIN returned to its all-time high in good time for the return of the Chinese political elite back to work on Mon Feb 22 upcoming. I would expect some positively-slanted news.
Also on the news front, I had already noticed that at least 2 months had gone by without a word from Vermilion (VET.UN). The stock had been flat and I had been very anxious to reverse my pairs trade and reinstate the somewhat larger VET position the trade paid for, before something broke and the stock ran away. I got the execution. Today VET reported very positive drilling results in Holland (4 succesful mainland wells from 4 spuds). Added revenues are expected very fast - by Q2 2010 and a decent production life. The stock moved up with some conviction. I would think there will be positive talk on the new gas field off the coast of Ireland soon. If so, an increase in the monthly tax-free distribution to shareholders would make sense, perhaps as early as Q3 this year. Even so, at $34 the stock is far below the $50 level it reached before the 2008 market break.
A lot of people are very nervous today that the market has not yet collapsed as expected, so they sold into the very strong buying today. I think many of these are likely the same people that did not buy into the 2009 massive upward until very late in the game and most of the benefit was over. BUT, it is very easy to be complacent as soon as things go well. A concern, but getting frightened on Day 1 seems a bit too weak-kneed. So I recalculated where I should sell, first on a 2-week to 2-month change scenario, then also on a 3-month to 6-month case. My long-line (1 year to 3 years) scenario remains unchanged. But with those baselines laid down, I can look at unfolding data over time in order to have a flexible but coherent plan as to how to achieve my goals. I can talk about conceptualizing goals and reality checks and modifications along the way.
There are some events coming out there that will be very unsettling. One of these may be the Chinese reaction to Obama's upcoming meeting with the Dalai Lama. People mistakenly believe the Chinese position on Tibet has something to do with religion or minority discrimination. That superficiality is trumpeted by the media as a reason for Western counter-action. Nothing is further from the underlying reality, which like Kashmir, is all about upstream water. It is sufficiently important that the Chinese military is starting to speak out.
If the meeting goes ahead (and it will), it may result in China intervening in the announced sale by the US of very valuable aircraft contracts to Taiwan. This is a US mid-term election year. If such a scenario occurs, all hell will break loose in Washington and against Obama. He will not be able to take the implied recognition back - implied recognition both of Tibetan independence but also of Taiwanese independence, in a single incident. The Chinese now have a high-tech bluewater navy. The South China sea in now a Chinese lake. No US aircraft carrier will ever go to Taiwan. It is denouement, the recognition of shocking new realtities and the adjustments they require that most unsettle markets. One such market would be currencies.
Tuesday, February 9, 2010
What about the 2011 Outlook
Feb 9 2010
The Obama US budget just unveiled involves $3.8T, $1.6T of which involves debt. Even in an era of gigantic numbers, this one is HUGE. Consideration of its impact is being pushed to the side at the moment with all the hand-wringing over European debt, but this cannot last for long. Sooner rather than later, investors will return to this enormous and sobering reality.
And the reality is this. It wil enormously cramp the US ability to grow its economy, which in turn means its employment. Counteracting the effect in the very short-term, 2010 is an election year. The large unspent balance of the US stimulus bill will go into the economy during the next few months. Demand for labour will have to rise through this summer and show up as positive numbers at least until January 2011. Also, interest rates will be suppressed by every means possible until then. Pressure on commercial banks to make new loans during the months immediately ahead will be very high as well, leading to monetization of some of the system's capital and increase velocity. The PR machine will be flooding media with data pointing up. After the votes are counted, all bets are off.
The resulting pullback, encouraged by a new populist outcry for cutbacks by groups like the Tea Party movement that do not seem to appreciate the consequences of what they are doing, will hit hard. Financial problems that are being papered over will break wide open in California, Florida, Ohio, Michigan, Indiana, North Carolina and several other states. At that point, the need to cut expenditures will impact public need for entitlements and public services in a major disruptive way.
It is hard to believe that more money will not be printed to "solve" the problem, not just of the federal government but these states. Others will immediately want their share if money is being handed out to cover property tax shortfalls. Without a recovery in housing construction alone, which with related expenditures on appliances, furniture etc, together amout to about 20% of total US GDP, there will be no real economic and jobs recovery. Pensions will be in jeopardy. (In Canada, the Harper government has already set an ominous precedent by agreeing to covering the shortfall in the private and bankrupt Northern Telecom pension. People with perhaps no pensions will be taxed to pay for those who have, but in this case were never on the government payroll. The fact that the bulk of those affected live in a hotly-contested Ottawa-area riding will not stop the outrage if the same largesse is not provided to other companies). If it has not happened by the January-February 2011 time frame, these financial events spell serious trouble for the US dollar that could make the Euro effect appear mild.
The Obama US budget just unveiled involves $3.8T, $1.6T of which involves debt. Even in an era of gigantic numbers, this one is HUGE. Consideration of its impact is being pushed to the side at the moment with all the hand-wringing over European debt, but this cannot last for long. Sooner rather than later, investors will return to this enormous and sobering reality.
And the reality is this. It wil enormously cramp the US ability to grow its economy, which in turn means its employment. Counteracting the effect in the very short-term, 2010 is an election year. The large unspent balance of the US stimulus bill will go into the economy during the next few months. Demand for labour will have to rise through this summer and show up as positive numbers at least until January 2011. Also, interest rates will be suppressed by every means possible until then. Pressure on commercial banks to make new loans during the months immediately ahead will be very high as well, leading to monetization of some of the system's capital and increase velocity. The PR machine will be flooding media with data pointing up. After the votes are counted, all bets are off.
The resulting pullback, encouraged by a new populist outcry for cutbacks by groups like the Tea Party movement that do not seem to appreciate the consequences of what they are doing, will hit hard. Financial problems that are being papered over will break wide open in California, Florida, Ohio, Michigan, Indiana, North Carolina and several other states. At that point, the need to cut expenditures will impact public need for entitlements and public services in a major disruptive way.
It is hard to believe that more money will not be printed to "solve" the problem, not just of the federal government but these states. Others will immediately want their share if money is being handed out to cover property tax shortfalls. Without a recovery in housing construction alone, which with related expenditures on appliances, furniture etc, together amout to about 20% of total US GDP, there will be no real economic and jobs recovery. Pensions will be in jeopardy. (In Canada, the Harper government has already set an ominous precedent by agreeing to covering the shortfall in the private and bankrupt Northern Telecom pension. People with perhaps no pensions will be taxed to pay for those who have, but in this case were never on the government payroll. The fact that the bulk of those affected live in a hotly-contested Ottawa-area riding will not stop the outrage if the same largesse is not provided to other companies). If it has not happened by the January-February 2011 time frame, these financial events spell serious trouble for the US dollar that could make the Euro effect appear mild.
Markets Feb 9 2010
Tues Feb 9 2010 pre-open
Markets, including gold (which we use as a reverse proxy for the underlying trend of currencies) are on a knife edge. Markets are enormously nervous. The VIX is recording very high expected volatility. Because the Euro has been so weak with the hammering on Greece and the whole PIGS chatter, it makes the USD look and act better in the moment. People forget that the whole Euro thing is very analagous to the US and the financial position of the states, especially the 7 or so led by California. While the UK in not part of the Eurozone, financial problems there are at least as difficult as in the weaker Euro states. But since its GDP is vastly larger, it would be capable of creating much more havoc if the GBP were to seriously appear in jeopardy of devaluation. So everything is relative and strength in the USD does not necessarily mean there is an expectation that the systemic problems with the US economy are about to end.
We also know that trader short positions in the Euro are massive. This means that major financial groups are actively working to bring it down, which in effect is working against the public interest. Market talking heads are very fearful of another break downwards in the market and the rest say they will 'take something off the table' on any short term bump up.
The technicals of JIN continue to look OK, which reinforces never to overlook what is happening to your specific holdings. As the French officer commanding the Old Guard is reported to have said as the Prussians entered the field at Waterloo, "Courage, my children".
The impact of indirectly positive breaking news:
Information was just released by CNBC and I now have it confirmed online from the G&M:
In a disclosure to the US SEC, China Investment Corp, its $200B sovereign wealth fund, has been quietly accumulation stakes in Canada, including Kinross Gold and Potash Corp of Saskatchewan. It has also already made about $2B on its earlier investment in Cdn gold and base metals miner Teck Resources, making it the fund's largest single equity holding. JIN responded instantly to this news, gaining 20c by 10:30am and appears to be consolidating there, just below my re-entry point.
Markets, including gold (which we use as a reverse proxy for the underlying trend of currencies) are on a knife edge. Markets are enormously nervous. The VIX is recording very high expected volatility. Because the Euro has been so weak with the hammering on Greece and the whole PIGS chatter, it makes the USD look and act better in the moment. People forget that the whole Euro thing is very analagous to the US and the financial position of the states, especially the 7 or so led by California. While the UK in not part of the Eurozone, financial problems there are at least as difficult as in the weaker Euro states. But since its GDP is vastly larger, it would be capable of creating much more havoc if the GBP were to seriously appear in jeopardy of devaluation. So everything is relative and strength in the USD does not necessarily mean there is an expectation that the systemic problems with the US economy are about to end.
We also know that trader short positions in the Euro are massive. This means that major financial groups are actively working to bring it down, which in effect is working against the public interest. Market talking heads are very fearful of another break downwards in the market and the rest say they will 'take something off the table' on any short term bump up.
The technicals of JIN continue to look OK, which reinforces never to overlook what is happening to your specific holdings. As the French officer commanding the Old Guard is reported to have said as the Prussians entered the field at Waterloo, "Courage, my children".
The impact of indirectly positive breaking news:
Information was just released by CNBC and I now have it confirmed online from the G&M:
In a disclosure to the US SEC, China Investment Corp, its $200B sovereign wealth fund, has been quietly accumulation stakes in Canada, including Kinross Gold and Potash Corp of Saskatchewan. It has also already made about $2B on its earlier investment in Cdn gold and base metals miner Teck Resources, making it the fund's largest single equity holding. JIN responded instantly to this news, gaining 20c by 10:30am and appears to be consolidating there, just below my re-entry point.
Monday, February 1, 2010
more on gold
Feb 1 2010 8:30pm
Carrying forward re JIN and therefore gold:
I think it only makes sense to say that my interest in JIN is because of more than its position as a start-up producer. Some indication of my strategic view can be inferred from my original remarks. But I would never break the investment rules to such a degree on just a good-looking startup in any industry, whether here or overseas.
There is a huge divergence of opinion among professional investors as well as economists relating to US monetary policy (affected by fiscal policy), inflation and gold. These impact policies in other countries around the world. This is way too big and hot a topic to cover comprehensively in a single blog , but I should try to touch the main points. Note that the USD has been the sole international reserve currency for most of the period since WW2.
Many people believe, just from practical observation, that inflation is the result of too much demand chasing goods in shorter supply than for those who want them. Terminology gets a bit confusing here. Those who call themselves "supply siders" in the US also say they are "conservative" but by this they mean politically (eg, Republican). Let it just be said that conservative economics is more technically connected to the "Austrian school", which is more rigorous and not supply side. Supply in this sense means policies supportive of increasing the aggregate productive capacity of goods within the economy.
Feb 3, 2009
Prior to year end we all knew that massive strategic trader John Paulson was going to list a new gold ETF in early 2010. Knowing that he was already heavily positioned, you could take that a couple of ways. The most negative take would be that if the gold market started to move ahead again after flirting with a technical breakdown in January (..watch out, it's the most crowded trade in the world! - or so some say), he could use any appreciation to substitute other people's money for his own, keeping the physical position stable but thereby getting out without crashing the market - at the same time cashing in big time without any further material rise in price. Or he might not. Investments in Paulson ETF will require a minimum of $10 million and a 1-year lockup.
The heavyweight on the other side is Bill Gross of PIMCO, the largest bond fund in the world. Paulson's giant call in the past was multi-billion bet that sub-prime mortgages would collapse. Paulson as said he will put $250 million into the new fund. This, in effect, is a put against the USD.
Part 1 to the gold case - which is really about monetary inflation or deflation - has already happened in the unparalleled increase in the US Fed's increase in debt used to save the banks, auto industry, the economic stimulus, the wars and as of Feb 1, the new $1.3T deficit budget for the year just started.
The trick that those on seeing no inflation on the horizon while recognizing the negative Fed problem, is they maintain that as the economy eventually recovers and the banks begin to lend the vast liquidity available, monetary and tax policies will be deftly implemeted to avoid a roaring emergence of inflation and currency debasement. This is fine except for the fact that no government has ever been able to actually succeed in dampening the inflation. Paul Volker, Obama's key adviser in this regard, eventually snuffed inflation at the end of the '80s, but with 20% interest rates that caused a new recession.
The historical experience is seen by many as why the US government will not be any more successful in containing the problem that it has now created, than any other government. One could even reasonably question if indeed it actually expects to try, as distinct from talk. Without taking decades of no growth, it is hard to see another route left for the government is to make itself and homeowners whole again by letting inflation wipe out the debt. Of course, it is politically impossible to admit this or be seen to allow it. Hence the cries of "King Dollar".
We have not even touched on the subject of whether the rest of the world is prepared to see the US and King Dollar reign by itself again and what they seem to be doing about it..
What Paulson actually said last year in the Time article was that his gold fund's objective "is to outperform gold price in a rising gold price environment." They will pursue this by investing in gold equities that are levered to the price of gold, as well as derivatives on the price of gold. In additions to its other characteristics, JIN is a gold equity, unhedged and highly leveraged to the gold price.
SA reports that three private equity firms are on the shortlist to bid for Morgan Stanley's stake in China International Capital Corp. All are competing for the $1B-plus stake that MS bought for just $37M in 1995. The sale could get up to $1.5B.
At Davos, legendary currency trader George Soros (who once broke the Bank of England) made a statement strangely capable of being read two ways. The negative way hit the UK press immediately at the end of January while markets were in a funk. But in reality he was just stating a fact in his comment about gold as "the ultimate bubble". Historically this is true. Gold will not reflate before mortgages or land and financial speculation. He did not say the bubble was here now and was about to break. But the price did drop in a way to frighten many. Then only days later, on Feb 1 it rose strongly after Obama disclosed the massive size of unfunded spending in his scheduled announcement today of the new US budget.
If Soros had intended, unlike the panicky conclusion of the Daily Telegraph, to create a buying opportunity for himself, it certainly worked. Of course, I do not know whether he made a move at that time or not, nor do I KNOW that today's action is the re-establichment of gold's strong upward trend - at least not yet. But one thing for is for sure I stood pat in my position.
In the end, for practical purposes it is what the Fed DOES that counts. To date they have not 'talked their book', that is what they have been saying is not what they have been doing. But good ol' 'helicopter Ben' Bernanke has said specifically "I will not monetize the debt". Events outside the US, or the law of unintended consequences could force monetization regardless oof intent. At present, the contiuation of the Fed doing more of what they been doing looks more likely than any serious change for the better. This is also an US election year. Unemployment is an economic drag that is making the electorate both angry and irrational. More on this as events unfold.
Carrying forward re JIN and therefore gold:
I think it only makes sense to say that my interest in JIN is because of more than its position as a start-up producer. Some indication of my strategic view can be inferred from my original remarks. But I would never break the investment rules to such a degree on just a good-looking startup in any industry, whether here or overseas.
There is a huge divergence of opinion among professional investors as well as economists relating to US monetary policy (affected by fiscal policy), inflation and gold. These impact policies in other countries around the world. This is way too big and hot a topic to cover comprehensively in a single blog , but I should try to touch the main points. Note that the USD has been the sole international reserve currency for most of the period since WW2.
Many people believe, just from practical observation, that inflation is the result of too much demand chasing goods in shorter supply than for those who want them. Terminology gets a bit confusing here. Those who call themselves "supply siders" in the US also say they are "conservative" but by this they mean politically (eg, Republican). Let it just be said that conservative economics is more technically connected to the "Austrian school", which is more rigorous and not supply side. Supply in this sense means policies supportive of increasing the aggregate productive capacity of goods within the economy.
Feb 3, 2009
Prior to year end we all knew that massive strategic trader John Paulson was going to list a new gold ETF in early 2010. Knowing that he was already heavily positioned, you could take that a couple of ways. The most negative take would be that if the gold market started to move ahead again after flirting with a technical breakdown in January (..watch out, it's the most crowded trade in the world! - or so some say), he could use any appreciation to substitute other people's money for his own, keeping the physical position stable but thereby getting out without crashing the market - at the same time cashing in big time without any further material rise in price. Or he might not. Investments in Paulson ETF will require a minimum of $10 million and a 1-year lockup.
The heavyweight on the other side is Bill Gross of PIMCO, the largest bond fund in the world. Paulson's giant call in the past was multi-billion bet that sub-prime mortgages would collapse. Paulson as said he will put $250 million into the new fund. This, in effect, is a put against the USD.
Paulson's Gold Thesis:
Again excepted from the Time article, according to presentations from Paulson & Co., their thesis for gold is threefold. Firstly, they believe that the printing presses of money that have been working overtime in America and other countries will cause depreciation in paper currency. Secondly, they believe that demand for gold will increase, particularly as a reserve currency. In fact, they think gold could beome the primary reserve currency again as they have been looking at gols as currency, not a commodity. Thirdly, their belief is that demand for gold in general will be far greater than supply, causing prices to head higher. Overall, they see a very high probability of inflation in America's future and have selected gold related investments to hedge against this.
I have the same point of view on this. The US monetary base has expanded to an absolutely exponential degree. The correlation between the monetary base and money supply (the monetary base, when transformed through bank loans, becomes the money supply when placed in borrowers' hands) is very close, almost 1:1. In turn, unit money supply as also highly correlated to the GDP price index, nearly 1:1 again. So the main argument here is that the monetary base has expanded dramatically, yet the money supply growth has not yet expended. This is due to the fact that the velocity of money (the pace at which it changes from hand to hand and business to business) dropped furiously after the collapse of Lehman Bros. last year. Once money supply expands, look out for inflation!
Other countries have been following the profligate US lead. From late 2008 until Q2 early last year, while the US balance sheet expanded by 119%, the Bank of England expanded 127%, the Swiss National Bank's by 80% and the European Central Bank (ECB) by 39%. The rates have increased since then.
To those citing the 'crowded trade' or gold bubble argument, Paulson argues there has been a vast appetite for gold, particularly in the popular exchange-traded fund GLD. In comparison to GLDs $60 billion, the comparable pool of US money market reserves (which are capable of being moved instantly) was $3,850 billion. This implies a vast amount of room for savers to shift from very low money market rates into gold. But very importantly, he expects central banks to become net buyers of gold after decades of selling. We saw this with India in December 2009.
It appears more likely to continue in this direction than revert back to net sales. Some highly stressed banking systems like Greece - maybe even the US to some degree - could be sellers, but I would expect these volumes to be handled successfully by the market if they occur.
Even the highly-regarded Dennis Gartman tonight (Feb 8) grumblingly (he says he always hates to be positive on gold because it can mean bad things for other sectors) acknowleded that the technical price performance of gold during the current VERY shaky market looks impressive and he is staying long, mostly in actual gold and the GLD ETF.
As an aside, there is an element of suspicion that the amount of physical gold held by the GLD ETF and even by the US Treasury at Fort Knox is overstated. The Treasury, a known seller, has reported identical, unchanged hodings every month for nearly 2 years. There has been no actual third-party audit of the secret offshore holding by GLD. If significant under-reporting is a fact, in the event of a sharp price rise, this would be considered very bullish for the price. The point being that the missing portion might have to be purchased under duress and the supply available to the market may be significantly less than it is genearally stated to be.
So the crux of this argument revolves around money suupply. Historically, inflation has lagged money supply growth by 2 to 3 years. It says that when you have this kind of money supply growth, inflation is just around the corner. Gold has historically held its value and/or appreciated in times of inflation. Paulson selected the the gold equity strategy (along with some long-dated options) as having greater potential upside as the think gold equities will benefit most should gold prices stay flat or continue to rise.
I have held these views and a position in JIN for several years. Until lately, this was during a very slow gold price rise. Despite this, returns have been far above average. On the other hand, developments within the company itself have been very positive with an outstanding outlook over the next several years, regardless of this background. However, if you row you boat in the direction that the river flows, your work is easier and the distance travelled is greater.
The thing that changed the game from ordinary prospect for traders to a strategic investment opportunity was "quantitative easing". Once that at the US Treasury, history and a new direction was set.
Part 1 to the gold case - which is really about monetary inflation or deflation - has already happened in the unparalleled increase in the US Fed's increase in debt used to save the banks, auto industry, the economic stimulus, the wars and as of Feb 1, the new $1.3T deficit budget for the year just started.
The trick that those on seeing no inflation on the horizon while recognizing the negative Fed problem, is they maintain that as the economy eventually recovers and the banks begin to lend the vast liquidity available, monetary and tax policies will be deftly implemeted to avoid a roaring emergence of inflation and currency debasement. This is fine except for the fact that no government has ever been able to actually succeed in dampening the inflation. Paul Volker, Obama's key adviser in this regard, eventually snuffed inflation at the end of the '80s, but with 20% interest rates that caused a new recession.
The historical experience is seen by many as why the US government will not be any more successful in containing the problem that it has now created, than any other government. One could even reasonably question if indeed it actually expects to try, as distinct from talk. Without taking decades of no growth, it is hard to see another route left for the government is to make itself and homeowners whole again by letting inflation wipe out the debt. Of course, it is politically impossible to admit this or be seen to allow it. Hence the cries of "King Dollar".
We have not even touched on the subject of whether the rest of the world is prepared to see the US and King Dollar reign by itself again and what they seem to be doing about it..
What Paulson actually said last year in the Time article was that his gold fund's objective "is to outperform gold price in a rising gold price environment." They will pursue this by investing in gold equities that are levered to the price of gold, as well as derivatives on the price of gold. In additions to its other characteristics, JIN is a gold equity, unhedged and highly leveraged to the gold price.
SA reports that three private equity firms are on the shortlist to bid for Morgan Stanley's stake in China International Capital Corp. All are competing for the $1B-plus stake that MS bought for just $37M in 1995. The sale could get up to $1.5B.
At Davos, legendary currency trader George Soros (who once broke the Bank of England) made a statement strangely capable of being read two ways. The negative way hit the UK press immediately at the end of January while markets were in a funk. But in reality he was just stating a fact in his comment about gold as "the ultimate bubble". Historically this is true. Gold will not reflate before mortgages or land and financial speculation. He did not say the bubble was here now and was about to break. But the price did drop in a way to frighten many. Then only days later, on Feb 1 it rose strongly after Obama disclosed the massive size of unfunded spending in his scheduled announcement today of the new US budget.
If Soros had intended, unlike the panicky conclusion of the Daily Telegraph, to create a buying opportunity for himself, it certainly worked. Of course, I do not know whether he made a move at that time or not, nor do I KNOW that today's action is the re-establichment of gold's strong upward trend - at least not yet. But one thing for is for sure I stood pat in my position.
In the end, for practical purposes it is what the Fed DOES that counts. To date they have not 'talked their book', that is what they have been saying is not what they have been doing. But good ol' 'helicopter Ben' Bernanke has said specifically "I will not monetize the debt". Events outside the US, or the law of unintended consequences could force monetization regardless oof intent. At present, the contiuation of the Fed doing more of what they been doing looks more likely than any serious change for the better. This is also an US election year. Unemployment is an economic drag that is making the electorate both angry and irrational. More on this as events unfold.
Friday, January 29, 2010
Blogstart
Introduction and Disclosure.
This is the start of an entirely a personal-view blog, started in the early weeks of 2010.
For a number of years I had been asked to write, mostly by my wife but occasionally by other family members, some sort of material. I have avoided this on the grounds that in my own opinion I had nothing to say that was more original, insightful or germane than pieces that I have read, written by others. On the other hand, they don't read material in my particular fields of interest.
With respect to financial comment, to the extent it may refer to any particular stock, investment vehicle, point of view, strategy or action, under no circumstances are such to be construed as actionable recommendations, advice or ideas appropriate for the reader's circumstances. In fact, they may often be counter to accepted investment techniques with which it would be useful for the reader to be familiar. Any person reading this and interested in taking financial action should do their own research and/or consult a reputable financial institution or their own accredited advisor. While not necessarily the case, I may have a vested interest in specific investments mentioned.
That having been said, my interests are both macro- and microeconomic. They range from specific corpoate situations to international political and economic policies, particularly those pursued by central banks, the worldwide financial structure and the socio-economic-political responses that form its orbit or bear its consequences.
Unfortunately, young people are not routinely and formally taught about money, or anything whatever about how and why the financial system works. Everything is assumed and they are turned out on the street like creatures in the field, to figure it out for themselves - mostly from totally clueless sources. That eventually means that adults know precious little and while it may sound extreme, there are capable and expert accountants (just to use an example) who know money like a mechanic knows a car, without knowing how to run a successful auto manufacturer, its place in the world-wide auto industry or the impact of international policies. This is a social shortcoming and disadvantages most of the populace of most countries.
Beyond this, after years of institutional investment involvement and subsequent decades of observation, it is my opinion that many educated and otherwise well-informed persons see a financial world largely contrived by others for their view. This fact that this macro-level effect works against them (although opportunity does exist for anyone sufficiently determined to find out) is not so much planned that way as indifferent to them (the derogatory description of "them" is sheeple) - except with respect to the latter's broadly predictable collective responses. Eventually the larger populace is sufficiently co-opted that even when a matter can be made plain, a blind eye is turned to the disclosure so that the distortion - even though against their interest - is accepted, forgotten and even denied.
When Nelson said he had not seen the flagship signals to break off naval combat, he asked for the spyglass to look for the admiralty code flags. When he placed the glass to his sightless eye, he knew what he was doing. He continued to fight, and won. Wilful public blindness not just to the consequence, but to the very meaning of events is a very different thing.
---------------------------------
Current happenings: right now, the markets are demanding both discipline and attention.
Tues Jan 19, 2010
The day after the US MLK holiday has become a trial to one's courage and conviction. (Convictions, of course, must always and continuously be tested for validity). After deciding last week that my JIN target re-entry point was probably too low - despite being staged over a week - this morning the price slumped exactly to my original calculated area. "Catching a falling knife" is invariably a tough act when cool intellectual plans meet the emotional turmoil of actual action: fear and greed. Economists loftily call the effect "animal spirits". This combination invariably leads to the question - 'did I just misjudge the volatility a bit or is this the start of something worse'. Looking up from the bottom of a pit feels more uncomfortable than looking down from the top.
Fri Jan 22, 2010
Among classes of active investors, day traders (who are always flat at the close) can't live without at least moderate volatility. Other types of investors including myself (...if I had to pick a term I would probably class myself as a swing trader), use volatility to differing degrees. But essentially the purpose is the same - an effort to increase returns over a given period of time to a degree greater than a 'buy & hold' investor, broad market-based mutual fund or its modern competitor, a market ETF would give. The movements which are viewed from minute-to minute up to daily are a separate phenomenon from whatever the secular gaining or losing trend might be. But when volatility pushes to very high levels (there is an index, the VIX, that measures this) it becomes dangerous to the health of many participants. This is where we have been this week.
High volatility like this comes especially at times of great confusion, conflicting opinions relative to the economic outlook or when there are overhanging political or international events in which outcomes are difficult to foresee. Even worse, if among the events an' inflection point' is near. An inflection point is a market level where technical indicators broadly accepted by some groups of analysts tend to trump fundamental business data, and suggest that a move to certain levels could precipitate a sharp and lasting aggregate change up or down, based on near-term market action.
We have all of these right now. The US and international markets are really spooked. Partly I feel locked in and could kick myself for stepping back into the market and committing too early. The plan was perfect but the execution was off by a couple of days. Any other time, it would be immaterial. Still, with 2009 a stellar performance I can hardly complain.
There is a dichotomy between the popular stock market indexes, which give a mid-term view of its national economy (as modified by events in the broader world economy), and the progress and valuation of individual stocks. On the other hand, in most cases an individual company can be damaged seriously or even bankrupt with little or no danger to the market as a whole because it is not ordinarily big enough to impact the overall economy. Obviously there are narrower indexes tailored for specific groups, depending on what stock (companies) are selected to comprise the index.
If an investor is not in danger of of forced liquidation in a sudden and sharp downturn as might be the case using borrowed money (margin or leverage - where the broker or financial institution can force the sale), most good companies in time revert to their mean growth rate and price. If this occurs, a trading profit may be missed but there is no existential damage. This relates to the old (currently out of favour) "buy & hold" strategy made famous by Warren Buffet (Buffet's company had a major fall in '09). Another view in a specific decline (in the absence of actual detrimental news) is the percent the stock fell in comparison to the market or within an index. If that percent is high, there is a possibility it will rebound more actively than the market as well and is therefore potentially susceptible to specific good news than the group.
Along those lines, I think the time to really benchmark again is after Feb 15. Let the Year of the Tiger begin!
-------------------------------------
Jan 29, 2009
As a therapeutic exercise, I'm going to do a bit on Jinshan Mines Ltd. (ticker JIN-T), which as disclosure, I am long. Also see the notes at the top of this blog.
-------------------------------------
Jinshan Overview and Indicators:
JIN is a Canadian mining development company headquartered in Vancouver and listed in Toronto. It controls a newly productive gold property in China called the CHS mine, which is what I learned of during research before I even identified the company. All of the books use Canadian accounting methods and all mine testing is done to Canadian standards.
As I expected before it took place, share control of JIN was acquired from its previous Canadian controlling shareholder (Ivanhoe Mines) by China National Gold (CNG), which now holds 41.2%. JIN started production in mid 2009, is now earning and for most practical purposes its future financing has been assured through CNG. CNG is the principal Chinese state entity in this field.
All production from the Canadian-developed CHS mine is sold to CNG in remnimbi (Chinese currency) at world price equivalents. It therefore has an immediate, unhedged market for all production but - this is key - not earning actual US dollars (therefore it has no US currency risk) but still earns at international gold values.
The original Canadian management wanted to co-list the shares in Hong Kong, but this was too expensive during their pre-production, pre cash flow period. Future listing in Hong Kong or Shanghai is now feasible and a source of future equity funds. Chinese IPOs have been frequent and successful. This would be easier starting from a higher market price. We can reasonably expect that the stock price is a very important consideration for CNG. The additional market exposure to millions of new investors also greatly improves the liquidity of the shares, thereby would confer the beginning of investment grade status to them. I expect such an event within 2 years.
China National Gold:
In December 2009 the new controlling shareholder, CNG, applied for and has now received approval from Chinese authorities, JIN shareholders and the Toronto Stock Exchange to change the company's name to China International Gold. This has not yet occurred and has been explicitly described as an indication of the status being conferred on the company. This kind of status company is often referred to as a "dragon head". I expect this change to occur during Q1 2010. The change also enhances prospects for expanded listing.
Since this notification, the Jinshan web site has been changed to state these goals:
Maintain Top Gold Player in China Status, expand in China and Globally
Focused on Becoming a Leading Gold Producer supplemented by Non-Ferrous Metals
Committed to Global Expansion and Efficiency in Mineral Resource
Large Scale and Low Cost
Financing Opportunities in Asia and North America
Acquisition of Quality Projects from Major Shareholders and Third Parties
I have observed and consider Chinese policy statements at this level generally credible.
China:
JINs CHS mine is located in the Chinese province of Inner Mongolia, north of Beijing. The territory stretches east and west as China's northern border and adjacent to the country of Mongolia. The area is rolling and within direct driving distance from a new Terex mining truck and equipment factory. It has already been announced, without details yet, that JIN will participate in an additional gold property controlled by CNG in the extensive and prolific mineral belt elsewhere in Inner Mongolia.
In addition, JIN has been extensively drilling the Dadiangou gold prospect in the central province of Gansu within the prolific Qinling Fold Belt. A mineralized zone has now been defined. I expect details on these to be released by Q3 2010.
Mongolia:
Ivanhoe used the proceeds of the 2008 JIN share block sale in part to carry forward development of it's world-scale Ovu Tolgoi copper and gold mine property, together with a major coal deposit, in southern Mongolia. JIN and Ivanhoe are on cordial terms.
At the end of 2009 JIN entered a "Memorandum of Understanding to Develop Gold Business" with Monnis International, the official Mongolian distributor for Nissan automobiles and many heavy equipment manufacturers from around the world, including the mining industry. Monnis is also developing expertise in geology, construction and finance. JIN will hold a majority position. I expect the first operational announcement before the end of 2010.
Pakistan:
At the end of 2009 major Canadian miner Barrick Gold (the world's largest gold producer), together with a Chilean partner, were preparing to negotiate a formal mining lease with the government of Pakistan's state of Baluchistan, on the Reko Diq gold project - this after they spent US$300 million doing tests, feasibility and environmental studies over the past several years. In late December, Baluchistan announced it was severing ties with Barrick, reportedly under pressure from China. This is being contested by Canada. China is also financing the construction of a new commercial port in the region, operates a small copper mine near Reko Diq and is a major supplier of arms and economic aid to Pakistan.
In view of the announced Chinese strategy for JIN, it is not far-fetched for rights to Reko Diq, if acquired by China, to be exercised by the future China International Gold. Ruffled Canadian feathers would be smoothed by allowing the project to go forward with another Canadian entity. If this occurs, the project and nature of the transaction would catapult JIN into international attention. This could be possible in 2010 or 2011.
Russia:
Along with the statement of agreement with Mongolia, CNG made a similar statement regarding Russia. To date there has been no further comment. Large energy resource and pipeline deals with Russia have been jointly announced and are now underway.
Saskatchewan:
In Ocober 2009 JIN appointed as a director, John K. Burns, former VP and CFO of Drexel Burnham Lambert Commodity Group in New York and London, and former Managing Director and Global Head of the Derivative Trading and Finance Group of Barclays Metals Group of Barclays Bank. Mr Burns is Managing Director of NuCoal Energy Corp., a private company in Saskatoon. NuCoal is the largest coal landowner in Saskatchewan. Its main direction is in Coal to Liquids (gasoline) technology.
The CEO of 49 North Resources (FNR-T) in Saskatoon, well-known mining expert Tom MacNeill, points out that Saskatchewan has amazing unexploited resources and offers high sovereign security, having now changed from decades of socialist policies. FNR is both a mining investor and developer. He reports a recent discussion with a high-level advisor to a Chinese Sovereign Wealth Fund. There was recognition that Saskatchewan has incredible prospects but not the capital to develop them. The Chinese observed that they had the exact opposite - trillions of dollars and not enough projects to support the country's demand for resources (including potash, of which Saskatchewan is a world supplier).
These connections are not going to go unappreciated by either Saskatchewan or China, especially in view of the JIN web site reference to investments in North America, which I had never seen before.
This is the start of an entirely a personal-view blog, started in the early weeks of 2010.
For a number of years I had been asked to write, mostly by my wife but occasionally by other family members, some sort of material. I have avoided this on the grounds that in my own opinion I had nothing to say that was more original, insightful or germane than pieces that I have read, written by others. On the other hand, they don't read material in my particular fields of interest.
With respect to financial comment, to the extent it may refer to any particular stock, investment vehicle, point of view, strategy or action, under no circumstances are such to be construed as actionable recommendations, advice or ideas appropriate for the reader's circumstances. In fact, they may often be counter to accepted investment techniques with which it would be useful for the reader to be familiar. Any person reading this and interested in taking financial action should do their own research and/or consult a reputable financial institution or their own accredited advisor. While not necessarily the case, I may have a vested interest in specific investments mentioned.
That having been said, my interests are both macro- and microeconomic. They range from specific corpoate situations to international political and economic policies, particularly those pursued by central banks, the worldwide financial structure and the socio-economic-political responses that form its orbit or bear its consequences.
Unfortunately, young people are not routinely and formally taught about money, or anything whatever about how and why the financial system works. Everything is assumed and they are turned out on the street like creatures in the field, to figure it out for themselves - mostly from totally clueless sources. That eventually means that adults know precious little and while it may sound extreme, there are capable and expert accountants (just to use an example) who know money like a mechanic knows a car, without knowing how to run a successful auto manufacturer, its place in the world-wide auto industry or the impact of international policies. This is a social shortcoming and disadvantages most of the populace of most countries.
Beyond this, after years of institutional investment involvement and subsequent decades of observation, it is my opinion that many educated and otherwise well-informed persons see a financial world largely contrived by others for their view. This fact that this macro-level effect works against them (although opportunity does exist for anyone sufficiently determined to find out) is not so much planned that way as indifferent to them (the derogatory description of "them" is sheeple) - except with respect to the latter's broadly predictable collective responses. Eventually the larger populace is sufficiently co-opted that even when a matter can be made plain, a blind eye is turned to the disclosure so that the distortion - even though against their interest - is accepted, forgotten and even denied.
When Nelson said he had not seen the flagship signals to break off naval combat, he asked for the spyglass to look for the admiralty code flags. When he placed the glass to his sightless eye, he knew what he was doing. He continued to fight, and won. Wilful public blindness not just to the consequence, but to the very meaning of events is a very different thing.
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Current happenings: right now, the markets are demanding both discipline and attention.
Tues Jan 19, 2010
The day after the US MLK holiday has become a trial to one's courage and conviction. (Convictions, of course, must always and continuously be tested for validity). After deciding last week that my JIN target re-entry point was probably too low - despite being staged over a week - this morning the price slumped exactly to my original calculated area. "Catching a falling knife" is invariably a tough act when cool intellectual plans meet the emotional turmoil of actual action: fear and greed. Economists loftily call the effect "animal spirits". This combination invariably leads to the question - 'did I just misjudge the volatility a bit or is this the start of something worse'. Looking up from the bottom of a pit feels more uncomfortable than looking down from the top.
Fri Jan 22, 2010
Among classes of active investors, day traders (who are always flat at the close) can't live without at least moderate volatility. Other types of investors including myself (...if I had to pick a term I would probably class myself as a swing trader), use volatility to differing degrees. But essentially the purpose is the same - an effort to increase returns over a given period of time to a degree greater than a 'buy & hold' investor, broad market-based mutual fund or its modern competitor, a market ETF would give. The movements which are viewed from minute-to minute up to daily are a separate phenomenon from whatever the secular gaining or losing trend might be. But when volatility pushes to very high levels (there is an index, the VIX, that measures this) it becomes dangerous to the health of many participants. This is where we have been this week.
High volatility like this comes especially at times of great confusion, conflicting opinions relative to the economic outlook or when there are overhanging political or international events in which outcomes are difficult to foresee. Even worse, if among the events an' inflection point' is near. An inflection point is a market level where technical indicators broadly accepted by some groups of analysts tend to trump fundamental business data, and suggest that a move to certain levels could precipitate a sharp and lasting aggregate change up or down, based on near-term market action.
We have all of these right now. The US and international markets are really spooked. Partly I feel locked in and could kick myself for stepping back into the market and committing too early. The plan was perfect but the execution was off by a couple of days. Any other time, it would be immaterial. Still, with 2009 a stellar performance I can hardly complain.
There is a dichotomy between the popular stock market indexes, which give a mid-term view of its national economy (as modified by events in the broader world economy), and the progress and valuation of individual stocks. On the other hand, in most cases an individual company can be damaged seriously or even bankrupt with little or no danger to the market as a whole because it is not ordinarily big enough to impact the overall economy. Obviously there are narrower indexes tailored for specific groups, depending on what stock (companies) are selected to comprise the index.
If an investor is not in danger of of forced liquidation in a sudden and sharp downturn as might be the case using borrowed money (margin or leverage - where the broker or financial institution can force the sale), most good companies in time revert to their mean growth rate and price. If this occurs, a trading profit may be missed but there is no existential damage. This relates to the old (currently out of favour) "buy & hold" strategy made famous by Warren Buffet (Buffet's company had a major fall in '09). Another view in a specific decline (in the absence of actual detrimental news) is the percent the stock fell in comparison to the market or within an index. If that percent is high, there is a possibility it will rebound more actively than the market as well and is therefore potentially susceptible to specific good news than the group.
Along those lines, I think the time to really benchmark again is after Feb 15. Let the Year of the Tiger begin!
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Jan 29, 2009
As a therapeutic exercise, I'm going to do a bit on Jinshan Mines Ltd. (ticker JIN-T), which as disclosure, I am long. Also see the notes at the top of this blog.
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Jinshan Overview and Indicators:
JIN is a Canadian mining development company headquartered in Vancouver and listed in Toronto. It controls a newly productive gold property in China called the CHS mine, which is what I learned of during research before I even identified the company. All of the books use Canadian accounting methods and all mine testing is done to Canadian standards.
As I expected before it took place, share control of JIN was acquired from its previous Canadian controlling shareholder (Ivanhoe Mines) by China National Gold (CNG), which now holds 41.2%. JIN started production in mid 2009, is now earning and for most practical purposes its future financing has been assured through CNG. CNG is the principal Chinese state entity in this field.
All production from the Canadian-developed CHS mine is sold to CNG in remnimbi (Chinese currency) at world price equivalents. It therefore has an immediate, unhedged market for all production but - this is key - not earning actual US dollars (therefore it has no US currency risk) but still earns at international gold values.
The original Canadian management wanted to co-list the shares in Hong Kong, but this was too expensive during their pre-production, pre cash flow period. Future listing in Hong Kong or Shanghai is now feasible and a source of future equity funds. Chinese IPOs have been frequent and successful. This would be easier starting from a higher market price. We can reasonably expect that the stock price is a very important consideration for CNG. The additional market exposure to millions of new investors also greatly improves the liquidity of the shares, thereby would confer the beginning of investment grade status to them. I expect such an event within 2 years.
China National Gold:
In December 2009 the new controlling shareholder, CNG, applied for and has now received approval from Chinese authorities, JIN shareholders and the Toronto Stock Exchange to change the company's name to China International Gold. This has not yet occurred and has been explicitly described as an indication of the status being conferred on the company. This kind of status company is often referred to as a "dragon head". I expect this change to occur during Q1 2010. The change also enhances prospects for expanded listing.
Since this notification, the Jinshan web site has been changed to state these goals:
Maintain Top Gold Player in China Status, expand in China and Globally
Focused on Becoming a Leading Gold Producer supplemented by Non-Ferrous Metals
Committed to Global Expansion and Efficiency in Mineral Resource
Large Scale and Low Cost
Financing Opportunities in Asia and North America
Acquisition of Quality Projects from Major Shareholders and Third Parties
I have observed and consider Chinese policy statements at this level generally credible.
China:
JINs CHS mine is located in the Chinese province of Inner Mongolia, north of Beijing. The territory stretches east and west as China's northern border and adjacent to the country of Mongolia. The area is rolling and within direct driving distance from a new Terex mining truck and equipment factory. It has already been announced, without details yet, that JIN will participate in an additional gold property controlled by CNG in the extensive and prolific mineral belt elsewhere in Inner Mongolia.
In addition, JIN has been extensively drilling the Dadiangou gold prospect in the central province of Gansu within the prolific Qinling Fold Belt. A mineralized zone has now been defined. I expect details on these to be released by Q3 2010.
Mongolia:
Ivanhoe used the proceeds of the 2008 JIN share block sale in part to carry forward development of it's world-scale Ovu Tolgoi copper and gold mine property, together with a major coal deposit, in southern Mongolia. JIN and Ivanhoe are on cordial terms.
At the end of 2009 JIN entered a "Memorandum of Understanding to Develop Gold Business" with Monnis International, the official Mongolian distributor for Nissan automobiles and many heavy equipment manufacturers from around the world, including the mining industry. Monnis is also developing expertise in geology, construction and finance. JIN will hold a majority position. I expect the first operational announcement before the end of 2010.
Pakistan:
At the end of 2009 major Canadian miner Barrick Gold (the world's largest gold producer), together with a Chilean partner, were preparing to negotiate a formal mining lease with the government of Pakistan's state of Baluchistan, on the Reko Diq gold project - this after they spent US$300 million doing tests, feasibility and environmental studies over the past several years. In late December, Baluchistan announced it was severing ties with Barrick, reportedly under pressure from China. This is being contested by Canada. China is also financing the construction of a new commercial port in the region, operates a small copper mine near Reko Diq and is a major supplier of arms and economic aid to Pakistan.
In view of the announced Chinese strategy for JIN, it is not far-fetched for rights to Reko Diq, if acquired by China, to be exercised by the future China International Gold. Ruffled Canadian feathers would be smoothed by allowing the project to go forward with another Canadian entity. If this occurs, the project and nature of the transaction would catapult JIN into international attention. This could be possible in 2010 or 2011.
Russia:
Along with the statement of agreement with Mongolia, CNG made a similar statement regarding Russia. To date there has been no further comment. Large energy resource and pipeline deals with Russia have been jointly announced and are now underway.
Saskatchewan:
In Ocober 2009 JIN appointed as a director, John K. Burns, former VP and CFO of Drexel Burnham Lambert Commodity Group in New York and London, and former Managing Director and Global Head of the Derivative Trading and Finance Group of Barclays Metals Group of Barclays Bank. Mr Burns is Managing Director of NuCoal Energy Corp., a private company in Saskatoon. NuCoal is the largest coal landowner in Saskatchewan. Its main direction is in Coal to Liquids (gasoline) technology.
The CEO of 49 North Resources (FNR-T) in Saskatoon, well-known mining expert Tom MacNeill, points out that Saskatchewan has amazing unexploited resources and offers high sovereign security, having now changed from decades of socialist policies. FNR is both a mining investor and developer. He reports a recent discussion with a high-level advisor to a Chinese Sovereign Wealth Fund. There was recognition that Saskatchewan has incredible prospects but not the capital to develop them. The Chinese observed that they had the exact opposite - trillions of dollars and not enough projects to support the country's demand for resources (including potash, of which Saskatchewan is a world supplier).
These connections are not going to go unappreciated by either Saskatchewan or China, especially in view of the JIN web site reference to investments in North America, which I had never seen before.
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