Sunday, August 3, 2008

Safe Haven Investments and Global Crisis

As we make our investment decisions, we must be acutely aware what's going on in this country and around the world. We watched the TV report of the bank run on IndyMac Bank (IMB) and it was almost like a Hollywood movie scene of the Great Depression. But it is not a movie. Real people wait in long queue trying to get their life's savings back. Why must people wait till the crisis happens, before they would act to protect themselves? Have you done enough to protect yourself and your family, financially, materially and physically? Unfortunately the people, as individuals or as a whole country, are more likely unprepared until bad things happen and it is too late. We Americans are totally un-prepared to deal with what's coming our way!

Some speculate that World War Three is coming! This is no joking matter. Of grave concern is Iran's nuclear program. There is H.CON.RES.362 and S.RES.580 in the Congress on a fast track to be voted on soon, which calls for naval blockage of Iran, a de facto act of war. There can only be two outcomes. A nuclear Iran, or an Iran War. Third outcome? Maybe BOTH! Iran just said it is not retreating "one iota". Other things in that region are not looking good either so we all need to do something to prepare for the worst and protect our own assets in safe havens.

Putting politics aside, I think we are NOT in a position to launch an Iran War. Iran has the powerful oil weapon they can use. We do not have enough strategic petroleum reserve to deal with a catastrophic interruption of Middle East oil shipments. Not only we do not have enough petroleum in our stockpile, we do not have enough stockpile of any of the critical materials that are needed for national security. Those critical strategic materials include platinum group metals, rare earth elements, cobalt, indium, manganese, and niobium -- minerals used in everything from high tech equipments to every day products Americans rely on, and are vulnerable to supply disruptions. The US government used to have a large cache of all those critical materials. Unfortunately we sold them all since the 1980's. I am urging President Bush and the Congress to address our vulnerability immediately and stock up on petroleum and all the critical materials, before we ever launch another war, if it comes to the point that a global natural resource war is inevitable.

What's particularly worth noting are the platinum group metals (PGM). You may not know that there wouldn't be a World War I and World War II had platinum not existed, or had the German not invented certain platinum-catalyzed chemical processes, called Haber Process and Ostward Process, used to make dynamites and fertilizers. During World War II, the US government declared platinum as a strategic material and prohibit its use in jewelries, because it is needed to make the explosives used in the war. I think it will be patriotic, and profitable as well, that private US citizens should hoard some platinum and palladium, and sell them to the domestic market when these metals are desperately needed in the future.

I believe, at a time of crisis, platinum and palladium can serve better as a safe haven investment to preserve wealth than gold does. And cobalt will be more favorable than silver. I argued previously that the world has a huge stockpile of gold. Gold's value can fall below the mining cost, depending on investor sentiment, driving gold mining industries out of business, without causing any industry shortage. But if platinum value falls below cost, or does not go up with the increasing mining cost fast enough, major PGM mining companies may be forced to reduce production or shut the mines down, bringing about an immediate shortage and so price must recover to the profitable level to allow production to resume. Therefore, platinum provides a much better protection of value than gold, at good times and at bad times. Palladium, on the other hand, historically has a tendency to catch up with platinum price. Due to current extreme price disparity between the two metals, palladium probably will raise more percentage wise.

History shows that indeed many investors do consider platinum and palladium as much a safe haven investment as gold and silver. Look at history prices of PGM metals provided by USGS, and compare with gold price. All three metals share a major peak around 1980. There was nothing particular in industry demand to drive platinum and palladium up. Osmium and ruthenium prices were flat in 1980. According to USGS explanation, platinum and palladium prices were driven up by strong investment demand at the time, just like gold.

In the last month and particularly on August 1st, the prices of platinum and palladium plunged. On Aug. 1st, 08 alone, platinum dropped $106 and palladium dropped $20 an ounce. According to talking heads, the price drop was because the monthly auto sales numbers looked terrible, reducing prospect of PGM demand in auto catalytic converters. If you exam the auto sales numbers closely and you look at history, such knee-jeck reaction of PGM investors is totally wrong and unjustified. This price plummet give people an excellent opportunity to buy the physical metals, if you really know the fundamentals. Over the weekend I took the opportunity and swapped a big chunk of my silver for palladium!

If the talking heads travel back to 1980, what they would say about platinum and palladium? At the time, driven by crisis like the Iran-Iraq war, oil price was skyrocketing, just like today, there were long queues for gasoline at gas stations. Auto sales plummeted and GM stock price hit an all time low. Talking heads would claim the PGM demand for auto catalytic converters must fall (probably true), and hence platinum and palladium prices must fall through the floor. The prices actually rallied with gold and silver in 1980. People buy and hoard platinum and palladium just like gold as a safe haven investment. The investment demand more than make up for the drop in auto demand. Further, countries needed to hoard the PGM metals, just in case they needed the metals to make explosives in a possible World War III.

Knee-jeck reactions like the sort that happened on Friday Aug. 1st, 08 are wrong 99% of the time, because those are the mob's animal instinct reaction to headline news created by simple minded talking heads. The data is wrong; the headlines are for manipulation of mob psychology; critical information has not been filtered and processed by the brain when you react on animal instinct. A good example (page 103) was in December 1988 Ford (F) announced that they invented a platinum-free auto catalyst. Platinum spot price instantly dropped to $100 per ounce, from $500-ish. Have auto makers stopped using platinum today, 20 years later? When the so called Nisshinbo platinum-free fuel cell affair spread all over the world, I immediately contacted NIKKEI and searched NISSHINBO as well as Tokyo Institute of Technology web site, and find no reference whatsoever, and a T.I.T. researcher involved in platinum-free fuel cell research flatly denied knowing anything of the story. Based on information I collected I can conclusively say this must be a unsourced, unverified and not-credible news item, with no name mentioned, contributed to NIKKEI by an un-named author. What a shame! You just have to dig hard for authentic information because there is just too much noise out there.

Most investors are foolish not because they have no brains, but because they are too lazy to use their brains. The headline news claimed mind buggling auto sales drop in the US market. But auto sales in Canada actually went UP! Has any one actually digged through GM's actual sales document and analyze the actual data? Has any one actually visited a car dealership to find out the truth?

According to GM's monthly sales release, in July,08 GM delivered 235,184 units compare with last July's 320,935 units. That's where the claimed number of 26.7% drop in GM sales came from. But what people don't realize is the way GM report sales. For GM, any vehicle they shop out of the factories to the dealers is considred SOLD and booked in sales. The whole auto industry calculate sales that way. The problem is in any given month, GM can ship out any number of units, as they see fit. But it is NOT the actual sales. A vehicle is only sold when a customer walks into a dealer shop and drive away a brand new vehicle. So reading the GM delivery number is very misleading and does NOT reflect the reality of the market.

If you exam the GM data more closely, in July the inventory at dealers is at a low level of 747,000, a further drop from last month's inventory of 788,000. So GM delivery plus the inventory run down is the actual retail sales, which stands at 276,184 units in July, 08. In July last year, if you read the first paragraph, although GM delivered 320,935 units, retail sales were only 239,192 units, far fewer than GM's delivery.

So the true story is even through GM delivery dropped 26.7% y-o-y, the actual retail sales are UP 15.5%. US customers are actually picking up MORE vehicles, as I expected and I learned from dealers, that people are rushing to replace SUVs with new fuel efficient small cars, boosting the auto demand. GM must decided to ship less vehicles to dealers when the customers actually bought more, in an effort to reduce inventory and improve their liquidity position.

The conclusion is US auto demands are actually much stronger than the phony sales delivery numbers show. In emerging market like China, the sales data are the actual sales transactions, not the phony delivery numbers, and the actual sales in China is going up at 20% yearly pace. So globally, as told by Johnson Matthey the auto sales are growing strongly. Johnson Matthey made more than 1/3 of the world's auto catalytic converters so they are in a much more credible and authoritive position to tell the real trend of global auto demand.

Not only the US auto sales numbers are mis-interpreted, so are the news from ESKOM, South Africa's privately owned national electricity company. Lack of recent drama of load shedding lead some to assume "a brighter supply outlook out of South Africa." How dare any one make such a claim when ESKOM itself repeatedly warned the crisis will continue at least for the next five years. ESKOM's electricity supply in June, 08, despite having brought two mothballed decades-old plants back on line, actually DROPPED 2.3% from last year, although they claimed, in political correct way, that South Africans saved 2.3% in electricity consumption.

With half of the Koeberg nuclear power plant shut down, South Africa is running their electricity grid at dangerously low level of only 2.5% capacity reserve margin. It's only because large mining industries sacrificed themselves and received significantly reduced power supply during the time, that the whole country managed to escape more catastrophic power interruptions. Anglo Platinum (AGPPY.PK), largest platinum producer in the world, recently admitted that they never received the promised 95% of power supply, and had been running at 90% level all the time. Their first half 2008 production dropped16% from last year, or almost one month's worth of production in the first half year, much worse than a mere 5 days shut down in late January. So the South Africa PGM production reduction is very significant and is on going for the next few years.

The recent plummet of PGM prices reflects both the inevitable volatility due to strong investment interests squeezed into such a narrow market, and mis-understanding of market information. I would suggest that people interested in the PGM market to purchase a copy of CPM Group's Platinum 2008 yearbook. I was very impressed by the quality of their research and their data, from private emails. Right now, it's a great buying opportunity of the physical metals and of related mining companies, like Stillwater Mining (SWC) and North American Palladium (PAL).

My portfolio took a big hit lately but I am sticking to my convinction of the PGM metals bull market. Stocks of these two little known mining companies, PAL, and SWC, must be the most manipulated stocks I have ever seen. Some one must manipulate them for good reasons. In one month, the short interest in SWC ran up from mid June's 6.8M shares to mid July's 11.2M shares shorted, while the combined holdership of Norilsk (NILSY.PK), institutions and insiders now stands at 93.5M shares, higher than even the company's 92.78M outstanding shares. Likewise PAL's short interest also increased dramatically. I wonder how the shorts can manage to unwind such large short interest, accumulated at such low share prices, when the PGM metals start to rally again?

The market place has been extremely volatile lately. PGM metals are not the only thing that sold off lately. Petroleum also sold off heavily. I recently picked up a small stake in US Oil Fund (USO). Majority of market participants must be complete fools and their normal brain functions must be short circuited by animal instinctions. Congress passed a law to allow some drillings and suddenly peak oil is no more? We will get millions of barrels of oil out within days of the drilling while it may take another 100 years before Iran could obtains nukes? I don't understand! Perfectly intelligent people acting in totally foolish way.

There really is NO rationale in recent commodity sell off and financials rally. It's an inherit part of extreme market volatility. Such volatility results from a huge amount of money chasing a relatively narrow market. Prices could instantly move in the opposite directly violently on the most insignificant and ridiculous reasons.

I would love to use the analogy that if you squeeze 1000 people into a small room that fits 50 people, there will be fist fights right away triggered by the most innocent reasons. The market place is even crazier, consider how many trillions of all the absurd financial derivatives are out there, and how scarce the earth's remaining natural resources are. Extreme volatility is all but assured. You have to cope with it by keep a clear mind of the fundamentals, and buy the dips and sell the rallies.

Such volatility may provide me another opportunity to enter the coal sector soon. I told you in the past that I massively loaded up James iver Coal Company (JRCC) at $4. Although I sold it way too early, I did make the correct call to sell JRCC on June 20, one trade day before it peaked at $62.49. The coal price, as well as JRCC share price has fallen since, and there has been some extreme ups and downs in JRCC lately. My opinion, there is still too much bullish sentiments in JRCC and in other coal sector players, like ACI, ANR, BTU, CNX, FCL, FDG, MEE, and PCX.

One must wait for capitulation before buying coal players again. Capitulation is defined as the commodity and the stocks decline so much, that most people's sentiment change from bullish to bearish, and maybe with seeming good reasons, too. When that occurs, and when careful study convinces you that the bullish fundamental is still intact, that's capitulation and that's where you can buy. Pending the earnigns release of JRCC, which probably will be another disappointment, I think capitulation of JRCC will happen at $20 or below. I will buy at that price level but not before then. If you are in coal sector, sell now and buy back at capitulation time. In the PGM metals sector, I believe the capitulation has just occured. It's now a great time to buy SWC, PAL, PLG and ANO, as the bullish fundamentals of PGM metals are still intact.

A few short targets to consider. First Solar Inc. (FSLR) is one stock I love to hate. This is one well executed company with a good management team and proven track record of fast growth. It won't be a short, had it not been that they rely on cadmium telluride, the most toxic metal plus one of the rarest elements in the earth's crust. The cadmium toxicity makes FSLR vulnerable to Europe's update on the RoHS regulations. The tellurium scarcity as well as booming demand from other industry sectors put a very tight cap on FSLR's growth potential, and may ultimately force FSLR to go out of business, if emerging demands consume all the available tellurium. This should be a great short-to-zero target, but the timing of when to enter a short position is tricky, as there seems to be some big vest interests trying the best to support the share price, presumably to allow some big players enough time to get out. Althought tellurium price has eased down a bit recently, implying that FSLR may not face an immediate shortage for now, there have been indications that FSLR must be very anxious about their future supply. They have a secretive Tellurium Initiative Department seeking to extract residue tellurium from mining waste. That information was accidentally leaked in a job posting, #655, and they promptly removed the job postings after the leak. FSLR visited Capital Mining in Australia and Mexivada in Mexico in an obvious attempt to try to lock in some potential future supplies. Although these two mining companies are still in exploration stage and actually have very little tellurium to offer. More shocking is a recent Wincroft news which I shall not comment here. I will let you judge as FSLR so far avoided addressing the tellurium supply issues directly. If they pump the stock up to $300+ I will start to short.

Goldman Saches (GS) is one of the few financials that hasn't seen a significant drop yet so far but shall follow its peers soon. Coca Cola (KO) and Pepsi (PEP) are considered by many as good companies to hold during bad economic times, and with extremely low short interests, and they are Warren Buffett's favorite holdings for decades. During real bad economic times, who would spend discretional money on soft drinks when family budgets are tight even for regular food items? Soft drinks are unnecessary luxuries while a fuel efficient car will be a must have for average families. So I am contempting about shorting these three at good prices.

The Beijing Olympics will start on August 8th. I hope the game in the capital city of my motherland brings some peace and mutual understandings among nations on earth. But the real peace making event will happen at the same time but in the capital of the greatest nation, in Washington DC. The 14th International Conference on Condensed Matter Nuclear Science to be held in Washington DC from August 10-15, 2008. This science break through, if properly funded by our government and developed into commercial applications, will bring us virtually inexhaustible energy supply and put Peak Oil behind us. It will be a great dream come true, not just for the fortune of those of us who invested in palladium, the metal used in Cold Fusion, but for the good of humanity. No amount of money can protect us if World War III must be fought to grab the last remaining fossil fuel of the world. Let's hope that shedding blood for oil becomes totally unnecessary. I have urged my Congressman to send some one to listen in to the ICCF-14 conference and learn about the science first hand. Please urge your Congressional representatives to do the same!

P.S. The author is heavily invested in SWC and PAL and is also trying to build some short positions in FSLR, GS soon. I also hoard physical tellurium and palladium metals.

5 comments:

Sean Hinton said...

Hey there,

I enjoy reading your blog. Next time you're writing a post that refers to a publicly held company, you should consider embedding a stock chart.

You can easily embed any stock chart from www.wikinvest.com in your post with just a snippet of HTML. This is a lot simpler than taking a screenshot of a static chart, cropping the image in a photo editor, uploading it to your blog, and putting it in your post.

And, an embedded Wikinvest chart is better for your readers because it's interactive - they can click, drag, pan, zoom, and play with the chart on your site without a page refresh.

Here's a good example of an embedded stock chart in action: http://www.techcrunch.com/2008/07/31/wikinvest-gives-the-world-embeddable-interactive-stock-charts/

Could you try it out in one of your posts and let me know what you think/how we could improve the charts? You can create your own chart at http://www.wikinvest.com/special/Embed_Stock_Chart?ticker=fslr

Thanks,
Sean

Anonymous said...

Mark, I am long SWC as well, and am astonished at the price declines back to near where it was prior to the South African power crisis.

However, I have to agree with the other commenters on vehicle sales. Check out these posts. Nearly all automakers with sales in the U.S. saw declines:

http://freep.com/apps/pbcs.dll/article?AID=/20080802/BUSINESS01/808020356

And the effect of switching from SUV to car was overwhelmed by a decline in the aggregate due to higher fuel prices, restricted access to financing, and general decline in consumer spending:

http://www.econbrowser.com/archives/2007/08/july_auto_sales.html

So to re-hash the whole "Platinum is a closed system" argument, people junking their gas-guzzling SUV for a Prius are recycling Pt back into the system. Of course, the Pt recycling takes a few months to get going when incremental supply hits, so I am surprised SWC has declined so much.

The key questions, then are:

1. Which vehicles use more Pt, a big SUV engine or hybrids and fuel cell-only vehicles? I don't know the answer.

2. Will the South African power crisis continue to hamper production, or will the miners find ways of using off-the-grid generators to increase utilization back to 90%?

3. Will emerging market auto demand (the Tata Motors Nano, etc.) be significant enough in terms of Pt use to offset U.S. weakness?

My conclusion is that the shortages are persistent, and the "car culture" is not going away. Indeed, an Obama Presidency might include a mandate for better catalytic converters. Platinum will remain in tight supply and demand destruction will be minor.

Anonymous said...

Sorry, that second link didn't paste into the comments box correctly:

http://www.econbrowser.com/archives/2007/08/july_auto_sales.html

Anonymous said...

OK, last try. Add the characters "sales.html" to the Econbrowser link above.

Anonymous said...

Mark Anthony,

Your fundamental analysis may be correct. However you fail to see the technical side of trading.

The trend is your friend, trying to fight the wave is a futile and unprofitable endeavour.

Perhaps its time to stick to your knitting and keep with the singing.
BTW caongrats to you and Jlo on the twins.

Regards