Thursday, January 22, 2009

Extreme Opportunities to Make or Lose Money

Today's market is full of opportunities to make money or rather to lose them. Just remember: The market always makes the biggest group of people lose the largest amount of money to allow a few to get obscenely rich at the same time.

For your own good, you should always avoid the biggest crowd, and go to quiet secret places few noticed, it's true for making money and for life in general. Imagine you are at a place with hundreds of thousands of people. There is imminent danger and there are only two bridges leading to safety. One is narrow and in terrible shape. Another is big and in solid shape. Which one would you rush to? I would rather foolishly run to the dangerous one, knowing that all the smart folks will rush to the safer bridge, and collapse the safer bridge due to the sheer weight of the big crowd. That's the philosophy of life.

Read my previous analogy using Noah's Ark. Safe havens, by definition, must be narrow and can not accommodate too many people. If a perceived safe place can accommodate every one, then it is a death trap! The biggest presumed safe haven today, and hence a death trap, is the US Treasury Bonds market. There is an imminent danger in the TB market. People invested in treasuries have already lost big time, without realizing it. The bridge is perfectly safe, until one last person step onto it, and then it collapses suddenly under the collective weight.

Like the bridge, the TB market could collapse merely because there are too many investors in TBs for the perceived safety. The problem is when these people want to unwind their positions, who is going to buy? Whoever want to buy TBs have already done so! In 10 years you will be paid back the principal amount, but maybe not the purchase power. I suspect that government of China or Japan may have utilized recent US Treasury Bonds frenzy to quietly unload their overly too large US Treasury Bonds holdings which are otherwise impossible to unload. It's purely just my speculation with no evidence that I know.

Always avoid the big crowds! Last year when I suspected the big crowd had arrived, I called for folks in coal stocks like JRCC, ACI, ANR, BTU, CNX, MEE, to take profit. The timing was perfect as JRCC peaked just one day later after my article was published on Seeking Alpha.

Recently I was alerted that the dry bulk shipping stock DRYS was too crowded with too high a daily volume. My initial entry into the shipping sector was perfectly timed near the bottom, and I picked the best one to buy at that time, DRYS. But when I became cautious as the sentiment in DRYS was too high. So I switched from DRYS to EXM, another dry bulk shipper, as I believe EXM presented a much better valuation now. Read also David White's take on EXM.

Then, on Jan. 22, 09, DRYS dropped $4.01 on some "bad" news, even as the BDI surged up 5% that day. The news was out before the market open, but it turned into a total panic only in the last hour of trading. I think DRYS was overly punished by the news which isn't so bad after all. DRYS is over sold here. But EXM is still a better buy, from the valuation point of view. Unfortunately Mr. George Economou, the CEO of DRYS, will continue to disturb investors' perception of the company, regardless whether any of his private dealings are appropriate or not. I would rather stick with a company clean of such doubts.

In a previous article, I recommended shorting three stocks which are related to discretional consumer spending, and hence vulnerable during hard times: Coca Cola (KO), Pepsi (PEP) and Colgate (CL). All three are down from when I recommended the shorts. These stocks are not very volatile, and do not have too much short interests. So they are nice long term shorts if you hate volatility.

Along the thinking of discretional spending, I would now recommend shorting Apple (AAPL), and a recent high flier PALM. The current valuation of AAPL is just ridiculous. It is based on the hope of continued fast growth of AAPL's earnings, which is unrealistic. How many more iPhones can AAPL sell, before the market is saturated? The recent hype of PALM is a joke. They have a nice product which may be better than iPhone, but so what? I would rather buy a proven and established product, than something un-proven and non-established. Google (GOOG) is probably a good short, too. GOOG's income mostly comes from web advertisements. When companies are struggling to cut cost, they do not have much appetite spending money on advertisements. These three might not be immediate shorts amid recent earnings announcements. But watch closely for good short entries.

Stillwater Mining (SWC) continues to be my most favorite stock to hold. I firmly believe there is an undisputable bullish case for the precious metal palladium, and hence for SWC. I have yet to analyze North American Palladium (PAL)'s recent announcement for a comment. But SWC is a better value with much higher ore grade and a much bigger mineral reserve. Read about the palladium bullish case.

In short term, the dry bulk shipping sector is the best to be in. The global trade has not and can not come to a complete halt. The shipping industry is capable of adjusting to lowered demand quickly. But think about it: Trillion dollars of government spending is going to be a much bigger demand on physical goods and commodities, than your $200 weekly grocery shopping. There is a chance shipping can even reach new highs.

The unique nature of shipping supply and demand is that when demand is high, it's hard for supply to catch up, because you can not build new ships fast enough, or make the ship sail fast enough to meet the demand. On the other hand, when the demand is weaker, the industry CAN respond promptly to reduce capacity to meet lower demand, by canceling new ship orders, speed up scrapping of old ships, lay up ships for longer period of maintenance, or simply sail slower to save fuel cost and make fewer port calls. All those adjustments are happening right now so in short term, dry bulk shipping is very bullish. All of these shipping stocks are good buys: EXM, DRYS, EGLE, NM, TBSI, GNK and OCNF.

Full Disclosure: The author is heavily invested in SWC and shipping stocks EXM, EGLE, TBSI, as well as hold PAL and cobalt stock OMG. I have no positions on other stocks mentioned in the article.

Sunday, January 11, 2009

Precious Metal Fundamentals - Recent Developments

We live at a time where information, as well as ENTROPY, spreads at light speed. We must be able to use our own intelligence to discriminate and filter out the noise from the internet, otherwise the internet is nothing but a giant trash can. In this world with little trust left in the system, we can no longer trust the authority of any information source. Mr. Bernard Madoff has proven that higher authorities CAN tell much bigger lies for much longer time. Everything we hear must be scrutinized using facts, logic and reasoning. I spotted an internet fraud and developments so far proved me completely right.

Recently Mazda repeated its claim of their single-nano catalyst technology which cuts usage of PGM metals in vehicle catalytic converters by up to 70%. Their technology uses smaller PGM particles and a proprietary agglomeration prohibition material. As a PGM metal investor I always pay close attention to such news that may bring change to the PGM supply/demand fundamentals. So how much can we believe in Mazda's claim and how soon do we expect an impact on the PGM metals demand?

History is the best teacher! In 2002, Daihatsu, announced that they invented a perovskite based Self-Regenerating "Intelligent Catalyst", which dramatically cut PGM metal usage while making the catalytic converters more durable. The idea was pretty good. Frankly the 2002 Daihatsu claim was much more credible than today's Mazda claim. There were independent researches on the perovskite based self-regenerating catalyst at the time. Now six years later, where is Daihatsu's "smart catalyst" today? Has it leads to any reduction in autocatalyst consumption of PGM metal? Not a zilch! If Mazda's idea of reducing metal particle size could work, it would have been tried long ago. My physics background allows me to conclude confidently that the so called single-nano technology CAN NOT work reliably and durably. I do not believe it until they get an EPA approval.

I am not saying that Daihatsu or Mazda made false claims. But scientific researches and commercial applications are two different worlds. In reality, 99% of research advances never make it into commercial products. Those few that do make it into the commercial world, take a long time to get there, and could still be ultimately rejected by the market, for non-technical reasons. Inventor Thomas Edison got cold water poured over himself when he tried to patent one of his first inventions, a voting machine that can precisely tally up voting results. Why we struggled with hanging chads in 2000? Politicians would rather prefer Diebold.

Why recent PGM thrifting news only came from small Japanese auto makers like Daihatsu and Mazda, but never from bigger names like Toyota Motor (TM), or Johnson Matthey, who is responsible for 1/3 of the world's autocatalytic converters? Mazda is NOT setting its priorities right. Each catalytic converter contains about 4 to 5 grams of palladium, worth about $24 at today's price. How can they cut corners and sell vehicles with sub-quality parts to customers? There were so many complaints about defective catalytic converters that even EPA had paid attention. You think consumers will let you get away with it?

Auto makers should boost the palladium content in catalytic converters and make them reliable and durable. Green cars with reliable emission control should then be exempted from the costly ($60+) annual SMOG tests in California and other states. Consumers will welcome the saving of money and hassle as it is worth far more than the extra cost of PGM metals.

I am convinced that the bullish fundamentals of palladium are even better in 2009. Recently Impala Platinum (IMPUY.PK) updated their estimate of platinum and palladium supply/demand data for 2008. Notice the significant drop of Russian supply? The annual sale of Russian Strategic stockpile palladium, about 1.5M to 2M ounces a year, finally ENDED! Back on June 11, 08, the palladium market knee-jerked when Norilsk Nickel (NILSY.PK) merely suggested the termination of the stockpile palladium sale. Now it really ENDS, how will people react when it becomes widely known? Russia maintains a Defense Strategic Stockpile for its own war time needs, not for selling PGM metals below cost to the world.

In Impala's estimates, recycling accounts for 1.1M ounces of palladium supply in 2008. CPM Group estimated the recycling as high as 1.6M ounces a year. The good news is this supply will also be removed in 2009. A new catalytic converter contains about 4 grams of palladium. An old one has about 2 grams left. Recycling recovers about 75%, or 1.5 grams each, worth about $9 in palladium at today's price. The PGM recycling is a long complicated and costly process. At today's low price there is simply no incentive for recycling. Stillwater Mining (SWC) is better off dropping the PGM recycling business now and concentrate on mining. This can boost the metal's market price as well as unlock large working capital that was locked up in the recycling materials inventory, and hence enhance the company's balance sheet.

On recycling, more than 1M ounces of palladium supply are removed. Mining production also dropped significantly. Norilsk Nickel estimated the 2009 palladium production to drop to 2.6M ounces from 3.0M as they now mine the nickel rich and palladium poor minerals to reduce cost, as well as process third party nickel concentrates which contain no palladium. North America Palladium (PAL) shut the mine down earlier, removing another 0.280M ounces supply. South Africa also saw about 10% drop of palladium production, or 0.25M ounces. Stillwater Mining (SWC) also expects reduced production in 2009.

When you add up all the supply disruptions and halt of Russian stockpile sale, despite of a 5.3% drop in auto catalyst demand, we are looking at an unprecedented palladium deficit in 2009, far bigger than in any other precious metals. And we haven't added in potential investor demands! Who wouldn't want to buy some palladium if you know what's going on!

The collapse of PGM prices in recent months was NOT due to fundamentals; rather it was due to investment funds as well as big auto makers were forced to liquidate their precious metals holdings to raise cash. Especially General Motors (GM). Auto makers normally keep 6 months of PGM metals supply to weather any supply shocks. When GM struggled for its survival, it had to sell its PGM inventory at cheap prices. Now that GM says it can expect to survive without more government money. It's time for GM to rebuild the inventory in light of the looming shortage.

Palladium has by far the strongest fundamentals and the best potential for an explosive rally, among all precious metals. I still believe that due to the huge above ground inventory of gold, and the current price above the intrinsic value of production cost, the yellow metal has little room to gain in real value. Gold is a liquid and stable currency, but has no investment value if you are looking for gains.

I like silver better than gold. Silver is mostly a by-product metal so the supply is price-inelastic. As a safe haven investment, silver is more appealing to Joe-Six-Packs as it is more affordable, while gold is more appealing to rich people due to its high density of value. Most people on the GoldIsMoney forum believe silver is more bullish.

But none of the silver bugs even presented specific and quantitative data on silver supply and demand so I want to have a closer look. Photography usage of silver, which traditionally accounts for 1/3 of the demand, is now diminished as digital cameras replace analog ones. Sterling silverwares like spoons and goblets are also going into history. Industrial demand saw some increase in recent year but is uncertain as the global economy goes into recession.

The biggest uncertainty factor is silver jewelry. Silver jewelries are low end cheap jewelries. They are those cheap bling-blings you pick up in a mall or a grocery store when you happen to have a few extra dollars and you just like what you see. So in a sense silver jewelries are discretional spending items and are vulnerable in a slowing economy.

The high end jewelries made of gold, especially platinum and palladium are different from silver. They are rarer, and are more likely purchased as some special gift rather than casual spending. No one would buy a silver earring or necklace as an engagement gift, for example. Your fiance(e) will expect a diamond ring made of platinum, palladium or white gold. People will not tender their platinum wedding bands to pawn shops for cash, but they are perfectly happy to toss out old silver jewelry pieces.

Unlike PGM recycling, which is complicated and costly, recycling from scrap silver jewelries is simple and inexpensive as the materials contain high concentration of silver. Silver recycling remained at near constant high level over the past years, regardless of silver price. The PGM metals are different as low PGM prices discourage recycling and reduce the supply.

I believe silver remains bullish due to investment demand. But due to uncertainties in industry demand, I recently reduced my silver mining stock holdings in SSRI, PAAS and HL, and concentrated more on palladium mining stocks, SWC and PAL. The continued strong rally in Baltic Dry Shipping Index (BDI) shows I made the right call on the shipping sector. So I continue to hold large positions in shipping stocks, like EXM, EGLE, GNK, OCNF and DRYS.

Full Disclosure: The Author is heavily invested in palladium mining stock SWC and shipping stocks EXM, EGLE, GNK, OCNF and DRYS. I also hold positions in PAL, USO and OMG.

Wednesday, January 7, 2009

Opportunities in an Irrational Market Place

We saw another irrational knee-jerk market reaction on Jan. 7, 09. Oil price dropped more than 12% in a day in response to EIA's weekly inventory report, which shows an increase of 6.68M barrels. The un-warranted knee-jerk reaction shows the market interpreted the data completely wrong. If you scrutinize the data, oil price should jump up, not down.

Simply, if oil is being hoarded, of course the inventory will jump up. The data shows US oil imports of last week increased dramatically over the same week a year ago: 13.698M barrels a day versus 12.904M. So for the week an extra 5.558M barrels of oil was imported. If the USA is buying more crude oil, of course inventory will raise. When Americans are buying more, shouldn't the oil price be driven up in the international market? Inventory was up NOT because Americans are consuming less, but because we imported much more.

EIA report says oil products supplied was 20.1M barrels a day, down 2.9% from a year ago. Gasoline demand was down 2.2% from a year ago. Those are very small percentages. Early last year, due to high gasoline prices, many people switched to more fuel efficient vehicles. So it's not surprising that Americans may well be driving slightly more mileages but actually consume a bit less gasoline, simply because of better vehicle fuel efficiency.

I discussed in my last article that the fundamental demand on oil and automobiles have NOT weaken as mobility is a basic human needs, more important than even food. I cited the Great Depression story "The Grapes of Wrath" where a family lost everything but they kept the family truck as it was vital to the family's survival. The current weak auto car sales are merely postponement of demands, not disappearance of demands.

I did not sell my US Oil Fund ETF (USO) holdings during the panic on Wednesday. Shipping stocks like DRYS, EXM, EGLE, GNK, OCNF and NM all dropped heavily with oil, despite of the BDI index going up for the day. I used the opportunity to load up a lot more shipping stocks. My favorite now is EXM, because it is even more under-valued than DRYS. Hellenic Shipping News recently has a nice story about EXM. My initial entry into the shipping sector was on DRYS, but then I find that DRYS is a better known name in shipping. I would rather pick something a bit less popular. Why pay the extra premium just for a popular name?

How do you deal with an extremely irrational and volatile market, with stocks routinely move 10% up or down in a day? Just do NOT run with the mobs! Do things contrary to the group mentality. Buy on the dips, and NEVER set a stop loss sell order or panic sell. Why lose your positions to a computer, and then have to pay higher price to buy back the same shares? When people are selling in panic, it's good to buy. When people are complacent, then you should sell.

Not wanting to follow the majority is one reason why I was never interested in SPDR Gold Shares (GLD) and I recently get out of iShares Silver Trust (SLV) totally. I am always skeptical about the physical precious metal ETFs like GLD and SLV. The metals might actually be there as claimed. But they are not in your physical control. Someone else that you don't know, let alone trust, controls th0se metals. There is also counter party risks in these ETFs. I never understand why the banking Santa Clauses took all the trouble setting up precious metals ETFs and hire guards to watch the metals for you and help YOU make money without lifting a finger. Theoretically there can be one trillion shares of SLV held long and another trillion shares shorted. But the world does not have a trillion ounces of silver. You either buy and own physical precious metals and bury them in your backyard, or you merely own promises on paper.

Opportunities knock on the doors when you least expect it. Today I noticed something that shocked me. The trade volume of the E-TRACS UBS Long Platinum ETN (PTM) suddenly surged to more than 10 times the average daily volume, starting on Jan. 6, 2009, while platinum staged a remarkable multi-day rally. Some one must be buying the PGM metal massively.

I do not know what's behind the sudden surge of PTM trade volume. But I have done plenty of research in the PGM metals sector and I firmly believe the fundamentals of these metals are very bullish, despite of temporary set backs. I continue to hold a large position in Stillwater Mining (SWC), one of the world's only two mining companies who produce palladium as the main product. The other one is North American Palladium (PAL).

The sudden surge of PTM trade volume and recent strong rally of platinum and palladium prices are good news to shareholders of SWC and PAL. There have been some extreme daily movements of these two stocks lately, especially SWC's extreme price movement on Jan. 6, 09, which is also the first day PTM saw unusually high trade volume. I can only speculate that the price manipulation in SWC and the sudden surge of PTM trade volume could be connected.

I continue to monitor the coal sector even though I do not currently hold any coal mining stock. I believed that globally, the coal supply and demand was largely balanced, with a shortage of no more than 1% or 2%. The current economic downturn could well turn coal into a surplus, particular in the US coal market. I suggested that if you hold coal stocks like ACI, ANR, BTU, CNX, JRCC, etc., you should sell them in the next rally as the US coal market might be bearish in short term, although I believe coal has long term potential.

Surprisingly, international coal prices stabilized at not much below $100 per ton, and they are quietly trending up again, despite of oil price drop to recent lows. What gives? Maybe Europe figured that they need to rely more on coal as their oil and natural gas supplies become vulnerable. This is painfully clear after recent dispute between Russia and Ukraine shut down natural gas supply to a big part of Europe, causing panic. Predictably, Europe will need more coal and will need to import them from overseas. So the US coal market may not be bearish after all, if Europe starts to turn towards the USA to purchase coal.

But in such case, it's better to buy the shipping stocks at deep discount from their recent highs, rather than the coal mining stocks. The coal has to be transported by ships, right?

Full Disclosure: The author currently holds positions in SWC, EXM, EGLE, DRYS, PAL, OMG and USO. I do not own other stocks mentioned here.