Friday, December 3, 2010

Some Random Musings/Thoughts Late Thursday Night...

I have been busy during the day trading the crap out of the intra-day market volatility for both my fund and my own account.  As such, I've been a bit too preoccupied to post during the day.  In addition, as I was discussing with a friend tonight, I'm a bit burned out from spending the last three years researching/reading/analyzing etc in order to set up the fund I co-manage to be positioned to take advantage of what I believe will unfold financially/economically/politically in this country. I think we are entering the early stages of what will be a monster run in the metals/miners.  This is great for anyone positioned for what is happening - but really bad news for the well-being of the hoi polloi.

Of particular note, it looks like sophisticated institutional money is rushing into the large-cap, liquid mining stocks like SLW and AEM.  More significantly, real money is starting to sniff at the better quality, more visible junior mining stocks.  Some of the holdings in our fund have more than doubled over the last 2 months.  As such, this is still the early stage of what could be a breath-taking move in this segment of the mining stock universe.  As an example, ECU has moved from the high .50's to a recent intra-day high of $1.41.  It has pulled back and is consolidating this move.  I think it is now "coiling" for an even bigger move.  The last time around, starting in mid-2005 when I bought into the name personally at .34, it ran from my entry point to a little over $3.30 before the whole sector was manipulated into a crash by Bernanke/Paulson. I'm not saying that magnitude of a move will occur this time around - but it sure as hell could.

Let's work out some conceptual math using rough numbers to demontrate the possibilities using ECU.  Back in 2005, ECU had around 40 million ounces of 43-101 silver.  As my colleague Andy pointed out today in an email to our group, right now the juniors are being cap'd by the market at $1-1.25 per silver equivalent ounce.  In early '07 at the last valuation peak for juniors, the average valuation was anywhere from $4-7 per silver equivalent ounce.  Currently, ECU's share base has doubled since early '07 but its 43-101 silver has increased more than 10-fold to over 400 million ounces.  I'll let anyone interested in calculating possible price targets using ECU's current share base, 43-101 silver ounces and potential market cap targets.  In other words, stocks like ECU have quite a move ahead if we get a run like the market had the last time around.  And remember, back then the small cap mining stocks were largely fueled by the individual investor.  Contrast that with now, when it looks like bigger, more sophisticated capital pools are starting to discover the junior segment of the mining share sector...

George Orwell is smiling

If you just read the headlines, you would be led to believe that the U.S. economy is well on the road to recovery.  Black Friday weekend sales showed ebullient gains over last year, housing bounced a bit in October and the employment picture is improving. 

Of course, as Shakespeare penned thru "Macbeth," "nothing is but what is not."  What is "not" is any real data to support the fantasy being painted by Wall Street and its well-oiled media machine. It is my view, based on consumer polling and my analysis of the sales trends last weekend that, at this point, it would appear that very aggressive price discounting and marketing by the retail industry has "pulled forward" a substantial amount of holiday sales into the Black Friday weekend. 

As an example of media manipulation with the housing data, let's look at Toll Brothers.  The headline earnings release for TOL, one of the largest homebuilders, reported an unexpectedly big jump in earnings for the latest quarter.  Of course, if you look behind the proverbial curtain, you will discover that this gain was "manufactured" using a one-time tax benefit and some generous assumptions about the value of Toll's inventory - on and off-balance sheet. 

The fact of the matter is that new home sales continue to plummet and, overall, housing prices and true market real estate valuations continue to tank.  Furthermore, despite today's glossy headline announcing a record gain in the pending sales index for October, the bounce was generated from September's unexpectedly low index level and the index itself is still trending substantially lower vs. last year.  In addition, the actual and "shadow" inventory of homes for sale is spiking significantly higher.  As I dig through the "footnotes" that get completely ignored by the media, I can't help but conclude that a lot more pain is ahead for the housing market. 

The employment data is similarly chimerical.  If you just go by recent Government-generated employment reports and jobless claim data, you would think that the job market is gaining strength.  But I think by now everyone who cares enough to dig for the truth knows that the real unemployment rate is substantially higher than is being reported by headlines.   By "real" I mean the "real" workforce number, which would include not just the Government defined "labor market" - those employed plus those actively looking for employment - but would also include the rather large pool of workers who have given up looking but would still love to find a job.  The most conservative estimate of this can actually be found buried in the BLS employment report, which shows a "real" unemployment rate of 17%.  Private services like John Williams' Shadow Statistics estimate the "real" real unemployment rate is now over 20%. Lets also not overlook the Government's magical "seasonal adjustments" and other feats of data massaging.  In other words, welcome to the "Animal Farm" and the Ministry of Truth...

I'll conclude by linking  Alisdair Macleod's latest brilliantly and methodical calculations for where the price of gold is headed. This is a brief and concise must-read:  Gold is headed MUCH higher.

And I'm too fatigued right now to elaborate on the rapidly escalating fiscal catastrophies at all levels of Government (local, State, federal).  Not to mention the impending 2 million+ who will fall off the jobless benefit entitlements if Congress does not implement another emergency extension by the end of December. Suffice it for me to say with complete confidence that the golden truth of the matter is that the economy continues its death spiral into a massive depression and the price of gold and silver are set up to move up to price levels that will stagger the minds of all but the most informed of the precious metals community. 


  1. Dave:

    Poor old George Orwell is getting a bad press these days.

    Let's review: as a young man, he resigned from the police force in Burma after seeing first-hand how the British empire behaved. Later, he went to Spain to fight Franco's forces. In his journalism, he warned of the rise of Nazi Germany for years and years, to little effect. In short, he was an enemy of totalitarianism all his life.

    So why would he be "smiling" at the latest evidence of phony govenment statistics?



  2. Dave, some old-timers who remember the 80s also think the jnr miners will get a monster run. In time, I think you will look back on your post as a great call.

  3. A small community offering.


    And thanks for all you do Dave


  4. re: Orwell? Why is the Mona Lisa smiling? lol

    thanks Bill/sumo!

  5. Dave,

    It's amazing how prophetic Orwell was 60 years ago whenn he wrote Nineteen Eighty-Four.
    The BLS purposely skews the jobs numbers to try and make them look better than expected. Months later, when off the radar, the previously reported numbers are always revised lower.

    Here's an relevant example I've quoted from the book. Just substitute "creation of jobs" for "output of boots". Sound familiar?

    "For example, the Ministry of Plenty's forecast had estimated the output of boots for the quarter at a hundred and forty-five million pairs. The actual output was given as sixty-two millions. Winston, however, in rewriting the forecast marked the figure down to fifty-seven millions, so as to allow for the usual claim that the quota had been overfulfilled. In any case, sixty-two millions was no nearer the truth than fifty-seven millions, or than a hundred and forty-five millions. Very likely no boots had been produced at all. Likelier still, nobody knew how many had been produced, much less cared. All one knew was that every quarter astronomical numbers of boots were produced on paper, while perhaps half the population of Oceania went barefoot. And so it was with every class of recorded fact, great and small. Everything faded away into a shadow-world in which, finally, even the date of the year had become uncertain."

    Love your blog,


    Where does one find out about your fund?

  6. Dave, Any opinion of the SDRG situation with Cerros las Minitas? It looks like they lost the rights to Southern Silver, how could that happen?

    All SDRG will say at this point is that their lawyers are addressing it.

  7. re: SDRG. I spoke to Marc at length about it after that news had hit. It's a complicated situation that is even more complicated for the other party, who has problems with the way he filed his claim.

    What will likely happen is that there will some kind of negotiated settlement. I wouldn't worry about it.

    The company is finalizing plans to file an application for listing on the TSX. Stay tuned.

  8. Hi Dave,

    I very much appreciate your advice on this.

    Which other smaller Toronto miners would you put in the same category as ECU with regard to high potential upside that you suggest I look into?

  9. Thank you for your writing. Your articles bring knowledge and joy to all who read them. Have a great weekend!

  10. Hi Dave,
    This mining sector is WAY under the radar screen at 1400 gold prices.
    Been around this sector for eight years now, and still have to shake my head in disbelief of the ignorant investor out there.
    I just can't see these values not coming to light soon, I mean 600-900 dollars profit for most producers, and juniors WOW the ozs in the ground at 1400 gold!
    When this mining sector gets going, I mean the fever effect comes, it will make the dot com look very small.
    So for all that are just starting to look at this sector, you are on borrowed time.