Silver Wheaton: Propelled by the Suprime Meltdown

| About: Silver Wheaton (SLW)

The subprime meltdown will end the recent bull market in equities and propel gold and silver higher. At the end of the housing bull market you could apply for loan and get it without any proper credit check, with your income sufficient enough only to repay interest, and without any down payment. According to the New York Times "mortgages requiring little or no documentation became known colloquially as 'liar loans'.”

An April 2006 report by the Mortgage Asset Research Institute, a consulting concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated their incomes and then looked at documents those borrowers had filed with the I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half. Once the market moved into the bear territory, the value of the loan became higher then value of the house. The result? You are in negative equity. You have no money any more to pay interest because it has risen with Fed hikes, you will not be able to return loan and the house will go in foreclosure wita 20-30% discount even to recent market value.

Is this only on the margins of the economy? I am afraid not. Just look at GM (NYSE:GM); I thought they were supposed to compete with Nissan (OTCPK:NSANY) and Toyota (NYSE:TM). The biggest problem is that the Marginal Bank repackaged all those mortgages to other banks in the way of bonds sold with new high rating, but with the same junk underlying. The chain was going up in the perceived quality of bonds, with increasing rank of latest bank; when the house of cards falls down all these A ratings will be worth less than the paper to print them. Goldman, Merrill Almost `Junk,' Their Own Trader's Say.

How big is disaster? According the the Times:

Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.

All that excess liquidity from the reinflation of the economy out of recession in 2002, and which was driving recent Bull market in equities, found its way into the broadest available market - housing. An unsustainable bubble was created and inflation spiraled out of control. Tightening in the way of increasing Fed rates brought the first "marginal" borrowers to their limits; foreclosures and first losses will bring an even further tightening in the form of "restoration" of credit quality: loans will become less available, demand for housing will go down further, prices will collapse and consumers will stop driving economy without home ATM machines.

The economy is in recession. Markets are plunging, rates are cut and negative rates are pushing the USD downwards and driving the commodities, gold and silver bull markets. Silver could benefit even more then gold just because size of the market is relatively small. One of the interesting companies, Silver Wheaton (NYSE:SLW), is a "silver bank". This company has secured its supply of silver with fixed prices from silver mining companies by paying them upfront. If silver will be moving higher, as I am anticipating, this company will get all the upside from increasing prices. There is no specific mining risk connected to this company, so it is a pure option play without time decay on silver price.

The company has recently reported earnings of $23.8 mil or 10 cents per share, an increase of 150% from $7 mil or 4 cents per share in the prior year quarter. For the year, earnings expanded to $85.2 million, or 37 cents per share, from $25.3 million, or 15 cents per share, in 2005. It is an increase of 147% y/y and with a current price of $9.43. Tstock has P/E of 25.5.

Everybody is still exited about Google (NASDAQ:GOOG) growth, which is slowing by the way, yet here we have the ultimate earnings machine that nobody has even noticed yet. Silver sales more than doubled to $158.5 million from $70.9 million on increased silver sales volumes and higher average prices in 2006.

From Silver Wheaton's website:

Silver Wheaton is the largest mining company with 100% of its revenue from the sale of silver. Having silver purchase contracts with three separate mines, the Company expects to sell approximately 15 million ounces of silver in 2007, growing to 20 million ounces by 2009. The Company purchases all of the silver production from Goldcorp mines in Mexico and the Zinkgruvan Mine in Sweden, together with a portion of the silver production from Glencore’s Yauliyacu Mine in Peru. Silver Wheaton’s unique and simple business model is designed to create long-term shareholder value, providing for strong upside potential with downside protection. Silver Wheaton is unhedged and well positioned for further growth.

SLW 1-yr chart

Now Silver Wheaton is finishing its consolidation pattern and close to break out. If you are considering silver exposure for your portfolio, this company deserves your attention in line with the silver juniors I have covered before: Avino Gold and Silver Mines (ASGMF.OB) and Sterling Mining and Mines Management (NYSEMKT:MGN). The market cap of Silver Wheaton could accommodate big investors when the silver market is back in fashion and the stock will benefit first from the money inflows in this sector.

Disclosure: I have long positions in all covered Silver companies and a short position in Google.