"The usual bull market successfully weathers a number of tests until it is considered invulnerable, whereupon it is ripe for a bust" - George Soros (Financier, Philanthropist, Activist - born 1930)
If you missed last week's mini-bull market in stocks like Westport Innovations (WPRT), don't despair. Thanks to the decision by the Chinese central bank to lower interest rates last week, and now a massive bailout coming for Spain's banks, you'd think this week would begin with a big rally.
Though the precise amount of the lending program for Spain will be fine-tuned as the week rolls on, it's clearly not enough to replace the drama on whether Greece will pull out of the European Union.
As a Reuter's interview stated on Sunday, "This is a major step in avoiding a contagion," said Tim Speiss, partner-in-charge of EisnerAmper's Personal Wealth Advisors Group in New York. "The amount is pretty high, higher-than-expected. Although we need to get more details, at least for equity markets in the U.S. and around the world, this definitely eases short-term fears," Speiss said.
A $125 billion loan package is not chump change for Spain, but it isn't enough to solve the systemic financial problems in Europe.
Coming on the heals of last weeks easing of interest rates by China, keen investors seem to know what's happening and are both watching and waiting. It clearly indicates to me two big steps towards a coordinated effort to inflate the world's economy with massive fiscal stimulants.
Next Sunday is Greece's election then there's the Fed's Open Market Committee which meets June 19th and 20th.
The largest components of both an internationally coordinated easing of monetary policies and the launching of the next QE3 are yet unveiled. When they are, it'll be a "stock market on steroids", especially for precious metals stocks and particularly for the silver producers.
After a rather dismal performance in May by the S&P 500 - which fell 6.3 percent, its largest percentage drop since September - a rebound appears to be inevitable. Yet the last vestiges of this carefully controlled market sell-off may continue before the turnaround and stock market lift-off.
Take a careful look at the SPX in comparison to the 3-month price movement of silver as represented by the iShares Silver Trust (SLV).
As the broader stock market average began to correct in early March, silver prices fell off a cliff. Now compare the SLV with the Global X Silver Miners ETF (SIL). The damage goes from bad to worse.
Some of the more widely followed silver producers like Couer d'Alene Mines (CDE) and Hecla Mining (HL) are selling at single-digit forward P/E ratios. CDE is selling at slightly more than 6 times the earnings guidance it has given for the next 12 months. Its prospects for exceeding those earnings look bright in my opinion.
Then there's mid-cap silver producer Endeavour Silver Corp. (EXK). At current levels, it sells for a little more than 8 times forward earnings with no debt and almost $132 million in total cash. EXK focuses on the growth of its silver production, reserves, and resources in Mexico and Chile. And one of its Mexican sites, the San Sebastian project in Jalisco State,appears to have hit the jackpot recently.
On May 22nd, the company announced that exploration drilling at the San Sebastian property has discovered a new high grade silver-gold mineralized zone in the Terronera vein. The drilling results show broad, sometimes bonanza-grade intercepts with two of the best drillholes cutting 8 metres @ 1,489 g/t silver and 0.85 g/t gold.
"Other drilling highlights include 500 gpt silver and 1.15 gpt gold over 11.48 m true width (16.3 opT silver equivalent over 37.7 ft), including 4,500 gpt silver and 3.27 gpt gold over 0.20 m true width (136.0 opT silver equivalent over 0.66 ft) in hole TR12-1", the company reported.
Hugh Clarke, Endeavour's vice-president of corporate communications indicated the company was still measuring how extensive this potential bonanza find really is. As Mineweb.com reported, "Of note, however, the best of Endeavour's drilling results were some 500 metres apart. That's a decent stretch between such broad intercepts. The plan at San Sebastian, Endeavour said, is to continue drilling both laterally and vertically on the vein with one drill rig."
"To that end, Endeavour has some room to move as the Terronera vein has been traced two kilometres along strike. Expect more drilling results sometime mid-July," Clarke said.
The investment thesis here is to take an initial position in EXK before the next drilling results are announced. Whether they consist of better-than-expected results or are not so good, take a second helping of EXK. EXK is more than 30% lower than its 52-week high and any surprisingly good news could see the stock revisit those levels.
Another very promising silver producer selling at a little more than 8 times forward earnings is First Majestic Silver (AG), that Casey Research's "BIG GOLD" service rates as a "Best Buy". AG appears to have "the largest production trajectory of any primary silver company" according to Casey's analysis.
Although it's a very attractive value at $14 or below, even at $15, AG would still be 70% below its 52-week high. Convince yourself of its potential going forward by carefully reviewing the company's website which highlights its projects, share structure and recent news developments.
By the way, when it comes to Westport Innovations , if you're looking for a stock to short, this hope-filled maker of natural gas engines has gone up too far, too fast in just the past week.
At some point, a good investment hedge may be to go long the best silver stocks and go short the pumped up, zero-earnings companies like WPRT. Now that's a long and short idea with a silver lining if ever I've heard of one.