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David White
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David White is a software/firmware/marketing professional and a long time investor. He has worked in the networking field, the semiconductor equipment field, the mainframe computer field, and the pharmaceutical/scientific instrumentation field. He has bachelor's degrees in bioresource sciences... More
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  • Reasons For A Negative View On The Equities Markets In The Face Of A Good Earnings Season

    1) Marketwatch: Fannie Mae and Freddie Mac are checking files for underwriting flaws and forcing banks to repurchase those loans. The biggest losers are likely to be BofA, JPMorgan, and the mortgage giants themselves, who will still be stuck with billions of dollars in properly-documented delinquent mortgages. More bad news for BofA and JPM is not what the market needs right now.

    2) China tightening means lower than expected construction. It means lower than expected growth. This means lower than expected demand for industrial metals, wood, etc. China tightening also means fewer loans will be given to buy big ticket items. This includes houses and cars. Tightening means China will have to export more industrial metals, etc., or it will face big layoffs. It will likely face some amount of deflation in industrial metals, and in real estate (both commercial and residential). When the China stimulus package ends (more layoffs), these problems will be exacerbated, especially in industrial metals. The extra export of industrial metals by China (especially to avoid layoffs) will likely have a negative impact on world industrial metals prices and margins throughout 2010 (and possibly beyond). This may lead to depressed prices on base metals a little later.

    3) The USD Index has been generally rising for the last two months. It has risen from approx. 74 to almost 80 at the close Friday Jan 29, 2010. This is putting a lot of pressure on the USD carry trade. Many are already selling things to repay their borrowed USD’s before they go up more. One of the things they are selling is stock. This often means they are selling the “hot stocks” because those are the stocks these “risk on” traders own. When you see these “hot stocks” go down, it may not mean there is something wrong with them, it may only mean they are heavily owned by some very serious investors. The recent heavy drop in technology issues may be an example of this. The downtrend in the Hang Seng Index is evidence that money is getting tighter there.

    4) The Fed is inching closer to stopping its buying of MBS’s in order to support the real estate market. The home buyer tax credit is edging closer to expiring. This is definitive tightening by the Fed. Governor Hoenig has even come out in favor of raising rates soon. Plus we all know Fisher is a hawk. This would be another negative for the market. These things all make analysts think that the real estate market is in for more trouble in the immediate future. As the real estate market goes, so go the US credit markets, so go the equities markets.

    5) The financial trouble in Greece has put the focus on possible sovereign debt defaults. The EU has said they will bail Greece out if need be. However, many people think Greece is just the tip of the iceberg. There are many other European countries that are in trouble such as Spain, Portugal, Ireland, Italy, etc. S&P even warned the UK about possibly downgrading their debt rating. After you get done with Europe, many also point to California and other states that are in terrible financial shape. Whatever ultimately happens, the CDS’s for sovereign debt have already gone up dramatically since early January. This means the cost of borrowing has gone up. This is a very negative thing in countries trying to recover from a recession. It means the recovery time will be longer. It means the possibility of slipping back into a recession is higher.

    6) Many think US equities are over priced. They are temporarily oversold in the near term, but that still may not mean they will not go down. If they are over priced in a worsening environment, then they are very over priced. Some think the S&P500 Index only rates a value of about 900. If the analysts’ outlooks for 2010 and beyond are worsening, the pundits may push the market down drastically from its current value. Commodities will likely fall too.

    7) Obama’s bashing of top US banks is making people feel uncertain about even these stalwarts’ future. Are they going to be broken up? Are parts going to be required to be split off? How much is all of this going to cost? All of these are worries for the markets. All of these tend to pressure banks, which already face real estate and credit card problems, with still further negatives. Changes necessitated by new US or even worldwide regulations seem likley to hurt banks profits in the near term.This is bad for the equities markets.

    8) The price of oil may be a problem again in the near future. The phrase “peak oil” is being mentioned with increasing frequency. 2009 levels were very comparable to 2007 levels of use (less by the US but more by emerging economies). The worldwide demand is supposed to grow by approx. 1M bpd in 2010. Further growth is expected in 2011. Many are now suggesting $100+/barrel oil in 2011. This will be a big negative for a US recovery. High oil was one of the principal reasons for a US recession.

    9) Now that the recession is perhaps over, many are turning their attention to the US budget deficit. Worries are proliferating about the US having trouble selling its bonds in the near future. It seems fairly certain that the US will have to give buyers higher yields soon. This in turn will make it harder for the US economy to thrive.

    10) The US equities markets rallied in early Jan. before earnings, when they had no really valid reason to do so. This may have pushed them farther into over bought territory. It may partially explain the recent quick drop.

    11)   With the first real sign of weakness in the markets since March 2009, people who have made 60% profits since then may be anxious to take some profits, especially if the outlook seems to be in danger of changing.

    12)   Much of the reason for the great +5.7% GDP number on Friday is purported to be inventory restocking. With a lot of stimulus spending due to take palce in 1H 2010, GDP numbers may stay up, especially with some inventory restocking still to come. However, looking out beyond 1H, there will be little stimulus and little inventory restocking. Many are worried the US economy will flounder, especially if there is a significant credit collapse due to further real estate problems. Further we have not seen job growth yet. This is needed for the recovery to take a firm hold.

    12) I am sure I have neglected to mention many items. Please feel free to add these in the comments if you wish.

    In all of this one should not lose sight of the fact that earnings have improved. In Q4 results we are seeing significant revenue growth from a number of companies. This bodes well for the future. The balance between this and other factors may make for a very choppy market. Just when you think it is headed down for sure, it may head back up (or vice versa).

    The chart of the SPY ETF gives us a good picture of recent market action. The market has fallen swiftly from approx. $115 on the SPY to Friday’s close of $107.39.

     

    Good luck trading.



    Disclosure: no positions in SPY
    Tags: SPY
    Jan 31 9:25 AM | Link | 1 Comment
  • Two Junior Miners With Big Potential: TGB,PZG

    In my last mining stock article, readers asked for some good juniors to buy. PZG and TGB are my response. Paramount Gold and Silver (NYSEMKT:PZG) is a junior gold miner whose major mine just keeps giving great results with each subsequent mineral estimate drilling project. The latest estimate indicated that there are 2.65M ounces of gold equivalent at the San Miguel project. Apparently the plan is to drill to prove the reserves. Then management intends to sell out to a major. Some are estimating 10M ounces of gold equivalent by the time all of the drilling is done. Thus far there have been few disappointments. PZG has current market capitalization of 188.65M (Yahoo Finance). If the San Miguel project has 10M ounces of gold equivalents, that would be about $11B after it is mined. If PZG got 10% of that figure in a sale, you would multiply your money many times. If PZG only got 10% of 2.65M * $1100 = $2.91B * .1 = $291M, you would still do well. Plus PZG also has a project in British Columbia. PZG would have some residual value even after the sale of the San Miguel project. The chart of PZG is below:

    PZG 1 year chart:

     


     

    Another potential star is Taseko Mines (NYSEMKT:TGB). This is an older company that I think wants to become a major. TGB received its environmental assessment certificate for its Prosperity Gold-Copper Project from the BC Provincial Ministry of Environment on January 14, 2010.

    It will likely take about 2 years and about $.75B to construct the mining facilities. After that TGB will be making huge amounts of money per year. The project is said to contain 7.7M ounces of gold and 3.6B pounds of copper. TGB sold a 25% interest in its Gibraltar mine (a different project) for $170M to help finance the Prosperity mine. Based on that sale price, the Gibraltar mine is worth about $680M. TGB has a market capitalization of only $678.6M. Its current price does not even seem factor in the value of the Prosperity mine. Plus there is TGB's Harmony project (also in British Columbia). It’s price/book is listed as 3.47. This could be part of the explanation. Regardless of the listed Price/Book, the likelihood of this being a great value is extremely high. TGB still has relatively low debt/capital at 22.69%. It has a current ratio of 1.15. It can pay its bills.

    The permitting process has been going on for many years. The necessary permitting for the Prosperity project has at long last been obtained. The times are uncertain. The funding is worrisome, but you have to believe they will get this one done. This may be a great time to get in on a stock which will likely multiply your money many times over during the next few years. The permitting is no longer in question. Most of the speculation risk is gone. 7.7M ounces of gold * $1100/ounce = $8.47B. 3.6B pounds of copper * $3/pound = $10.8B. The total of the two = $19.27B (without figuring on expenses). Even 10% of this figure, makes the stock a bargain. The chart (below) looks good too.

    The 1 year TGB chart:

     

    I have yet to invest in either of these stocks, but I am seriously considering both of them. I may buy in the next few days.

     

     



    Disclosure: I have no positions currently
    Tags: PZG, TGB
    Jan 22 6:49 AM | Link | Comment!
  • WY: Lumber Isn’t Going Anywhere

    Lumber futures were up $13 on the January futures contract today to $226. You would think this would mean most lumber companies would be up, but WY was down. This seemed very odd to me. At first I thought maybe it was the Chinese. For the last couple of months they have been announcing tightening moves. What this ultimately means is that there will be less construction than there would have been. Since I hear there are many commercial buildings currently sitting idle and empty in China at the moment, this may be a good thing. There will likely be less residential building in China too, since credit will be harder to get, and prices (which spur building) will not be increasing as quickly. This means that there will be less need for lumber. “What a great rationale?”, I thought; but the lumber futures went up today, so I wasn’t satisfied.

    Looking around in the news I found a Los Angeles Times article on railroads dated today (Jan. 14, 2010). According to it, “Freight trains carried 20 percent less cargo last year than in 2008, according to a new report by the Association of American Railroads, and the industry shed nearly 21,000 jobs. The 12-month period was the slowest since the association began keeping records in 1988. Among the most dramatic declines was a 33 percent drop in

    Taken over a two year period that included all of 2008 and 2009, the declines were even more dramatic, according to the report: a 48 percent drop in the transportation of motor vehicle parts; a 49 percent drop in metallic ores and metals; and a 47 percent drop in lumber and wood products carried by train, a key indicator of demand for new construction. Trains carried 34 percent fewer motor vehicle parts and 8 percent less coal. lumber and wood products.
     

    By last month, though, the picture was beginning to brighten. Twelve of the 19 main commodities hauled by trains _ including grain, chemicals and petroleum and automobile parts _ showed growth during December when compared to the same period a year earlier. The number of rail cars in storage also began to drop in December, indicating another up tick in business.”

    This last might seem like good news, and it is. However, it also indicates how far these industries have fallen. It indicates how far they have to come back. The news for coal was less bad, as transport of it was down only 8% in 2009. For lumber, auto parts, and metallic ores and metals the numbers were disheartening. The transportation of each of these has gone down 47% or more in the last two years (2008 - 2009). It was down 33% for lumber in 2009 alone. This is really a knife to the heart for owners of WY.

    WY is set to lose -$1.94 in FY2009. It is estimated to lose money in 2010 as well. It has not made money FY since 2007. The railroad article indicates just how far it has to go to come back. It won’t be this year. With the China tightening, it really won’t be this year. China demand was the big factor in the lumber futures recovering last spring. If China will now be slowing its lumber use (as is likely), WY will take that much longer to recover. The demand for new commercial and residential real estate new building in the US is very low. That demand is not likely to recover soon. Cramer says that’s a good thing because we can get rid of some of our excess supply more easily then. That’s how bad the lumber business will be in the US in 2010 (and perhaps 2011). The almost 50% lower transportation figure for lumber in 2009 vs. 2007 is a reality check for investors. It should be listened to. The estimates for WY for 2010 are probably high. They likely don’t factor in a slow down in growth of lumber use by China. When a lumber company, without any bad news of its own for the day, goes down with lumber futures up $13 on the day, that company is troubled. I will leave the more nitty-gritty fundamentals for another day. Instead I say to you, “Listen to the rails. You will hear the train coming from much farther away. You will have plenty of time to make up your mind what to do.Today that train is the SELL train.”

    WY has announced that it intends to become an REIT sometime within the next year (2010). One problem with this is that it will have to pay out nearly $6B to shareholders. Sounds great for shareholders, but wait a minute for the gotchas. At the end of last quarter, the assets - liabilities = $4.349B. This is less than WY legally has to pay out. WY will try to solve this problem by paying out the monies with about 90% in stock. This will cause dilution. However, that dilution will go to the shareholders. Still they really won't be getting a real payout, except the part they get in cash. Further the credit agencies are now more worried than ever about WY's debt. Since WY will have to pay out 90% of profits to shareholders as an REIT, it will not be able to pay down on its debt as it becomes more profitable except by issuing mroe stock. This means shareholders shares are likely to go down due to future stock issuances after the conversion to an REIT. In other words stockholders will get payouts, but their stock value is likely to go down due to perpetual stock issuances.

    The charts below further illustrate the current situation: 

    WY 2 year chart:

     

     

    WY 3-month chart:

     



    Lumber Futures chart:

     

     

     

    From looking at the charts above, one can see that WY is trending down slightly at a time when lumber futures are clearly trending up. You can also see a trend of money flow out of WY. Look closely at the end of the lumber chart and at the end of the 3-month WY chart to see these things.

    When you can see this kind of counter trend for a commodity stock, it is time to sell. It may be time to consider buying puts on the stock. You may not wish to short it because you might end up being responsible for paying the dividend. LEAP puts might be a better idea.

    Good luck trading.


    Disclosure: Bought a few puts on WY.
    Tags: WY
    Jan 15 2:57 AM | Link | 1 Comment
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