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  • The Capital Asset Pricing Model : The Vast Shortcomings & More Efficient Alternatives.

    The Capital Asset Pricing Model Is a Joke if You Ask Me: (Used to Calculate the Cost of Equity). Here is the formula and I will cover every variable Ke = Rf + B(Rp). I will start will B or Beta because the risk free variable is not necessary

    Beta - Is a measure of Volatility measured against a benchmark, or more specifically a linear regression of the daily returns of an equity measured against the daily returns of one of the major Indices. But why is the assumption made that volatility is a bad thing? Small and mid-caps necessarily have a higher beta due to a smaller share count (generally speaking). Especially in the case of small caps who may be thinly traded, thus causing small purchases or sales to dramatically influence the price. I find it odd that especially now that the lower Beta stocks i.e large money center banks, GE, etc turned out to be the most risky. They weren't even solvent!  Briefly getting into specifics, how can you run a regression of an equity against and index when that equity is part of that index?? Even is Beta accurately measured risk, it would still be distorted by that fact because part of that regression is necessarily 1:1

     Rp - Risk Premium - The mainstream thought on this to input what the usual market average return will be or the expected market return for a given year. But how does that have any correlation to the "risk" of equity? It's utter nonsense.

     So what are some alternatives? Well basic short term liquidity and Solvency ratios, which the banks would have failed. Two other great ratios to use are the current ratio (current assets to current liabilities) and TIE ( times interest earned). Although TIE has to do with debt, you want to know if a firm has viable capital structure. So the higher the TIE, the less risk of default. Some others are operating cash flow i.e free cash flow to liabilities, free cash flow as a % of net income.

     ALTMAN-Z  (which has a great track record for detecting companies that would go bankrupt) and other alternatives to this model. Another model is the Beneish Model with calculates the probability of accounting manipulation (and like the Z-score, has a rather good track record).

    If anyone cares to know the formuals of these models just make a comment. BTW, the Beneish model had a 78% accuracy rate over a ten year period  (I believe 1992-2003). It is calculated Enron has a 100% chance of accounting manipulation

    Tags: risk, valuation
    Jul 07 9:00 PM | Link | 1 Comment
  • A Juggernaut Re-emerges

         Coeur d’Alene mines have gotten much publicity over its recent victory in the courtroom concerning Kensington, its gold mine in Alaska. This typically leaves little room to profit as the market quickly recognizes these happenings and re-prices such assets accordingly. But in this case, there has been little reaction at all. Sure the stock price is higher, but that is only due to the 10:1 reverse split which took place earlier this year. They were engaged in a 17 year (well really since 2005) long battle in regards to their permit at their Kensington mine. This was handed down by the Supreme Court so it is fair to say, we have heard the end of that. This will be one of their flagship mines, so the importance of this legal victory is enormous. It is located in Juneau, Alaska giving them diversity away from Mexico which is often the case with silver miners. To help understand the vast importance of this legal victory, let’s take a step back at the production of this mine alone relative to the market cap of the company.

    The real obstruction to a key mine necessary for CDE’s survival began in 2005 when a deposition was filed by environmentalists regarding a previously issued permit for the lower slate lake. This was thrown out and repealed for 3 years in various courts. As mentioned above it reached the Supreme Court and the permit was ruled in Coeur d’Alene’s favour. Given the fact the Kensington mine accounts for about 30-35% of CDE’s NAV, coupled with two other flagship mines coming online, will spur rampant growth to the tune of 40+m GEO by 2011-2012! What’s more amazing is the market price, which has stayed suppressed and obviously has a stigma in the market place

    For those who think inflation is soon on the horizon, silver will skyrocket at along with gold, is a great hedge. I personally think we will mirror inflation of the last 70’s, and even then silver touched $50/oz. Now given the money supply has tripled and global industrialization will pick back up again, I think the case for silver is incredibly bullish. Not to mention the role it will play in the next generation of batteries, which will start being used the end of this year. The following is a passage from a previous article for those who have not read it:

    "Everyone who uses laptops or cell-phones these days is at least partially aware of the battery technology everybody uses in those devices. Lithium-ion and lithium-polymer batteries have literally changed the world of portable devices, making them lighter, while also extending useful battery life. They have become the most common type of battery used in consumer rechargeable devices. The alternative comes in the form of silver-oxide or silver-zinc technology. Silver-zinc batteries can run up to 40% longer than the equivalent lithium-ion battery. Over 95% of the primary elements in the battery can be recycled. There are no heavy metals or toxic chemicals in modern silver-zinc batteries. Plus, their water-based chemistry makes them free from the risk of thermal runaway, fire, and explosion. 

    There is little doubt that these batteries are a safer, greener, longer-running choice for laptops and cell-phones. With a little more development, their future looks very bright. The technology has the backing of some heavy hitters, as well. For example, Intel Capital has invested in a silver-zinc battery manufacturer named Zinc Matrix Power (ZMP). 

                Laptop manufacturers are in the process of examining silver-zinc batteries for use. ZMP claims at least one laptop maker already has designs in the queue with an eye toward introduction in their high-end laptops in mid 2009. Eventually, we may even see after-market, drop-in replacement batteries engineered to retrofit older laptops with this safer technology. Expect advertising to tout extended run times and the "green" aspects as major selling points." 


    Just think about how many laptops are used today along with all the other gadgets that require batteries. Now that everyone is going “green”, whatever that means, people may prefer the ZMP to the less efficient, less durable lithium Ion.


    Valuation of CDE:  or


    Disclosure : Long CDE

    Tags: CDE, SLV, mining
    Jul 06 12:28 AM | Link | Comment!
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