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Larry Cyna
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Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the... More
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  • Economic Negativity Is Blinding Investors

    An Overview of the Markets

    Investors today feel that they have been burnt as their stock portfolios have performed poorly. Each day they are bombarded with negative news from Syria where fighting continues, from Europe where the ever increasing debt crisis never seems to reach resolution, from Japan where debt levels continue to rise as the population continues to age, from the USA where unemployment remains stubbornly high and where there is fear of the future, from China where there seems to be an increasing slowdown, and the negativity emanates from every news source.

    The Daily Swings in the Stock Market
    The stock market seems range bound without a clear direction. One day, reports of disappointing house sales in the US sends the markets down. The next day an interpretation of the latest remark by a Fed Member leads some commentator or another to surmise that a new round of Quantitative Easing will be forthcoming, which sends the markets higher. It seems that almost each day, there is an anticipation of some news or event that will signal either a dramatic fall and a worldwide depression, or the end of the downturn and the start of a massive upturn. Yet the markets seems to fall back to the mean after the latest rise or fall.

    Taking a Broader View
    What is needed is for investors to take a broader view of the world.

    The Major Stock Market Indexes
    In October 2008 and again in March 2009, there were dramatic falls in the stock markets, and investors fled the markets fearing that all value was dissipating. In order to have a proper overview, let's start with the indexes and see what has happening over the last 4 years.

    The Dow Jones Industrial Average
    The Dow Jones Industrial Average hit a low of about 7,000 in 2009. Since then, it has relentlessly risen, albeit with significant dips along the way. If you plotted the DJIA on a chart, it is in a upward channel that is continuing. Today it stands over 13,000, which is almost double its low of 4 years ago. It is above the 10 day MA (Moving Average on a yearly basis), above the 50 day MA and above the 200 day MA. Ignoring the daily news headlines and only looking at the long range trend, the Dow Jones averages have been on a positive path for 4 years now.

    The Dow Jones Composite Index (NYSEARCA:DJCI) shows a similar movement through a clear upward channel. The 2009 low was around 2,400. The current is above 4,400, again almost double that low.

    The Current Stability
    It is often repeated that the stock market foretells the future. As China and other economies rose to prominence, the price of precious metals rose dramatically, as did the price of base metals, and other commodities. After such a rapid rise, one would expect the downward slide would be similar. But this has not happened.

    Gold peaked in the $1,900 range in 2011, and then fell to $1,600 where it has stabilized. It has been range bound around $1,600 for some time. It has not fallen back to $300, where it started its rise, nor to $1,200 where many pundits prophesied.

    Silver had a similar stellar rise to almost $45, but has weaken to the high $20′s and stabilized. Copper had a similar fall and then rise, but has stabilized above $3.00. Similar results can be seen for energy prices. The stability of commodity, metal and energy prices at levels far higher then historical norms bodes very well for the future.

    Recent Volatility in the Stock Market
    As the market reacted to strong negative or positive news over the last year, stocks either rose or fell dramatically, but then bounced back to the current levels. But as the summer progresses, and the news never changes, investors are calming and not reacting quite so dramatically. Volumes of stock trading have continued to moderate and more and more money is being parking in the Money Market at near zero interest rates.

    The Stability of the World
    The clear interpretation of this is that there is worry in the investment world, but that demand for commodities, metals, and goods and services remains constant. There has been no great crash, and the market is telling us that there will not be a great crash.

    What to Expect
    The debts in Europe are impossible to deal with. Germany does not have sufficient resources and strength to bail out everyone without being hurt badly itself. Either a common Eurobond is created that mandates closer economic controls over all countries, or the weaker countries will sink further into the mire. Either way, there is no escape from economic reality. The advantages of this great economic experiment have been overshadowed by the excesses of benefits given by governments to its citizens. Europe is too big an economic block to fail, so it will muddle along. In due course, reality will force a moderation in spending and slow economic growth and inflation (hopefully mild) will gradually diminish the debt and the abuses. But the point is that Europe will not disappear and goods and services will remain in demand.

    China will also face its weakening as its great economic boom which was fueled by world demand for cheap goods and services abates, due to higher costs and weakening demand.

    Japan will continue its path towards economic uncertainty because of the aging population and increasing debt.

    The USA will not have a government that destroys economic activity through a dramatic recreation of the scenario that caused the great depression - dramatic and abrupt debt reduction. Political rhetoric will give way to economic reality as it always does.

    The Bottom Line
    We are in the bottom of the current cycle, and the next economic cycle is starting. The stock market is telling us so. The enormously increased numbers of middle class consuming people around the world are demanding more goods and services. The old abuses are slowly being wrung out the system, and patience is warranted while the world changes yet again - as it always does.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund have positions in the shares of companies mentioned.

    Aug 15 2:28 PM | Link | Comment!
  • The Gamble Of Buying Apple AAPL - Irrational Investing

    Market Darlings That Disappoint
    There is a lot of talk currently about Apple whose shares reached an astonishing $644 in April 2012. Today they trade at $585 which is a 9% drop in value. It is reminiscent somewhat of the painful share performance of Research in Motion (RIMM) which reached an equally astonishing $148 in 2008 and now trades at $7.50, and is showing further weakness. The issue is that greed and the herd instinct often betray investors. When a stock has a spectacular rise in value, or when the media concentrates on an upcoming IPO, normal rational thought seems to abandon investors. The history of the stock market shows that market darlings normally retrench after reality sets in. Of course there are exceptions to this rule, such as Apple when Steve Jobs returned to the company, and when Google went public. But these are the exceptions, rather than the rule.

    How to Value a Stock
    A stock is normally valued by analysts and the market based on expected future earnings. In essence, the market values stocks based on what they are expected to achieve in earnings and market presence, rather than on the reality of what the company is doing today. When a stock becomes a market darling, that expectation of what will happen in the future is the primary factor in what investors will pay for the stock. There is one glaring problem with this method of valuation. No-one can accurately predict the future. When someone does achieve the ability to predict the future, then investing criteria will change. But until then, investors listen to the hype of Analysts and the media. So investors jump on the bandwagon for every new market darling.

    Apple is an amazing company. When Steve Jobs came back to the company, it became an amazing place, that changed the world with its constant stream of radical innovation. But stop for a moment and think about reality. There was only one Steve Jobs. His replacement is not Steve Jobs. It is possible that his replacement will create something equally astonishing, but think about the odds of that happening. Pretty slim aren't they? Now think about the stream of new products developed by Steve Jobs' fanatical personality. I am confident that there still are some surprises in the pipeline of product improvement and innovation, but Steve Jobs is gone.

    Now think about earnings. Earnings come from the sale of products. The last quarter's earnings were a bit disappointing, but think about how high a standard was established in sales volume by the iPhone and similar products in previous years, each more amazing than the last. But Samsung is now breathing hard on Apple's heels. The Android open source system is establishing more and more market presence. Google is entering with its own device. Microsoft has announced that they are entering the competition. It will be very difficult to repeat the astonishing sales records of the recent past.

    Yet investors remain faithful. Perhaps there is a new product coming which will revolutionize TV, or travel, or whatever, but why would an investor bet that new management will exceed the brilliant success of the past. This is a hard bet and one that investors should be cautious about. Yet the market price of Apple shares remains high.

    Gambling on the Stock Market
    There is a long established belief that a portfolio should consist of blue chip stocks and that this represents safety for investors. But blind categorization of a stock as being in the class of Blue Chip Stocks is far more of a gamble than one might expect. Perhaps Apple will announce something amazing, but if it doesn't, the downside is far greater than the upside. Think about the sheer size of needed sales by Apple in order to match previous records. What a difficult task to achieve. Now think about what will happen to the stock if earnings disappoint in the future. The downside is far greater than the upside.

    This is a gamble and not worth taking. If you wish to gamble with the odds stacked against you, go to a casino. If you wish to make money in the stock market, apply normal intelligent thought to the process. Accept no-one's advice without applying your own rational thought to the matter. Common sense is a far greater contributor to making money in the stock market, than tips, gossip, and the latest hype from the media.

    There is life cycle to all stocks. When a stock is 'hot', everyone jumps on the bandwagon. Realistic valuations are forgotten and the herd instinct takes over. If your neighbor is buying a stock, it would be most embarrassing to see him next month at a neighborhood party and have to listen to how much money he made on a stock that he mentioned, especially if he can say "I told you to buy it". How embarrassing that would be.

    The problem is, that the guy that gave you the tip, is no more knowledgeable than you are, and unfortunately, that is also the case with most Investment Advisors. They work in an environment of rumor, gossip, hot tips, and competition. They have to perform. If a client calls and asks about a hot stock, that is bad. What is good is that the Investment Advisor calls the client first to mention a hot stock.

    Trends in the stock market are a strange thing. If you catch a trend, that is normally the way to make money. But trends always fade, and the last ones on the bus are the ones left holding the stock that is now falling. The smart money has long since moved on and they sold their holdings to the ones getting on the bus most recently. It is a tricky game and best played by those working in the industry, not by the casual investor listening to neighborhood tips.

    Some Simple Rules
    Use common sense. After you hear the hype, think about it logically.

    Buy because there is a real and recognizable value being increased, not because of past glories

    Buy because the future looks far more promising than the past.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund may have positions in the shares of companies mentioned.

    Aug 01 6:10 AM | Link | Comment!
  • Companies In Risky Jurisdictions Have To Be Compelling,

    Investing in Risky Jurisdictions? Take Note

    A successful investor is one that is always taking risk factors into account. Reducing the number of losers is more important than choosing winners.

    There is enough risk in investing without the added risk of political instability, which is also known as Jurisdiction Risk, so why does the investment community often use the same metrics to value the shares of exploration and production of resources companies regardless of their location in the world? This is so very wrong, yet it continues.

    Frankly, when investing in the stock market one should always discount the value of the stock that one is considering buying if the jurisdiction of the company's operations is not historically safe, stable, and economically strong.

    Why Safety from Political Risk Warrants Little Attention

    1. Analysts and investment houses give little emphasis to investing risk in unsafe jurisdictions because they are in the business of selling product. Investment houses need product to sell. They make their money not from successful investing. No, that would be too logical. They make their money when they sell something to you. It doesn't matter if it is a good investment or a bad investment. When you buy, they earn a commission. It is as simple as that.

    2. Countries want investment dollars and downplay the risk of investing in their country. Two countries - Argentina & Colombia - who have had problems in the past, and until recently were considered "safe", have now hit the press.

    a) Stephen Ferry of The New York Times wrote recently, regarding Colombia, that "Involvement of armed men has been a part of the history of mining in the country. Guerrillas and their paramilitary adversaries use mining to launder money and to extract extortion payments." As the "War on Drugs" makes drug trafficking more dangerous for the drug cartels, they are turning to other activities including kidnapping for ransom and extortion. More and more miners in the country are paying extortion money in order to stay in business. There are now stories of heavily armed men guarding the areas being mined to ensure that they are paid properly by the companies for any activities.

    b) Hernán Scandizzo of Latinamerica Press wrote: "In early May, Argentina's Congress passed the Executive-driven Hydrocarbons Sovereignty law by an overwhelming majority. The entirety of the ruling party and a large part of opposition parties approved the legislation, which expropriated 51 percent of YPF's shares that were held by Spanish oil firm Repsol. It also declared self-sufficiency in hydrocarbons as well as in exploitation, industrialization, transportation and marketing to be "of national public interest and a primary objective of the country," and created the Federal Hydrocarbon Council.

    Portfolio Composition

    Given the above examples of Jurisdiction Risk and Political Risk it is very important to consider such in the composition of one's portfolio. When one considers creating a portfolio, diversification is very important. This is an accepted Investment Truism. If nothing else, the dramatic swings in stock values over the last 4 years should convince doubters. Jurisdiction events that negatively affect a stock's value, have exaggerated the losses of some portfolios.

    Don't Gamble in the Stock Market

    It is realistic that a small portion of a portfolio may be used for stock trading, or other forms of gambling but one should never gamble with an entire portfolio by heavily concentrating in a single sector, or in a single geographical location. Getting wiped out economically in not fun.

    A corollary of the above Investing Truism is that a certain portion of a portfolio should be in juniors. The question is, "Which Juniors?" There are many companies in the exploration and development of natural resources to consider in many parts of the world and some of their stocks may be prone to getting beaten down because of Political and Jurisdictional Risk.

    When things are calm and everyone is optimistic, stocks tend to rise or fall based on the prospective value of the investment.

    When troubles or unrest crop up, or news of government interference crop up, stocks in these jurisdictions face a greater fall than stocks not in those jurisdictions.

    Investing Alternatives

    South American Silver Corporation (TSX:SAC) is a company that is attempting to grow and advance one of the world's larger silver, indium and gallium resources in Bolivia. It is a good company, but it is an example of the above mentioned issues as noted in a recent press release from the company stating that "a small group of people carrying out illegal artisanal mining on exploration concessions owned by South American Silver have been encouraging confrontations between communities and attempting to interfere with work on the project. Groups associated with this illegal artisanal mining activity have joined with activists from outside the local community and have recently held protests in La Paz and are now protesting near the project site."

    As a comparison to the issues of South American Silver, one may look at Quebec in Canada, which is one of the friendliest and most proactive mining jurisdictions in the world. Other Canadian provinces may not match the unique advantages than Quebec offers, but everywhere in Canada is safe, secure, and business friendly (with some grimaces when thinking about British Columbia). Below are some Canadian companies that have great value:

    Mines Virginia Inc (TSX:VGQ): This is a gold producing company located in Quebec with excellent management, a good track record, some good resources and an active exploration and acquisition program.

    Golden Valley Mines (TSX-V: GZZ): This is a beaten up junior with experienced and involved management. They have a wide and diversified portfolio of projects and a management style that lets others spend the money in Joint Ventures. An issue with GZZ is that the market does not seem to recognize the value.

    Altius Minerals Corporation (TSX-V: ALS): This is a company with amazingly good assets. Its portfolio of projects, ownership of interests in other good companies, with real cash in hand now with more in the future, makes this stock a very compelling story.

    Conclusion

    When investing in the stock market ALWAYS discount the value of the stock that you are considering buying if the jurisdiction where the company's operations are taking place is not historically safe, stable, and economically strong.

    Larry Cyna, CA, is CEO and Portfolio Advisor to Cymorfund, a boutique hedge fund. He expresses his insights several times a week on his blog www.cymorfund.com and offers a free newsletter which can be subscribed to.

    Aug 01 6:09 AM | Link | Comment!
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