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Jim Fickett
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Jim Fickett has a PhD in mathematics and has managed specialized information for decision makers for 30 years. His primary effort now is on a financial information site,, which has in-depth reference information as well as current commentary.
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  • Uranium is cheap, but maybe not for long
    Uranium is not on very many hot topic lists right now.  But it is cheap, and there are good reasons to think it will not stay cheap too much longer.

    The simple case for uranium has often been presented.  Do a little googling, and you will quickly see that  (1) demand is going to increase considerably, especially in China and India, (2) mine production is insufficient even to meet current demand, and will not meet projected demand any time soon.

    That is all true, but to really make the case for uranium, you have to look a little more closely at the complex matter of secondary supply -- most importantly, military material.  The total military stockpiles of the US and Russia would supply the world's nuclear reactors for about 12 years at current usage rates, and no one knows how much of that supply might make it to the market.  The current Megatons to Megawatts program, under which it was agreed to convert uranium equivalent to about 20,000 warheads to nuclear fuel, ends in 2013.  But Obama has pledged to work towards a nuclear-free future.  How much more military uranium might make it to market?

    No one knows, and there is some investment risk in that.  But consider the following:
    So there is some uncertainty from military supplies, but it is unlikely they will greatly distort the market (quite possibly disastrous for the planet but, if we survive, good for uranium investors).

    It comes down, then, to the economics of mining.  And evidence has been steadily accumulating that the price needs to be higher if mining is going to meet demand.  According to a Bloomberg article last week,
    “The uranium bull market of 2006 and 2007 stimulated the development of new supply, but we do not think it is enough,” Schatzker [Adam Schatzker, a metals analyst at RBC in Toronto] wrote in a report. “The prevailing uranium price is too low to stimulate sufficient supply to cover future reactor requirements.”
    Now might be a very good time to seriously consider investing, for three reasons:
    1. Although the uranium price drifted lower for a long time after the peak of 2007, it seems to have bottomed, and the price has been in an uptrend for about two months
    2. The main point of that Bloomberg article was that China is stocking up
    3. The latest edition of the Red Book, the ultimate authority on supply and demand in this market, has just been published, and it is bullish on price
    The web site publishing the Red Book has been experiencing difficulties, but the third point above is clear from the press release and from an article foreshadowing the publication.

    From the press release:
    ... the high-cost category (<USD 260/kgU or <USD 100/lbU3O8), reintroduced for the first time since the 1980s. This high-cost category was used in the 2009 edition in response to the generally increased market prices for uranium in recent years, despite the decline since mid-2007, expectations of increasing demand as new nuclear power plants are being planned and built, and increased mining costs. Although total identified resources have increased overall, there has been a significant reduction in lower-cost resources owing to increased mining costs. (emphasis added)
    And from a recent article in the Nuclear Energy Agency newsletter:
    This article is based on the latest edition of the “RedBook”, Uranium 2009: Resources, Production and Demand, which presents the results of the most recent biennial review of world uranium market fundamentals and a statistical profile of the world uranium industry as of 1 January 2009. …

    Should demand increase as projected growth in nuclear power is realised, uranium prices would strengthen allowing mine production capacity to be increased even further. However, sufficiently high market prices will be required to fund such mine development activities, especially in light of rising costs of production. (emphasis added)
    I don't think everyone is going to be looking the other way much longer.

    There are many ways to invest in uranium.  I take the most direct route, holding shares in the Uranium Participation Corp. (U.TO or URPTF.PK).  This is basically a warehouse full of uranium oxide, managed by Denison Mines (NYSEMKT:DNN), one of the big miners.  Holding the commodity itself avoids any issue of cost from rolling futures contracts.  Of course holding miners is also interesting, and if you search for uranium on Seeking Alpha, you will find a good deal of interesting information on miners.

    Tags: URPTF, DNN, uranium, energy
    Jul 21 3:25 AM | Link | Comment!
  • Junk is junkier than it used to be, and sentiment could easily turn
    Most recent commentary on the high-yield market compares recent spreads (5.8 percentage points on 29 Mar, for the Merrill index) to historical spreads (median for the last 13 years about one point narrower).

    But junk bonds today are not the same as those in the past.  And the ratings distribution has changed significantly for the worse.  Have a look at this chart from the IMF:

    CCC fraction of junk

    The fraction of CCC or lower-rated bonds approximately doubled from early 2007 to early 2009.  And according to a recent report from Fitch, the fraction at the end of 2009 was still 27%. 

    So what?  Well, since junk bonds have lower ratings on average today, they should have wider spreads than historically.  In other words, one should not expect spreads to narrow further unless one thinks the economy today is in better shape than average.  With unemployment at 9.7% and millions of foreclosures still to come, that would require heroic optimism.

    In fact, though many articles in the news quote optimistic projections from the ratings agencies on defaults dropping, Fitch, at least, sounds a strong note of caution:  "Fitch believes significant risks linger and the default situation could turn ugly again if economic and market conditions slip back into recession or into a positive but anemic growth environment. ... If, in the aftermath of the unprecedented events of the past two years, the U.S. economy continues to be weighed down by more conservative consumer and corporate spending patterns, Fitch believes the high yield market may be faced with an environment of consistently elevated default rates."

    Currently there is a virtuous circle, with flows into high-yield funds leading to an environment where lower-rated companies can easily roll over debt and postpone any problems.  But what will happen to sentiment, and to this virtuous circle, if the junk default rate rises again, or even if defaults began to rise in, for example, US municipals?  The latter is certainly not hard to imagine, considering the current state of state and local budgets.

    I am not trying to predict whether junk bond prices will be higher or lower next month.  The virtuous circle could certainly continue for some time.  What I am saying is that a rather quick reversal is not hard to imagine.  This is a dangerous market to be in.

    (See also Avi Morris' more general recent comments.)

    Disclosure: No positions
    Mar 29 10:37 PM | Link | Comment!
  • The ultimate success rate of HAMP may be only 2%
    A rough calculation using numbers supplied by the Treasury and the Federal Housing Finance Agency suggests HAMP, currently the cornerstone of the government foreclosure prevention programs, is likely to provide successful modifications for only about 2% of seriously delinquent loans.

    The Home Affordable Modification Program, HAMP, is aimed mainly at mortgages delinquent 60 or more days.  In its latest progress report Treasury, which administers the program, estimated that there were 5.6 million mortgages delinquent 60+ days.

    Not everyone qualifies -- not all servicers participate; only owner-occupied homes are eligible; jumbo non-conforming are not covered; borrowers must be in financial distress, etc.  Treasury estimated that 1.7 million out of the 5.6 million loans were eligible.

    The trial period, which has varied to some extent, is meant to be three months.  If we take the number of permanent modifications completed as of the end of January, 117,302, and divide by the cumulative number of trial modifications as of three months earlier, 708,120, we get a completion rate of 17%.  This particular three month period was one of Treasury -- shall we say -- very strongly encouraging the banks, so the completion rate is unlikely to get much better than this.

    If we assume, optimistically, that all 1.7 million of the mortgages eligible in Jan result in trial modifications eventually, and apply the 17% completion rate, this would suggest that there might be eventually 289,000 permanent modifications from this cohort.

    According to the most recent Federal Housing Finance Agency Foreclosure Prevention and Refinance Report, the percentage of loans remaining current 6 months after modification was 44%.  So perhaps 44% of the 289,000, or 127,000 loans, might avoid re-default.

    127,000 is 2% of the 5.6 million seriously delinquent loans. 

    All these number will continue to evolve.  However this analysis of the current cohort of seriously delinquent loans strongly suggests that large-scale mortgage modification is very unlikely to significantly reduce the eventual number of forced sales.

    Probably the main reasons for low success rates are (1) on the part of lenders, the conflict between the interests of first- and second-lien holders, and (2) on the part of borrowers, that many who have lost most or all of their equity would rather get out than pay off the mortgage, even under easier terms.

    (For full details and source material see this reference page on foreclosure mitiation efforts.)

    Disclosure: No positions
    Feb 22 12:43 AM | Link | Comment!
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