Anniversary Day for the April Gold Massacre

04-14-2014_GOFO_cleaned (1)

The paradox in investing hinges on the tension between having both the strength of one’s convictions and the intellectual flexibility necessary to admit, relatively quickly, when one is wrong.–Unknown

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.  It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.  Alan Greenspan (1966) http://www.321gold.com/fed/greenspan/1966.html

There are two ways to conquer and enslave a country. One is by the sword. The other is by debt. –John Adams, 1735-1826

When you consider the rate at which public debt is increasing, along with the fact that so many countries around the world instituted their own versions of quantitative easing (i.e. printing money) while increasing debt levels, these conditions are unprecedented. We have found NO HISTORICAL example of so many major countries simultaneously engaged in quantitative easing. Just ten years ago we would not have thought such an economic environment even possible. –Arnold Van Den Berg, Feb. 21, 2014

Gold Massacre

Today’s price decline in gold is probably a gift for the long-term buyer. A year ago on tax day the gold market had a large sell-off with rising demand from China.  big gld

Today, gold gets sold off $35 in the New York open, because demand from China is falling due to weakening money supply, credit stress and ?? What else can we make up?  China is relentlessly accumulating gold.

small GLD

However, 2014 is far different in market structure than 2013. 900 tons have already been removed from gold ETFs and demand to hold gold is greater than cash based on negative GOFO rates–see chart at the top and read here: http://www.tfmetalsreport.com/blog/5663/plunging-gofo-rates

Take a look at the negative rates here: http://www.lbma.org.uk/pricing-and-statistics.  An article discussing gold’s anniversary day: http://www.321gold.com/editorials/thomson_s/thomson_s_041514.html

http://investmentresearchdynamics.com/todays-gold-price-take-down-operation-has-the-smell-of-desperation/

The cause of today’s sell-off is not manipulation, contrary to the howls from goldbugs, but traders getting ahead of possible collateral issues tied to swap agreements:http://www.alhambrapartners.com/2014/04/15/the-inconvenient-marriage-of-yuan-and-gold/  So, gold prices could continue to be pressured–welcome to markets. Which force will be greater?

Valuation

Has anyone has attempted a valuation of Detour Mines (DRGDF) mentioned in this post: http://wp.me/p2OaYY-2m2? I won’t post my valuation until the $500,000 prize is awarded.

My quarterly report (The Horror!) :Gold and Miners_April First Qtr Report

A reader wished to share a report on investing in materials:  Fortnightly_Thoughts_-_14_04_14_-_Materials

Simple Discussion of Austrian Business Cycle Theory

Head or tails

An excellent discussion of how and why ABCT works.  Note that the speaker, David Howden, says the middle stages of production (like building infrastructure and maintaining stores) are declining now.  Excellent!

ThinkerAUDIO http://fetch.noxsolutions.com/tomwoods/audio/woods_03_17_2014_2.mp3    Just copy and past into your browser. Thirty minute audio.

David Howden, economist, articles: http://ideas.repec.org/f/pho322.html and http://mises.org/daily/author/1259/

Global Meltdown?  http://www.caseyresearch.com/lg/meltdown-video  Thoughts?

Michael Price’s Case Study on Hospira HSP) Valuation

Michael-Price

I wait for large discounts; I look for the growth guys selling to the value guys.”

Video Lecture: http://youtu.be/Nph-sDz1EtA on November 9, 2013 in London.

Thanks to London Value Investor Conference, 22nd May, Featuring Mason Hawkins and Don Yacktman,  April 7, 2014 by Tobias Carlisle

SEARCH STRATEGY

Wait for bad news; wait for things (news/events) that can drastically affect the company. Be prepared to act on it. At MFP, we spend all our time determining intrinsic values (“IVs”). Try to lead them. Determine IV beforehand, so you can act quickly when events push prices below IV. The Sell-Side talks about this last quarter. How the hell helpful is that?  I don’t think one or two quarter’s matters or even a year’s worth of earnings reports. Understand what MIGHT HAPPEN not what DID HAPPEN.

Get prepared and wait for these opportunities like HSP,  today (Nov. 8, 2013) at $32. It will be worth $45 in a year.

HSP

Management has said they have fixed problems at the plant, the balance sheet is clean. Management will buy-back stock. The company has $2.00 per share in earnings now and in a year it will have $3 per share. A fifteen multiple (conservative given the business and competing investments) gives you $45.

VALUATION

See:HSP VL

Hospira (HSP) is a manufacturer of generic drugs, a pharmaceutical company. The Federal Drug Administration (FDA) regulates their plants for certain standards of cleanliness and to ensure the bio equivalency of their drugs.

So HSP was earning $3 EPS and was an absolute growth stock that never disappointed Wall Street up until 2010. Earnings were growing at a nice rate.

Then one day, the FDA shuts down one of HSP’s larger plants. The stock opens at $28, down $17 points from $45. So what happens when a company has 200 million outstanding shares and the stock declines 17 points—HSP loses $3.5 billion of market cap. I do not believe it will cost $3.5 billion to fix the plant to FDA’s standards. HSP has 17 plants and the FDA closed only ½ of one plant.

The stock market puts $3.5 billion discount on the bad news from Hospira. The market is OVER-discounting or over extrapolating the bad news (perhaps to ALL of Hospira’s business).

THAT situation—a good company hit with a temporary/fixable problem to go on sale—is what value guys wait for.

HSP was consistently growing, earning $3 EPS and trading at 15 times earnings. It was owned by all the growth guys. So what happens when a stock goes from $45 to $28 or 17 points? The growth guys are selling to the value guys and the value guys, at $28 per share, are saying that the company will be hit now for $1 per share (earning $2.00 per share temporarily) but will be back to $3.00 per share after the company fixes the plant, buys back stock, etc.

It will take two years to get back to earning $3 per share and cost the company about $500 million or a $1 billion to fix the large plant. Meanwhile, the company will earn 50 cents or a $1 less than it would with the plant operating normally ($2.00 to $2.50 per share), but the intrinsic value of the company is about $45 with a 15 multiple on normalized earnings of $3.00 per share that the company should earn once they get religion and run their plants a bit better.

Then the growth guys will come back into the stock and then the value guys sell to the growth guys.

You look for the most down stocks; down 25% to 35%. I look for the growth guys looking to sell the value guys.  Ask yourself if the discount is great enough. WAIT FOR BAD NEWS.

Michael F. Price 13F


% of Portfolio as of 12/31/13
Hess Corporation 7.48%
Intel Corporation 6.2%
FXCM INC. CLASS A COMMON STOCK 3.87%
Alleghany Corp. 3.85%
Boston Scientific Corporation 3.1%

See a more detailed Case Study: Case Study Hospira by Price London 2013

and a prior lecture: M PRICE Columbia Lecture Notes_2009 and G&D Spring 2011

A student should listen carefully to the above lecture and try to also value Hess, another company mentioned in his London speech.

Value AMEX during the Salad Oil Scandal (A Great Blog)http://hurricanecapital.wordpress.com/

Momentum Stocks Mauled, A Lesson in ABCT

RUTNDXDJIASPX-divergences

Momentum Mauled: http://www.acting-man.com/?p=29724#more-29724

When momentum stocks crack, this is what it feels like: http://youtu.be/go9uekKOcKM

When retail investors blindly buy Yelp, Tesla, Concur Technologies, and IBB, I see:

YELP

SPLK

CNQR

A reader asked if ABCT was helpful in timing purchases or sales.  I don’t believe so, but you see where the canaries are beginning to die in the coal mine. If artificially manipulated interest rates–through the Fed’s manipulating the value of the currency (The Fed monetizes the debt through “quantitative easing” which is just currency debasement/printing up fiat currency)–cause mal-investment, then you would expect to see the first cracks in the most over-valued areas of the market first.  Note the collapse of sub-prime in 2007 before the general equity collapse in 2008/09.

Here Ludvig Von Mises(1881 – 1973) explains, “The boom can last only as long as the credit expansion progresses AT AN EVER-ACCELERATED pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.”  Note that the Fed is “tapering” or buying fewer bonds with newly issued fiat currency.   For the boom to continue, the Fed would need to VASTLY INCREASE the monetary madness.

This fractional reserve banking system allows banks to engage in credit creation by issuing notes and bank balances unsupported by any new wealth. Or the Fed simply creates the money out of thin air to purchase Treasury Debt from other individuals and institutions.  Since money substitutes are created out of thin air, the whole process is a risky venture. On its face, such a practice would be fraudulent except that it has a legal basis whereby central banks give commercial banks the legal right to issue “counterfeit” money.

All the interference of free market prices by the Fed to lower interest rates just promotes business activity that would be uneconomic at normalized interest rates (read: a higher cost of capital). Can you be surprised when Tesla, Yelp or Pets.com (in 2000) are the first to plunge?

Fed buying

 A great blog: http://www.marketanthropology.com/2014/04/a-staggered-start_7.html  In the chart above, note the last time in the 1940s when the Fed was monetizing the government’s debt to pay for WWII.

Today:Recent Fed Buying

 While perhaps investors and their money are moving here:
Staggered Start

 

Case Study: Valuing Detour Gold; Industry Map

miners

A gold mine is a hole in the ground with a liar on top–Mark Twain

Industry Map:

Industry Map of the Precious Metals Sector   OK, I give myself a D- for effort and appearance but time has been passing so we need to move forward to a valuation of Detour Mines (DRGDF). Please see where Detour is highlighted in my industry map.

A reader was kind to share a brokerage report on the industry: Merrill_Global_Gold and Precious Metals and Gold-Special-Report-Time-to-Mine-2014 (I personally do not spend much time on jewelry demand, etc. because investment demand, in my opinion, drives the price of gold).   When you hear that China’s demand for gold is higher per year than annual production and the only reason gold is lower is because of manipulation in the “paper” (Comex/LMBA), think for yourself!  Because of the huge stock to flow ratio (190,000 tonnes supply vs. 2,500 annual production) what matters is the NET hoarding (buying) and/or dishoarding (selling) at the current price. Gold doesn’t disappear like wheat, it simply changes hands at a certain/specific price.  When silver hit $50 in 1980, Grannies started melting down their silver tea sets to sell into the market. 

Try to value Detour Mine with today’s gold price give or take $100 to $200 dollars–the range we have been trading through for the past year.  On Monday, I will give a big hint in how you might value Detour, but let’s see if you can spot the obvious, first.  Good luck!  What prize would folks like for their effort?  Money, gold bullion, or a date with my Ex?

Have a Great Weekend!

REMEMBER: It is a long, long way from searching for gold to this:

Gold Bars

James Grant; Corning the Gold Market; the 1960′s Bowling Bubble

James Grant’s speech about the Federal Reservehttp://csinvesting.org/wp-admin/post.php?post=2620&action=edit#

How to corner the gold market: http://www.tavakolistructuredfinance.com/2010/03/corner-gold-market/

The 1960 Bowling Bubble: http://www.theatlantic.com/technology/archive/2014/03/let-the-good-times-roll-the-incredible-bowling-bubble-of-the-1960s/359787/

The Monetary Polaris or Back to the Future (Free Book)

Monetary Polaris Book Cover

220px-Gold_Bars

 

 

 

 

Free Book: Gold, the Monetary Polaris  by Nathan Lewis 

I highly recommend this book to understand our current mess and how we can go back to stable money and a prosperous world for all.  Before dismissing the idea of a gold standard with thoughts of–there is not enough gold; we tried that before and why gold, we now have Bitcoin–learn first how a gold standard works and then financial and monetary history. Your study will pay huge dividends.  Lewis debunks the myth that you need 100% gold-backing for paper money. (See Rothbard’s book, Case for a 100 Percent Gold Dollar)

For a great romp through financial history and the role that gold played: Gold as money Lewis  Another great book.

Lewis writes on page 5, “A gold standard system has a specific purpose: to achieve, as closely as is possible in an imperfect world, the Classical ideal of a currency that is stable in value, neutral, free of government manipulation, precise in its definition, and which can serve as a universal standard of value, in much the manner in which kilograms or meters serve as standards of weights and measures.”

The author shows how and why the Classical principle of stable, gold-based money once made Americans wealthy. Why not now?

Stable money along with clear property rights/rule of law and low taxation/regulatory burdens have provided the means for the greatest human prosperity.

View Nathan Lewis’ articles here: www.newworldeconomics.com

Video Lecture published on Feb 18, 2014: Http://Www.Cato.Org/Events/Gold-Monet…

In this sequel to Gold: the Once and Future Money, Nathan Lewis describes the theoretical basis of gold-standard monetary systems. Lewis argues that the pre-1913 world gold standard system was perhaps the most successful monetary system the world has ever seen, enabling high levels of economic growth. Descriptions of both Britain’s economic rise under the gold standard and the United States’ rise to economic prominence under gold are also discussed.

A Reason to be Bullish; Industry Maps

There is hope for America. We have the lowest energy costs in the world (electricity).  See both sides of boom and gloom.

Industry Maps

Gold Industry Map A reader submitted this–giving him a $2,000 prize (Actually, on Amazon New, the book is offered at $3,500).

Measuring_the_Moat_July2013  See page 12 for an example of an Industry Map of the Airline Industry.

Value Investing Program at Columbia University   If you still want to learn how to do an industry map, go here and pay $80,000 per year for the value investing program.

I will wait and see if any other readers wish to submit a gold industry map, then next week we move onto valuing a company.

A great interview of a resource investor, Rick Rule. http://www.sprottglobal.com/media/46263/rick_rule_q_a_march_18_2014.mp3

 

Have a Great Weekend!

20 Lesson Course in Value Investing

2014-03-18-dollar-decline

The results above of the Fed’s ability to maintain stability of the U.S. Dollar

 

“Studies of everyday reasoning show that the elephant is not an inquisitive client. When people are given difficult questions to think about—for example, whether the minimum wage should be raised—they generally lean one way or the other right away, and then put a call in to reasoning to see whether support for that position is forthcoming. For example, a person whose first instinct is that the minimum wage should be raised looks around for supporting evidence. If she thinks of her Aunt Flo who is working for the minimum wage and can’t support her family on it then yes, that means the minimum wage should be raised. All done. Deanna Kuhn, a cognitive psychologist who has studied such everyday reasoning, found that most people readily offered “pseudoevidence” like the anecdote about Aunt Flo. Most people gave no real evidence for their positions, and most made no effort to look for evidence opposing their initial positions. David Perkins, a Harvard psychologist who has devoted his career to improving reasoning, found the same thing. He says that thinking generally uses the “makes sense” stopping rule. We take a position, look for evidence that supports it, and if we find some evidence—enough so that our position “makes sense”—we stop thinking.” Course on Plato.

Investing Course

I don’t know the quality of these lessons, but beginners can learn from Sanjay Bakshi’s attitude and approach.  Let me know if you find the lessons worthwhile.

http://www.safalniveshak.com/value-investing-sanjay-bakshi-way-2014-part1

Gold Stock Analysis Question

Anyone want to submit an industry map of gold mining company before I do. Best map wins $2,000 prize equivalent (rare investment book).

Government Debt Bubble; Financial History

DEBT

In the Land of the Free, the Government Accountability Office (GAO) recently released its 2013 Financial Report of the United States government.

This is the government’s best attempt at an honest accounting of its books. And even though they use a different accounting system that gives them special advantages, the picture is still remarkably bleak.

We all know that the US government has racked up a substantial debt; as of this morning, total outstanding public debt is $17,546,814,482,078.90. ($17.5 trillion)

But it’s not all about the debt. Debt is not necessarily evil… and it’s important to look at the situation qualitatively in addition to quantitatively.

Let’s drop a few zeros and consider this in terms of personal finance.

Assume you had $1.75 million in total debt. That sounds like a lot to most people.

But if you had $3 million in liquid assets to offset the debt, plus $500,000 in annual income to pay interest, living expenses, and just about any contingency that could come your way, you’d be in great shape.

It would be even better if that $1.75 million in debt financed a lucrative real estate investment which was generating a 25% cash-on-cash return for you.

But that’s not the case for the US government.

Despite the Obama administration touting a budget deficit of “only” $680 billion in 2013, the GAO’s more accurate accounting shows a total government cost of $3.8 trillion on total revenue of $2.8 trillion.

In other words– the administration wasn’t exactly honest with the American people– the deficit was more like $1 trillion, not $680 billion. But it gets worse.

The GAO added up ALL the US government’s assets in 2013. Aircraft carriers. The highway system. Land. Cash and financial assets. The total is $2.97 trillion.

The liabilities, on the other hand, total $19.88 trillion. This includes the official public debt, plus all sorts of IOUs and loan guarantees.

This means the net EQUITY of the US government is minus $16.9 trillion.

Moreover, the US government’s cash position is a mere $206 billion… roughly 1.1% of its public debt. This isn’t enough to cover net interest payments for the next year.

Unlike a savvy investor who borrows cheap money to purchase productive assets, the US government borrows money to pay interest.

Quantitatively AND qualitatively, the data point to an inevitable conclusion: despite all the propaganda, this is NOT a risk free environment.

And understanding these trends and consequences is absolutely critical to your long-term financial survival.   From: www.sovereignman.com (Simon Black)

A solution? Debtors’ Prisons

local-govt-debt1-13

http://www.oftwominds.com/blogmar14/legal-looting3-14.html

 

Total-US-Government-Debt-overlayed-by-Rodrigues-Bubble-Model

A great audio interview of Bob Hoye, a financial historian & money manager, discusses our current situation compared to the past: http://radio.goldseek.com/nuggets/goyette.03.19.14.mp3