How Cheap It Was: The 1920-21 Stock Market


Chapter 19: America on the Bargain Counter (The Forgotten Depression, 2014) (pages: 197 to 200)

On August 24, 1921, the low point of the Dow, many stock prices translated into multiples on 1923 earnings of less than five times. That held true of the steel companies but also of the kind of consumer-products companies that had enjoyed a relatively prosperous depression. Thus, Coca-Cola, at $19 a share—500,000 shares were outstanding, providing a stock market capitalization of all of $9.5 million—was valued at what would prove 1.7 times 1922 earnings and 2.5 times 1923 earnings; the shares provided a dividend yield of 5.26%. Gillette Safety Razor Company, which was selling as many razors and blades in 1921 as it had in 1920, was quoted at a little more than five times forward earnings and yielded 9.23 percent. Radio Corporation of America, not yet revealed as one of the great growth stocks of the 1920s, could be purchased in the market for about as much as the company earned in 1923: $1.50 a share.


As a matter of course on Wall Street, bargains hold no appeal at the bottom of the market. In August 1921, stock prices had been sliding for almost two years. At such junctures, the memory of losing money is usually more vivid than the imagined prospect of making it.

It didn’t take much imagination to recognize the value of F.W. Woolworth Company, the five-and-dime chain merchandiser that was finishing its tenth year as a fused corporate unit. Frank W. Woolworth himself, founder and builder of the gothic corporate headquarters tower at 233 Broadway in lower Manhattan, had died in 1919, but his successors had distinguished themselves in the depression. They had stopped buying any but essential merchandise after the break in whole sale price in June 1920, while customers, happily, had kept right on buying. Now 1921 sales were on track to surpass the total for 1920. While other chain stores had raised prices, Woolworth hewed to the letter of its five-and dime appellation (15; cents was the top ticket west of the Mississippi). And how was this exemplar of deflation-era merchandising—about to close its year without bank debt and with no mis-priced inventory—valued in the stock market on August 24, 1921?  At a price of $105 a share, or 3.7 times imminent 1922 earnings and 3.3 times what would turn out to be 1923 earnings.  The stock yielded 7.62 percent.

James Grant Explains The Forgotten Depression

Sell the Rally (CUBA)


Obama Gives A Green Light on Cuba   Sell the rally!  Because the initial euphoria will set in after a few weeks or months.

current cuban investor

A current investor in Cuba.

Plus, you gotta deal with this: Raul

My experiences in Cuba: A glimpse of Cuba

Go Where the Outlook is Bleakest (RUSSIAN STOCKS)


One of my favorite quotes, I think from “Investing is the only place where when things go on sale, people run out of the store”

  1. Go Where the Outlook is Bleakest of John Templeton’s 16 Rules **
  2. The Risks of Investing in Russian Stocks
  3. Black Swans



Of course, being contrarian requires MUCH PATIENCE. See link (**) above that featured the gold market in my post of Jan. 2014.




An intelligent move: sandstorm-gold-announces a buy-back of shares after a 80% decline in share price.  The opposite of tech stock managements who are currently buying back shares at their all-time highs after a six-year move up in their stock prices)

Ghost Airports or EU Mal-investment Gone Berserk

A smart way to view gold ownership by an expert   This bullion dealer understands that gold is money and NOT an investment.

Financial-crises-during-the-gold-standard-era/ (great blog:

The Horror of Herbalife

You can watch Pershing Square’sa 7:45 video at: and the entire 3-hour video is posted at:






Joel Greenblatt Discusses Portfolio Management


An excellent Wealth Track interview of Joel Greenblatt on his portfolio management process (25 minutes):

At the ten minute mark Joel makes an amazing statement: 97% of the top quartile money managers from the decade of 2000-2010 (encompassing two big sell-offs) were in the bottom half of performance three years out of ten; 79% were in the bottom quartile and a whopping 47% were in the bottom decile (in tenth place!) in three of the ten years.  Talk about fortitude and sticking to your strategy!

Joel Greenblatt’s Magic Formula for those unfamiliar with his approach.

Joel Greenblatt is the founder and a managing partner of Gotham Capital, a hedge fund (also called a private investment partnership). He is also an adjunct professor at the Columbia University Graduate School of Business, and holds a B.S. and an MBA from the Wharton School.  According to Greenblatt’s “The Little Book that Beats the Market” (Wiley, 2005) learning to successfully invest in the stock market is simple. Greenblatt said that he wanted to write a book his children could read and learn from. The main point Greenblatt makes is that investors should buy good companies at bargain prices-businesses with high return on investment that are trading for less than they are worth. This is a classic value investing methodology that Benjamin Graham would have espoused.

Finding Undervalued Stocks

To those familiar with Benjamin Graham, Greenblatt’s approach is obvious: buy stocks at a lower price than their actual value. This assumes you are able to somewhat accurately estimate a company’s actual value based on future earnings potential. Greenblatt alleged that stock prices of a company can experience wild swings even as the value of the company does not change, or changes very little. He views these price fluctuations as opportunities to buy low and sell high.He follows Graham’s “margin of safety” philosophy to allow some room for estimation errors. Graham said that if you think a company is worth $70 and it is selling for $40, buy it. If you are wrong and the fair value is closer to $60 or even $50, you will still be purchasing the stock at a discount.

Finding Well Run Companies

Greenblatt believes that a company with the ability to invest in its business and receive a good return on that investment is usually a “well run” company. He uses the example of a company that can spend $400,000 on a new store and earn $200,000 in the next year. The return on investment will be 50%. He compares this to another company that also spends $400,000 on a new store, but makes only $10,000 in the next year. Its return on the investment is only 2.5%. He would expect you to pick the company with the higher expected return on investment.Companies that can earn a high return on capital (the return a company makes after investing in the business) over time generally have a special advantage that keeps competition from destroying it. This could be name recognition, a new product that is hard to duplicate or even a unique business model.

Magic Formula

EBIT to Enterprise Value

Greenblatt compares a company’s ratio of EBIT (earnings before interest and taxes) to enterprise value against the risk-free rate. Enterprise value is a measure of company value that takes into consideration the company’s capital structure (debt versus equity). You could do a simple earnings yield calculation by dividing net earnings by the market value of the company’s stock, but Greenblatt has a different take. He divides earnings before interest and taxes by a stock’s enterprise value.  A company’s enterprise value represents its economic value, which is the minimum value that would be paid to purchase the company outright. In keeping with value investment strategies, this is similar to book value.Enterprise value is equal to the market value of equity (including preferred stock) plus interest-bearing debt minus excess cash. Greenblatt uses enterprise value instead of just the market value of equity because it takes into account both the market price of equity and the debt used to generate earnings.Companies with debt must pay interest on the debt and eventually pay off the debt. This makes the debt’s true acquisition cost higher. Adding debt to market capitalization lowers the EBIT to enterprise value, making a company less attractive. Excess cash is subtracted from enterprise value because the un-needed cash reduces the overall cost of acquiring a business. If a company is holding $25 million in cash, the effective acquisition cost is reduced by that amount. Excess cash raises EBIT to enterprise value, making the company more attractively priced.EBIT to enterprise value helps to measure the earnings potential of a stock versus its value. If the EBIT-to-enterprise value is greater than the risk-free rate (typically the 10-year U.S. government bond rate is used as a benchmark), Greenblatt believes you may have a good investment opportunity-and the higher the ratio, the better.

Return on Invested CapitalReturn on capital, or return on invested capital (ROIC) is similar to return on equity (the ratio of earnings to outstanding shares) and return on assets (the ratio of earnings to a company’s assets), but Greenblatt makes a few changes. He calculates return on capital by dividing earnings before interest and taxes (EBIT) by tangible capital. Instead of using net income, return on invested capital emphasizes EBIT, also known as pretax operating earnings. Greenblatt uses this number because the focus is on profitability from operations as it relates to the cost of the assets used to produce those profits.Another difference is Greenblatt’s use of tangible capital in place of equity or assets. Debt levels and tax rates vary from company to company, which can cause distortions to both earnings and cash flows. Greenblatt believes tangible capital better captures the actual operating capital used.The equity value Greenblatt uses to calculate return on equity ignores assets financed via debt, and the total assets value used in the return on assets calculation includes intangible assets that may not be tied to the company’s primary operation. According to Greenblatt, the higher the return on capital, the better the investment.

Greenblatt’s Implementation of the Magic Formula 

Greenblatt started his Magic Formula screen with a universe of the 3,500 largest exchange-traded stocks, based on market capitalization (shares outstanding multiplied by share price). He then ranked the stocks from one to 3,500 based on return on capital (the highest return on capital got a ranking of one; the lowest received a rating of 3,500). Next, he ranked the stocks based on their ratio of EBIT to enterprise value, with the highest ratio assigned a rank of one and the lowest assigned a rank of 3,500. Finally, he combined the rankings (if a company ranked 20 for return on capital and 10 for EBIT to enterprise value, the combined ranking was 30).For practical purposes, Greenblatt recommends investing in 20 to 30 stocks by purchasing five to seven every few months. The holding period he advises for each stock is one year. He believes this strategy will allow you to make changes on only a few stocks at a time as opposed to liquidating and repurchasing the entire portfolio at once.


Greenblatt tested his investing strategy over a 17-year period and earned an average annual return of 30.8%. He held 30 stocks at a time and held each stock for one year.In the book, Greenblatt devotes an entire chapter to explaining that the strategy is not a “magic bullet” that always works. During his test period, he found that, on average, five of every 12 months underperformed the market. Looking at full-year periods, once every four years the approach failed to beat the market.Sticking to a strategy that is not working in the short run even if it has a good long-term record can be difficult, Greenblatt says, but he believes you will be better off doing just that. Greenspan supposed that following the latest fad or short-term investment ideas will not yield market-beating results.

Narrowing the Stock Universe

The first step is to remove all over-the-counter stocks (OTC) and ADRs (shares of foreign companies trading on U.S. exchanges). Greenblatt’s initial database of stocks included only exchange-traded stocks. Next, all stocks in the financial and utility sectors are excluded due to their unique financial structures.

Market Capitalization

While Greenblatt’s original study included stocks with market capitalizations of $50 million or greater, he subsequently modified the minimum value for market capitalization between $50 million and $5 billion, depending upon on liquidity needs and risk aversion.

Return on Invested Capital

Return on capital measures the return a company achieves after investing in the business; the higher the return on capital, the better the investment.Tangible capital is defined as accounts receivable plus inventory plus cash minus accounts payable. This figure is based on the fact that a company needs to fund its receivables and inventory but does not have a cash outlay for accounts payable. For our screen, we require a return on invested capital greater than 25%, as specified in Greenblatt’s alternative screening suggestions.

EBIT to Enterprise Value

The ratio of EBIT to enterprise value helps to measure the earnings potential of a stock versus its value. To calculate, Greenblatt divides EBIT by enterprise value. For this screen, we use the EBIT-to-enterprise-value ratio to narrow the field to 30 stocks by choosing those with the highest ratio.


Like any stock screening strategy, blindly buying and selling stocks is never a good idea. Developing and implementing disciplined buy, sell and hold strategies is a better option. Greenblatt’s Magic Formula is not revolutionary, but does provide a new twist on the old value investing ideas. While his past record is impressive, it will be interesting to see how the screen holds up during this period of market turmoil and its aftermath.

Joel Greenblatt’s Magic Formula Criteria

  • Companies in the financial and utilities sectors are excluded
  • Over the counter stocks are eliminated
  • Non-US companies are excluded
  • Market capitalization is greater than $50 million
  • Return on capital is greater than 25%
  • Return on capital is found by dividing earnings before interest and taxes (EBIT) by tangible capital
  • EBIT = Pretax income + interest expense
  • Tangible capital = accounts receivable + inventory + cash – accounts payable + net fixed assets
  • Pick the 30 stocks with the highest earnings yield
  • Earnings yield = EBIT/ Enterprise value
  • Enterprise value = market value of equity (including preferred stock) + interest-bearing debt – excess cash

A Reader’s Question: What Determines the Price of Gold?

Gold Picture

If those who believe in the value of gold r “gold bugs”, believers in value of financial assets must be “paper bugs” – “bond bugs”, “stock bugs”..

Simon Mikhailovich @S_Mikhailovich · Nov 14

Money is a medium of exchange. That means money is the thing that people ask for in return when they supply goods and services to the market. You often see money being defined as something having three properties: medium of exchange, store of value and unit of account. But my view – and this is in agreement with Austrian school economists Menger and von Mises – is that store of value and unit of account are not the definitional properties, they are derivative properties that money has because of its function as a medium of exchange. There can be other goods in the economy that function as a store value but not as a medium of exchange, like property for example. And I would include gold in that category. It is a store of value, maybe superior to the performance of money proper in that respect.–Robert Blumen

The goal of this post is to understand how prices are set for goods that are not consumed like gold or stock certificates.   This is a follow-up to a prior post on Goldbugs

Many analysts covering the gold market lack a basic understanding of reservation demand.  Most gold market research is based on the premise that the supply side of the market can be characterized by the quantity supplied and demand side by the quantity demanded. The specific cause and effect relationship between these two variables and price is often unstated; and perhaps rightfully so: is it not obvious that a greater quantity demanded is the cause of a higher price, and that a greater quantity supplied is responsible for a lower price?


Market forecasts based on quantities of gold are meaningless. “Gold demand was up by 15% in 2012.” are true but only if they are understood in a misleading sense. The supply and demand sides of the market consist of supply and demand schedules, not quantities. A price forecast based on quantities is a non sequitur because there is no causal connection from the quantities to the price. This error has side-tracked the majority of analysts into an obsessive focus on quantities while ignoring the actual drivers of the price. 

Read: Misunderstanding-Gold-Demand (1) and for more examplesWhat determines the price of gold  Then to reinforce the concepts, Rothbard shows in detail how supply and demand schedules are derived from individual preference rankings in Man, Economy , and State starting with his discussion in Chapter 2, sections 4-5 and Chapter 2, Section 8: Stock and Total Demand to Hold, and then later as applied to money in Chapter 11 (Money and its Purchasing Power) Sections 2-5.  Link here:

If you grasp the readings above, you will have a greater understanding than many professional gold analysts. I am willing to take bets on this. Takers?

Then you will not waste your time reading the nonsensical: Global-gold-demand-will-overwhelm-the-manipulators Nathan Mcdonald-sprott-money-news

However, even if you agree/disagree with an analyst’s conclusion, you will know whether the premises are logical if not yet determined to be correct.

Revisiting the Goldman Sachs $1050oz gold forecast/

You might even be able to understand where a forecaster went wrong in their analysis: Eric Sprott sees gold at new high before year-end/

Debt grew and central banks printed so why did the price decline in gold from 2011 to today (Nov. 25, 2014)?

Gold wasn’t always in the dumps.  It rose right along with equities, indeed outperformed equities, from the 2009 Great Recession bottom – when central banks the world over first began implementing their unconventional monetary policies – straight through to its September 2011 top.  The reason we think it did is quite simple.  Coming out of the Great Recession, central bank credibility – their ability to “pull us out” of the Recession – was being severely questioned by investors. Thus, a good portion of investor money found its way into gold. That changed in 2011. Underwritten by these same central bank easy money policies, the as yet unresolved malinvestments of the Housing Bubble turn Credit Bust turn Great Recession, which were in the process of a healthy liquidation, were short circuited, while new, yet to be revealed malinvestments (we think the largest being anything in and around financial engineering) were starting to bear fruit.  The belief took hold that the heroic policies of these central banks were finally working, finally restoring long-term vitality to the economy. Gold then sunk while equities marched ever higher.

So here we are…

Right for the wrong reasons


November 26, 2014

It is not uncommon for people who make predictions about the financial markets to be right for the wrong reasons, meaning that even though their reasoning turned out to be wrong the market ended up doing roughly what was predicted. Here are two examples that explain what I’m talking about.

The first example involves the popular forecast, during 1995-2000, that the US stock market would continue to be propelled upward by a technology-driven productivity miracle. This reasoning was used by high-profile analysts such as Abby Joseph Cohen to explain why stratospheric valuations would go even higher. As long as the bull market remained intact these analysts were generally held in high regard, but their reasoning was terribly flawed.

Anyone with a basic understanding of good economic theory knows that increasing productivity causes prices to fall, not rise. Furthermore, while it is certainly possible for some individual companies to justifiably obtain higher market valuations by becoming more productive than their competitors, a general increase in productivity will not cause a sustained, economy-wide increase in corporate profitability and will not justify higher valuations for most equities. To put it another way, the main beneficiaries of higher productivity are consumers, not stock speculators and investors in equity-index funds. Consequently, there was never a possibility that rising productivity was behind the 1995-2000 surge in the US stock market. “Rising productivity” was just a story that sounded good to the masses while the market was going up.

Like all bull markets in major asset classes, the bull market in US equities that ended in 2000 was driven by the expansions of money and credit. After the pace of monetary expansion slowed, the bull market naturally collapsed.

The second example involves the forecast, in 2011-2012, that the gold price was destined to fall a long way due to deflation. Regardless of whether your preferred definitions of inflation and deflation revolve around money supply, credit supply, asset prices or consumer prices, there has been no deflation and plenty of inflation over the past 2-3 years, so advocates of the “gold is going to lose a lot of value due to deflation” forecast could not have been more wrong in their reasoning. However, the gold market has performed as predicted!

Rather than being a victim of deflation, gold was a victim of the reality that over the past three years a bout of rampant monetary inflation led to a huge rally in the broad stock market, which, in turn, boosted economic confidence. Ironically, had the reasoning of the “gold to fall due to deflation” group been close to the mark, the gold price would probably have experienced nothing more than a 12-18 month consolidation following its September-2011 peak. This is not because gold benefits from deflation (it doesn’t), but because the combination of economic weakness, declining economic confidence and the actions taken by central banks to address the economic weakness would have elevated the investment demand for gold.

I’ve noticed that fundamentals-based analysis is rarely questioned if it matches the price action and, by the same token, is often greeted with skepticism if it is in conflict with a well-established price trend. During a raging bull market even the silliest bullish analyses tend to be viewed as credible, and after a bear market has become ‘long in the tooth’ even a completely illogical or irrelevant piece of analysis will tend to be viewed as smart, or at least worthy of serious consideration, if its conclusion is bearish. However, from a practical investing perspective, fundamental analysis can be most useful when its conclusions are at odds with the current price trend. The reason is that the greatest opportunities for profit in the world of investing and long-term speculation are created by divergences between value and price.

Spend the time to understand how prices are set/determined and you will avoid faulty analysis and think better for yourself.


Valuing Growth


 Valuing growth is an art.  The readings below will help you think about how to assess growth in your valuation.

Greenwald_2005_Inv_Process_Pres_Gabelli in London This lecture places valuing growth in the overall context of value investing.

Greenwald-Class-Notes-5-Liz-Claiborne-Valuing-Growth-2  See pages 10 through 14 for a discussion on valuing growth.

Growth Stocks and the Petersburg Paradox

St Petersburg Paradox and Tech Stocks 2000


A Method of Valuing Growth Stocks

Newer Methods for Valuing Growth Stocks_1962_Security Analysis  Ben Graham tackles a tough subject.

Comments on the 15 Growth Illusion

When Growth Stalls

The Fallacy of Goldbugs or Understanding the Law of Supply and Demand

Gold Bugs

F. A. Hayek: “The curious task of economics is to demonstrate to men how little they really know about they imagine they can design.”


As a preview to understand how the law of demand and supply works see Trading Places in the Pits  Hint: Are there more buyers than sellers?

Thus you can explain the fallacy of Eric Sprott’s sentiment that demand is overwhelming supply:

We see almost 60 tons a week being delivered on the Shanghai Gold Exchange. Well, you start annualizing 60 tons a week you’re talking 3,000 tons a year now. We saw 94 tons of gold go into India in September. We saw the Russian Central Bank buy 37 tons of gold in September. I mean I could come up with numbers that might suggest that we’ve got 400 tons a week of demand. And we only got 230 tons a week of mine supply. And I’ve only gotten to three data points. I haven’t even gone to the rest of the world.

We’ve now created a situation unfortunately in the market where between high frequency trading and algorithms and interference by the planers they can make things happen that looks like everything is OK. And it’s the “OK” part where I think we can really relate to gold not being allowed to go up. Because that’s the canary in the coal mine. If gold was above $2,000 we’d all be wondering: What the hell is going on here?  And so they haven’t allowed it to happen.

But by suppressing the price – and one of the great things about a price of $1,100/oz is that you can buy a lot of gold at $1,100 versus $1,900 — you can buy almost 50%-60% more gold than you could three years ago with the same amount of money. And you can buy 3x the silver. With the same amount of money!  35 minute podcast.

Of course, demand must equal supply or supply equal demand at a CLEARING PRICE.  Go to pages 137 to 138 to understand Reservation Demand (critical in understanding a high stock to flow good like gold) Man Economy and State by Rothbard

If you don’t understand price moves against you, then scream manipulation on price declines. But where was the “manipulation” from 2000 to 2011 while gold rose in price vs. the U.S. Dollar by 1,600 dollars!  You are a fool either way. You trade in a rigged market or you complain that you are buying a good that is artificially depressed. You are subsidized to buy gold at “below” market (read manipulated) prices yet you complain.

The amount that a seller will withhold on the market is termed their reservation demand. This is not, like the demand for a a good in exchange, this is a demand to hold stock.  Thus, the concept of a “demand to hold a stock of goods” will always include both demand factors, it will include the demand for the good in exchange by nonpossessors, plus the demand to hold the stock by the possessors.

I strongly suggest that if you wish to improve as an investor that you read Rothbard’s book along with the free study guide.  The implication that demand is overwhelming supply with a falling price is absurd!  Yet, Goldbugs howl incessantly that the price is being suppressed since demand is “overwhelming supply.”  Nonsense, everything equals AT A PRICE.

Did you view the video of trading places above? Where was Louis’ Reservation Demand? SELL 200 APRIL ORANGE JUICE AT 142!

Most analysts do not understand the law of supply and demand

Does the Monetary Base Drive the Gold Price?

ECB-could-buy-gold-to-revive-economy.html  Will that work?

Low UAE gold prices set off buying surge  Does that imply rising prices?



Gold wasn’t always in the dumps.  It rose right along with equities, indeed outperformed equities, from the 2009 Great Recession bottom – when central banks the world over first began implementing their unconventional monetary policies – straight through to its September 2011 top.  The reason we think it did is quite simple.  Coming out of the Great Recession, central bank credibility – their ability to “pull us out” of the Recession – was being severely questioned by investors. Thus, a good portion of investor money found its way into gold. That changed in 2011. Underwritten by these same central bank easy money policies, the as yet unresolved malinvestments of the Housing Bubble turn Credit Bust turn Great Recession, which were in the process of a healthy liquidation, were short circuited, while new, yet to be revealed malinvestments (we think the largest being anything in and around financial engineering) were starting to bear fruit.  The belief took hold that the heroic policies of these central banks were finally working, finally restoring long term vitality to the economy. Gold then sunk while equities marched ever higher. So here we are…

Gold Bars

Down and Dirty on CRR (Process of Search and Quick “Valuation”)


Prior post on Carbo Ceramics (CRR)

CRR 10Q Sept 30 2014

My process is to weed out companies to look at based on their financial characteristics. In an ideal world, you would not be able to tell what the market price of the shares are trading at when you scan the Value-Line for the company’s financial history.

It is irrelevant where the price has been–either vastly higher or lower–just what your sense of the value is based on the FINANCIAL characteristics of the business.  I am not implying that my way should be YOUR way. Find what works for you in your search/valuation process.

My “Down and Dirty” on CRR Down and Dirty on CRR on November 14


An OK business with a clean balance sheet and incentivized management (14.5% ownership) and no dilution in a highly cyclical business. Not a franchise but an asset based business which means no value for growth.

I have rock bottom tangible book value of $32—a probable ugly case scenario if oil keeps falling to ?? Who knows.

Then I have reproduction value of about $43 per share which coincides with the lowest 1.3 times book value the stock has traded over the past 15 years. $45.

Industry multiples of EV/EBITDA (8.6 xs) place the value at $60 to $65

Median to high price-to-book value is $80 to $170.   Throw out the past high price. So……………..

Hard rock is $32 TBV;  Replacement or reproduction value $43-45;  Industry multiples $60 to $65; Cash flow multiple 12 to 13 times = $55 to $65.

Median price to book value past 15 years is $82, round down to $80   

$32 on the extreme low side to $80.   

So before looking at annual report or competitors to refine my numbers, I have an idea that this business might be worth buying at or under replacement value of $45. A plan for me based on my psychology and obtaining a price under replacement value might be to allocate a percentage of capital to buy this company starting at $45 down to $30. Perhaps three scaled buy orders on descending price?  Will I have the guts to keep buying to my allocation when and if oil goes to $60 and the S&P is down 600 points in a day? Yes, place GTC orders after final work is done.

Head in sand

Worth going through the proxy and 10-K for any problems.

Time: 15 minutes.


CARBO CERAMICS INC: A short thesis back when CRR traded above $150.


So What is it worth? Carbo Ceramics (CRR)


 The consensus (bull case): The power of psychology is overwhelming, and investor sentiment indicates that asset prices are being driven higher by QE and Zirp, that the Fed can be trusted, and that we should not worry too much about the unintended consequences, because the Fed will be able to follow a path to normalization and a soft landing. In any event, America is now a safe haven and always will be a safe haven. Moreover, goes the case, we may be at the sweet spot of the economic cycle. It has taken a long time to get here, but finally we are getting sustainable growth, and we can expect more of the same, Interest rates are completely under control, in fact, long-term rates are in a secular decline, which is not nearly at its bottom. Inflation is virtually impossible, and we really ought to be worrying about deflation instead. If we focus on getting inflation higher, then growth will follow. The currency is also under control, goes this line of thinking, In fact, what could the dollar fall against? The competition is in much worse shape. Banks are in far better financial condition than in 2008 and will gradually bleed off any remaining toxic assets that they own. If anything starts to go wrong, the government will step in to fix it. Pushing investors out on the risk curve in search of yield is a good idea and a clever way to encourage them to do what they should be doing on their own (i.e., taking risks to help the ecobnomy grow).  We should not worry, because things will be okay. We can even trust the representative branches of government, because elected officials will not have to do much that is unplatable or challending–the central bankers have it all covered. Above all, trust the Fed.  –Paul Singer

Do the Lessons of History Apply?

So what’s it worth?

Carbo VL

Carbo 2013

Carbo Presentation Sept 2014

Please do a “down and dirty” valuation giving your assumptions within twenty minutes.  I will post mine tomorrow!



PRIZE: A Date with my EX! for best valuation!

Buy Hatred and Fear: Kinross (Russian assets for practically free)


Gold Sentiment (CEF)

The above shows the extreme negativity in the gold market. You can buy the Canadian Closed-End Fund (CEF) at a 10% to 11% discount to gold (60% of assets) and silver (40%) approximately.  Gold and silver have no counter-party risk. Such is the world of closed-end funds.  Note the 20% premiums during bull runs!


The absurdity of gold stock valuations is illustrated by Kinross. Consistently improving operations with $5.30 book value and with no value attributed to their Russian mine. Net-debt-to-EBITDA of 1.28 with their debt covenants being 3.5xs to 1. Cash of $879 million. 1.14 billion outstanding shares. 27 cents of operating cash flow this quarter share, up 22%. A 2.6 to 2.7 million gold equivalent oz. producer. $698 cash costs and $919 All-in Sustaining Cash Cost.  They can survive at $1,000. Below $1,000 operations would be reduced.  Of course, Kinross represents a trifecta of hatred: poor past acquisitions (declining stock price), the gold market, and some Russian assets.

Basically, the market is heavily discounting their assets because the market is assuming sub-$1,000 gold. No value given to their Russian mine.


110514 kinross reports 2014 third quarter results


You should listen to the  Kinross conference call

Mining is a crappy business

Miners at or near ALL-TIME (past 90 years) low of stock price to gold price. Part of the reason for the decoupling is the time to find new deposits and place them into production has gone from five to six years out to ten years. Mining costs hve not been kept in check until recently. Past mining managements made poor capital allocation decisions. A mine is a depleting asset! But the market has had four years to replace managements and adjust.


Current sentiment in the gold miners ZERO (0). The recommended allocation is Zero. Contrarians take note but you better have a strong stomach in the near-term.


But what you need to focus on is not so much the nominal price but the REAL price of gold.  15% or more of the costs of a mine are energy based.

gold to oil

That said, do your own thinking and use this as a case study of where to look for negative sentiment.   The question is…..are you being paid enough for the risks?

Can gold go to $800? Sure and Kinross and other miners will be closing down many of their operations or even going bankrupt. But consider what $800 gold would mean in a world choking on debt! Perhaps stocks might not hold up in a deflationary bust!  It is not just the gold price but the real gold price that matters to miners.  However, nominal gold prices in US dollars matter to miners that have debt denominated in US dollars.

Just never buy one miner because of the risks to any one company. Use the EXTREME price volatility to your advantage. Don’t buy the stock all at once. If you need to diversify and have limited capital, then SGDM might be a choice–IF you think owning miners is the lowest cost way to participate in either a deflationary bust or inflationary response by the Fed.  Otherwise, CEF (above) might be a cheap form of insurance to monetary mayhem.

Miners in a capitulation phase–crashing on huge volume–after four year price decline. Folks have had enough. Money managers in forced liquidation?


Some history

Just remember that you are trying to buy assets at extremely low prices since this is not a franchise. A mine is a DEPLETING asset.   How much money goes into a mine versus what is sold discounted by your cost of capital.

Obviously, with a cyclical asset you will find losses and the widest spread between price and financial operating metrics because a trough occurs in a bear market of declining product prices.  The reverse occurs at the top of a cycle–huge revenues and profits during the boom. So you MUST sell–this is a “burning” match not a franchise. Burn this into your brain.

What could go wrong with financial assets?

Paul Singer grits his teeth while holding gold during a monetary delusion

Paul Singer on “illogical” market trends:

I disagree with Mr. Singer because the bubble in confidence in central planning by the Fed means extreme trends.   For example, massive printing of money will cause LOWER gold prices because the market sees perpetual support of financial assets. Why own gold when equities will NEVER drop more than 10% in our lifetimes.  Thus, massive monetary intervention is bearish for gold. Of course, house prices could NEVER fall nation-wide and the Internet Bubble ushered in a new normal.  Timing is impossible. 

THIS IS WHAT IT FEELS LIKE TO OWN MINERS THIS PAST MONTH–Please no women or children to click on this link!

Gold, Inflation Expectations and Economic Confidence

Wednesday November 05, 2014 11:29

Below is an excerpt from a commentary originally posted at on 2nd November 2014. Excerpts from our newsletters and other comments on the markets can be read at our blog: 

As a result of what happened during just one of the past twenty decades (the 1970s), most people now believe that a large rise in “price inflation” or inflation expectations is needed to bring about a major rally in the gold price. This impression of gold is so ingrained that it has persisted even though the US$ gold price managed to rise by 560% during 2001-2011 in parallel with only small increases in “price inflation” (based on the CPI) and inflation expectations. The reality is that gold tends to perform very well during periods of declining confidence in the financial system, the economy and/or the official money, regardless of whether the decline in confidence is based on expectations of higher “inflation” or something else entirely.

Inflation expectations are certainly part of the gold story, but only to the extent that they affect the real interest rate. For example, a 2% rise in inflation expectations would only result in a more bullish backdrop for gold if it were accompanied by a rise of less than 2% in the nominal interest rate. For another example, a 1% decline in inflation expectations would not result in a more bearish backdrop for gold if it were accompanied by a decline of more than 1% in the nominal interest rate.

Other parts of the gold story include indicators of economic confidence and financial-market liquidity, such as credit spreads and the yield curve.

That large rises in the gold price are NOT primarily driven by increasing fear of “inflation” is evidenced by the fact that the large multi-year gold rallies of 2001-2006 and 2008-2011 began amidst FALLING inflation expectations. These rallies were set in motion by substantial stock market declines and plummeting confidence in central banks, commercial banks and the economy’s prospects. Even during the 1970s, the period when the gold price famously rocketed upward in parallel with increasing fear of “inflation”, the gold rally was mostly about declining real interest rates and declining confidence in both monetary and fiscal governance. After all, if the official plan to address a “price inflation” problem involves fixing prices and distributing “Whip Inflation Now” buttons, and at the same time the central bank and the government are experimenting with Keynesian demand-boosting strategies, then there’s only one way for economic confidence to go, and that’s down.

Since mid-2013 there have been a few multi-month periods when it appeared as if economic confidence was turning down, but on each occasion the downturn wasn’t sustained. This is due in no small part to the seemingly unstoppable advance in the stock market. In the minds of many people the stock market and the economy are linked, with a rising stock market supposedly being a sign of future economic strength. This line of thinking is misguided, but regardless of whether it is right or wrong the perception is having a substantial effect on the gold market.

For now, the economic confidence engendered to a large extent by the rising stock market is putting irresistible downward pressure on the gold price.

Steve Saville