SEARCH STRATEGY: Announced Cash Liquidation

Sunridge Gold Corp. (SGC:TSX.V; SGCNF:OTCQX), which has a project in Eritrea that is getting sold to a Chinese entity. On a per share basis a shareholder will get about $0.35/share in cash or more payable in two tranches. It was trading at about $0.28/0.29 today in early February, and that offers about 30% upside.  The deal has been voted on and accepted. See terms announced here:

http://www.marketwatch.com/story/sunridge-receives-shareholder-and-warrantholder-approval-to-sell-sunridges-60-interest-in-asmara-mining-share-company-and-distribute-proceeds-2016-01-22?siteid=bigcharts&dist=bigcharts

The above is only for individual special situation investors. A miner in Eritrea!

Analyst Quiz is Gold Overvalued Based on CPI–Go SHORT?

gold vs cpi

You just got promoted to advise Ackman; he is keen to improve returns.  He slaps that chart on your desk and then asks if shorting gold would be a good idea? Why or why not based on this brilliant analysis?  In fact, with “Deflation” fears rampant, Ackman feels gold could drop to $650.

http://www.marketwatch.com/story/gold-has-no-business-being-this-expensive-2016-02-03?siteid=rss&rss=1

Also, you read: The Golden Dilemma where two PhDs project a $350 price target.  If experts such as these predict lower prices, then should you join the pack?

Also, you find a chart that supports what your boss thinks. Yahoo!

1-Gold-vs-commodities

Unfortunately, some nut-job sends you this link: The Positive theory of gold and the The ultimate extinguisher of debt

You have until this afternoon to report back.  This tests common sense and critical thinking skills. Good luck!

A prize to be awarded.

Don’t Believe the Hype

“First, never buy a bank at twice its book value, Number two, don’t trust any bank with a superior earnings record, Number three, you are buying a pig in a poke because the assets are inherenetly unanalysable… ”  “Then there are the contra rules, ” He went on, “such as the inability to earn exponential rates of return except through recklesness or fruad.” Also,” said Tisch…”a really smart person says to himself at a certain point that your pricing is set by the stupidest person in the market,” It is the marginal lender who makes the marginal loan at a bargain-basement rate, and it is impossible to compete with that optimist.

James Grant “Banking with Tisch” (October 6, 1986)

Theranos misled me

And that brings us to the lunatic valuation of the FANGs (Facebook, Amazon, Netflix and Google), which was also on display again this week. To wit, 100X+ PE multiples are always and everywhere a deformed artifact of central bank driven Bubble Finance, not the emission of an honest capital market.

The fact is, the greatest technology-based businesses of modern times accomplished its dramatic growth spurt in just over 20 quarters between 2011 and 2015. That was after the i-Phone incepted and the i-Pad worked up a serious head of steam.

Now Apple is pancaking or worse, and it is hard to believe that gimmick products like Apple Watch or Oculus can fill the hole from the fast fading i-Pad and the stalling i-Phone. No harm done, of course, and its entirely possible the APPL will have another modest growth run.

But here’s the thing. Apple essentially proves you can’t capitalize anything at 100X except in extremely rare cases because of the terminal growth rate barrier. That is, after a few years of red hot growth almost every large company’s organic growth rate bends toward the single digit path of GDP.

Fangs and Monetary Fools

 

oil historical

I’m wondering if people may take the wrong message from this chart.  Here’s my read:

The high prices in the beginning were due to oil being a very desirable but very scare resource.  Drilling only began in 1859 and the technology was primitive and inefficient.

Then entered J.D.Rockefeller, who brought major efficiencies to the industry and increased refining capacity to the point where it was in excess of that needed for kerosene (used in lamps), and so the price plummeted.  There was another brief spike in price as Rockefeller gained what amounted to monopoly control of the industry in the late 1870s, and new applications for oil were found.

Thereafter, the price plunged due to improved efficiency and competition from other areas and abroad.  Oil traded in a fairly broad but well-defined range for the next 60 years, depending on prevailing business conditions.  The wide swings in prices during this period suggest that there is a positive feedback mechanism involved in the prices.  Low prices make energy less expensive, which promotes increased economic activity, which increases demand, which causes higher prices, which quenches economic activity, which reduces demand, which reduces prices…

After WWII, with the discovery of the huge Arabian oil fields (as well as others) and the emergence of the US as the guarantor of stable world prices, there emerged a period of remarkable price stability from roughly the end of WWII onwards.  Stability resulted from increases in demand being met with increases in supply at current prices, coupled with the price stability resulting from the Bretton Woods monetary system.

The next significant break came with the “Arab Oil Embargo(s)” of the 1970s.  While there was an obvious political context here, the other part of the equation was that US production was peaking.  There was a short respite once political conditions improved, but the underlying dynamic was that some of the important producers, the US in particular, were unable to keep up with local demand.

This situation became global in the early years of the 21st century, as demand in emerging economies ramped-up, while at the same time production from important established fields was in decline.  New fields were found, but were typically much more expensive to exploit than the earlier fields.  Since that time, the supply/demand dynamic has been at play, with price increases driven by increased cost and limited supply, and price declines being driven by poor economic conditions caused by the heretofore high prices.  The feedback cycle outlined above is in full play, this time with prices being in a generally upward trend due to generally scarce supply at lower price levels.

My reason for pointing this out is that I’m not sure that identifying $47 as an average price is very meaningful.  The bottom line is that demand for oil will be robust whenever prices allow for it, while supply at any given level will become scarcer as the “low-hanging fruit” is picked clean.  My contention is that major price volatility with a generally upward trend is what we have to look forward to.  This will continue until something happens to fundamentally change either the positive feedback mechanism or the fundamental long-term supply/demand relationship.  So the $47 average price may be of historical interest, but may be of limited applicability going forward. (from an anonymous commentor).

 

Stockman is too optimistic

SEARCH STRATEGY: HIGH ROE Companies in Canada

spirit

DKAM-ROE-Reporter-January-2016   High ROE Companies in Canada

Screening_Weed out the losers

Search-Critieria-Suggestions

RISK MANAGEMENT

Analyzing Banks and Liquidity; Precious Metals and 2016

Surgery

Katalepsis and liquidity  Understand what drives banking soundness and liquidity.

MM on Gold A different perspective

macrocosm

Where we are and What WILL Happen INEVITABLY

austrian_business_cycle_theory

Short summary of ABCT

Dan Oliver of Myrmikan Capital (Video must watch!)

So as EBITDA for companies begins to flatten out and/or decline while corporate interest burdens rise as high yields rise, then the cash to service debt declines. The capital investments made while interest rates were low draw on capital that is NOT there since credit is not based on real savings. Mal-investment shown in massive overcapacity and declining demand (consumer demand was never at the appropriate level due to central bank intervention and distortion of interest rates) in commodities causes equity holders to be wiped out and banks to teeter.  The Fed will respond reflexively as it has over the past 101 years.

More here: Liftoff_Myrmikan Capital Dec 17 2015 

Unambiguously Good_Myrmikan Jan 22 206

Gold senses the danger as it rises relative to commodities (commodities are sold to raise money).  Gold is not rising (yet) in terms of dollars because fiat dollars are in an epic short squeeze–there are only $4 trillion of base money with which to service $90 trillion of debt–tightened by recent Fed action.  When defaults occur and/or the Fed creates the dollars to try to stop the collapse of banks and borrowers, gold will rise against the dollar.  This has been the pattern over the past 4,000 years.

The ancient Greeks discovered that debt could magnify wealth. The debtor feels richer from the use of the borrowed property, while the lender feels richer from the compounding interest yielded by his claim. Both indulge in consumption more freely. As long as the accumulating claims remain contingent, the bubble grows. But, eventually, someone asks to be paid, and the expanding claims on wealth must be reconciled to tangible wealth, much of which has been consumed.

The first recorded credit bubble popped in 594 B.C. Athens. Threatened with a civil war of creditor versus debtor, the Athenian ruler Solon pulled down the mortgage stones to free the debtors and devalued the drachma by 27% to relieve the bankers. Every credit collapse since – from the Panic of A.D. 33 to John Law’s Mississippi Bubble to the Great Depression and many others besides – has followed Solon’s template of debt default and currency devaluation.

“The natural remedies, if the credit-sickness be far advanced, will always include a redistribution of wealth: the further it is postponed, the more violent it will be. Every collapse of a credit expansion is a bankruptcy, and the magnitude of the bankruptcy will be proportionate to the magnitude of the debt debauch. In bankruptcies, creditors must suffer.” – Freeman Tilden, 1936

And against what is currency and debt devalued? Carl Menger, founder of the Austrian School of economics, was the first to explain that money is liquidity and that gold is the most liquid asset. Thus, gold has served as the reference point of value since the origins of money and is that against which currency must be devalued to relieve debts. Paper promises depreciate.

“The faith is lost. All with one impulse people rush to seize the gold itself as the only reality left—not only people as individuals; banks, also, and the great banking systems and governments do it, in competition with people. This is the financial crisis.”
– Garet Garrett, 1932   

Source: http://www.myrmikan.com/port/

GYX_gold_140116

The sequence repeats: a boom based on ponzi finance (fractional reserve banking, fiat currency, etc.) causing a distortion in the production structure, and then bringing on the inevitable bust.

Structure of production

Does anyone see ANY OTHER outcome besides either a credit or currency collapse?   Reward!

Revaluation: Gold Revaluation

How tough it is to pick stocks

P.S.: I will be sending out value vault keys soon.   I usually wait for a que to develop. Thanks for your patience.

Price vs. Value–a Disagreement

Clearly people can have violently different views on price vs. value.

When’s the Crash?

Dow and Q

spy

The cyclicality of markets and risk

I have been sour on a majority of the general “market” since the end of 2013 as anyone following this blog would know, but that doesn’t mean ALL stocks are overvalued, but just that risk in general may be mispriced.   The Q represents for me an arbitrage between buying the asset or selling stock.  I don’t know if a big bear market is coming (no one does) but 20% to 40% declines shouldn’t be surprising when prices are bid up on easy credit (ZIRP and BURP).

Q is high

A Ticking Time Bomb

Certain pundits say a market can be “overvalued for years” but risks rise as market “internals” such as credit spreads widen. Bubble and Bust

Distortions and Time Preference

Note how commodities gain on gold during the boom and decline during the bust phase of the cycle. Proof of gold as money and how extremely distorted cycles have become Boom and Bust Indicator

GYX_gold_140116

Have a Good Weekend!

PS: Good example of fracking economics: Oil Markets PZENA

More on the Capital Cycle

FMQ for blog

We last left off here: follow-the-capital-cycle-as-a-contrarian

Gold and the capital cycle_2 Edward Chancellor discusses the fall-off in supply in precious metals which bodes well for FUTURE profits for miners.

The future turn in oil prices: http://www.resilience.org/stories/2016-01-12/arthur-berman-why-the-price-of-oil-must-rise

Over or mal-investment in the commodity cycle: Commodity Crash due to Monetary Supernova_Stockman

Buy disappointment and sell popularity  Don’t do this reflexively but place into context.

Peabody from hero to zero_case_resolution_fictconsulting

FCX_AR_2014 Note the increase in the rapid increase in assets before the stock price collapse. Note the research on how rapid asset growth usually precedes declines in future profitability  Robin Greenwood Investment and Ship Prices and asset_growth

Follow the Capital Cycle as a Contrarian

Stanley

Ed Chancellor on the capital cycle…

From his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15, which was released in hardcover today (Dec. 2015):
Typically, capital is attracted into high-return businesses and leaves when returns fall below the cost of capital. This process is not static, but cyclical – there is constant flux. The inflow of capital leads to new investment, which over time increases capacity in the sector and eventually pushes down returns. Conversely, when returns are low, capital exits and capacity is reduced; over time, then, profitability recovers. From the perspective of the wider economy, this cycle resembles Schumpeter’s process of “creative destruction” – as the function of the bust, which follows the boom, is to clear away the misallocation of capital that has occurred during the upswing.

The key to the “capital cycle” approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side. In his book, Competitive Advantage, Professor Michael Porter of the Harvard Business School writes that the “essence of formulating competitive strategy is relating a company to its environment.” Porter famously described the “five forces” which impact on a firm’s competitive advantage: the bargaining power of suppliers and of buyers, the threat of substitution, the degree of rivalry among existing firms and the threat of new entrants. Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.

  1. Follow the capital cycle as a contrarian (well worth STUDYING!)
  2. Gold miners in the capital cycle (part 2)

http://www.marathon.co.uk/global-investment-review.aspx (Read several articles on the capital cycle in investing).

Watch for errors  (Interview of the gentleman pictured above)