Reading the Financial News; Microdocumentary on Boom/Bust

As Gold Rises; Gold Miners Fall Down By Johanna Bennett

The price of gold may be rising, but gold mining stocks are getting hammered today. And do you know why?

They are still stocks.  (What does THAT mean?)

On the heels of yesterday’s late-day price surge, the Market Vectors Gold Miners ETF (GDX), of fell more than 4.5% amid a broader market selloff that sent the Dow dropping more than 300 points and the S&P 500 declining almost 2%.

The dovish minutes from the Federal Reserve’s September policy meeting have gold bugs buzzing. The precious metal touched a two-week high today, amid easing concerns that the Fed is near to raising interest rates, reviving gold as an inflation hedge.

Gold prices rallied to $1,234 a troy ounce, their highest level since Sept. 23, a day after minutes from the Fed’s September policy meeting revealed officials were worried weaker growth in Asia and Europe could curtail U.S. exports. The central bank also highlighted a stronger dollar as a barrier to U.S. inflation climbing toward the Fed’s 2% target, stoking hopes for a sustained period of low interest rates.

The most actively traded contract, for December delivery, was ended the day at $1,225.10 a troy ounce on the Comex division of the New York Mercantile Exchange, up $19.10, or 1.59% after earlier today climbing as high as $1,380.

ETFs linked to the commodity prices saw little improvement today. The SPDR Gold Trust(GLD) rose 0.25% to $117.76, while the iShares Gold Trust (IAU) inched up 0.21%.

But while worries regarding a weak economy can lift gold prices they can squeeze gold mining companies. GDX has plunged more than 60% over the past two years with the likes of Barrick Gold (ABX) falling more than 65% during that same time span and Newmont Mining (NEM) falling 59%.

The above is an article from an “elite” financial publication (Barrons) where the theme is that miners are being hurt/squeezed because they are stocks.  I ask my readers how are miners hurt LONG-TERM (the next decade) if the REAL price of gold is rising?  Sure miners may have been sold today due to leveraged investors selling to go into cash, but how does that “squeeze” the mining business if gold is risng RELATIVE to input costs like crude oil and commodities? Mining is a spread business. You make money on the spread between input costs and output revenues.  Never take what you read on face value.

gold oil

Gold commodities

 

gdxj gold

Miners realtive to gold in the chart above.

Four Boom and Bust Cycles and the Implications for today’s Cycle (Microdocumentary)

This microdocumentary video examines in detail 4 major booms in the last 100 years and explains how monetary policy and interest rate manipulation has led to the inevitable bust:

  1. The great depression of the 30ies
  2. The recession of the 90ies
  3. The dot com bubble
  4. The housing bubble

http://www.safehaven.com/article/35401/microdocumentary-the-truth-about-boom-and-bust-cycles   A bit simplistic, but a good introduction to the dangers of excess credit growth.

Rap Video on the Boom Bust Cycle or Hayek vs. Keynes

The Problem with Bubbles

1-babson

housing bubbles

Debt Based Fiathouse distortion

It’s the timing.   Babson was two years early, so by the time the bubble peaked, no one cared.   Sort of like today with six years of easy money/credit and rising prices in the US stock markets.

Note the housing bubble.   Home prices were far above owner’s equivalent rent (the cash flow/income to support home prices) in 2002/2003 but then two to three years later the apex was reached.   Soros in his theory of Reflexivity would propose to ride the bubble knowing you were in a bubble and then reversing course once it burst (the most marginal buyer has bought).  Not easy in the hurly-burly world of investing.

King Dollar or Listening to Pundits

7-Dollar

The dollar “breaks-out” and

8-dollar-sentiment

Sentiment and consensus rally–a new KING DOLLAR for many years to come.

6-Gold-weekly

Gold, of course, sells off on King Dollar, stronger US economy, and less inflation fears.

This post illustrates the HUGE swings in sentiment from the DEATH of THE DOLLAR in 2011 when this was occuring:

dollar gold

Back to today (Oct. 2014)

Dollar

King Dollar, with the obvious understanding that it’s dominance has only just begun (Dennis Gartman at minute 2 proclaims a bull run for the US dollar-click on this link). My have we come a long way from the new moon of the dollar cycle low in late April of 2011, where many of the same players and pundits openly declared the dollar crisis in full swing and just getting started. Back then, the mood in the markets was decisively dimmer, from both the usual suspects – to the ominous warnings from leaders in the private sector that the US consumer would soon face “serious” inflation in the months ahead.

Lesson: The same pundit, Dennis Gartman, who was proclaiming the Death of the Dollar in 2011 near the absolute low is now, four years later, trumpeting that the Dollar is King. No one knows the path of the dollar or gold. We can make our own probabilities but to be CERTAIN is the sin.  I gave up watching CNBC then years ago. 

from: http://www.marketanthropology.com/

And what do the pundits say about this on CNBC?

sp.profits

sp500.all_1-600x398

I hear crickets…………..

Evolutionary Development of Contrarians; Letter to An Analyst

What does it mean to be a true contrarian? (www.truecontrarian.com) Steve explains the fundamentals of his investment philosophy and how to apply it to real-world situations. He details how human herding, group following, and projection of the recent past into the indefinite future enabled our ancestors to survive thousands of years ago, while weeding out those who were contrarians. This has caused contrarian behavior to be quite rare in modern times because it goes against our hard-wired emotions. Steve analyzes why the financial markets often act most irrationally during the first hour of each trading week. He also describes the reasons that financial analysts at major corporations are unable to invest in a contrarian fashion even if they know intellectually why they should be doing so.

Letters to an Analyst    http://researchpuzzle.com/

The Education of a Value Investor Part III: The “Ugly”

The-Education-of-a-Value-investor

Everyone has a plan ’till they get punched in the mouth. –Mike Tyson

The author describes in Chapter 7: The Financial Crisis, Into the Void, his trauma. He learned not to be leveraged and to turn off the Bloomberg to avoid the daily carnage.  But I wonder why—if the experience was so searing—he didn’t reflect deeply on the causes for what had happened. Like after seeing the dead and wounded in your safari camp after an elephant stampede and then wondering if changing the color of your tents would stave off disaster.  Perhaps studying elephant migratory patterns would help. Value investors like Seth Klarman and Jim Grant were howling about rapidly burgeoning mortgage debt and centrally-planned interest rates.  Mr. Spier should dust off his Mises and Rothbard texts on the Austrian theory of the business cycle.

On page 80, he believes that people’s human excesses and moral compromises helped cause the financial crisis. Poppycock!  And even if true, then what lessons could be learned? People are always and everywhere greedy, kind, cruel, amoral, and just plain human. Forget the inner scorecards, Robert Cialdini, author of the book Influence, would be saying, “look at incentives.”  The U.S. banking system is inherently flawed.  Since 1840 the US has had 12 major banking crises, while Canada has had none—not even during the Great Depression. See Fragile by Design by Charles W. Calomiris and Stephen Haber. I don’t believe Canadians are less prone to humanness than Americans? Ever been to a hockey game?  The author makes an assertion without theory, evidence or fact. That’s ugly.

The author seems to lack curiosity as to what happened to him.  However, he did listen to Michael Burry’s warnings about the mortgage crisis, but he didn’t share what he thought happened. He bet that policymakers would use every available tool to avert disaster.  But why should the politburo at the Federal Reserve intervene to pile more debt upon debt? To what effects and consequences? What about the crisis of 1920? The Fed did nothing and the result was the fastest and strongest recovery in US history. View: http://youtu.be/czcUmnsprQI.

Now the US labors under high private debt, too-big-too-fail banks, absurd Dodd Frank bank regulations (10,000 pages and counting of rules), and a $4 trillion dollar Fed balance sheet.   Imagine if the Fed did the right thing and shut down.   The panic of 2008 was a global banking crisis. Wealth would have been unaffected, however titles to that wealth would change from the profligate to the prudent.  Now, in 2014, bubbles and moral hazards abound.

My questions are not only asked of Mr. Spier but also of Mohnish Pabrai and Bill Miller.  Mr. Miller once mentioned how cheap housing stocks were at 6 times earnings during 2006 http://www.bloomberg.com. Yet homebuilder company earnings were at 200-year peaks.  Mr. Miller may have lacked understanding of how much mal-investment occurred along with a host of other reasons (community reinvestment act that forced banks to lend to poor credit risks so they could be rechartered). Mr. Pabrai can clutch a check-list but that won’t help in a credit crisis if he owns a subprime lender.

Ironically, Mr. Spier mentions sub-prime auto dealer/lender, Carmax (KMX), as a risk.  Now with massive Fed intervention with QE, QE2, QE3, and QE Forever, why be a value investor? Move over Graham and Buffett, own the most leveraged, subprime lenders you can find like: KMX

But be sure to sell in time:

Conn

Balance sheets matter when bubbles pop. Right now–for now–bubbles abound.

May Mr. Spier enjoy his nirvana, but I can’t recommend this book for anybody who is forging their own way.  You are better off to read Buffett and Graham’s writings while thinking of your own strengths and weaknesses. Follow Mr. Spier’s example and keep a diary of your progress. It’s YOUR journey.

I won’t be doing other book reviews unless I am 100% behind recommending the book to you. I would like to next look at DEEP VALUE by Toby Carlisle. Ten thumbs up.

Tutorial on Gold and the Mining Business from the Denver Mining Show

Very good overviews of gold and mining

Updating the Bullish and Bearish Cases For Gold http://bit.ly/1B6LHte 

Gold Bullion and the Need for Systematic Insurance. http://bit.ly/ZLb0pc  An excellent review of market risk.

How Not to Blow it Next Time http://bit.ly/1tYZYYI 

The Education of a Value Investor: Part II, The “Bad”

 

The-Education-of-a-Value-investor

 

We do not see things as they are. We see them as we are.  – The Talmud

Part II: The “Bad”

To be fair, the author delivered exactly on his promise in the first paragraph of his book:

My goal in writing this book is to share some of what I’ve learned on my path as an investor. It is about the education of this investor, not any other investor. This story is not an investment how-to. It’s not a road map. Rather, it is she story of my journey and of what I’ve learned along the way. With my own flaws and foibles and idiosyncratic abilities—and despite my considerable blind spots.

I titled this part of the review, “Bad” because I was hoping for so much more from the author. Much of his description of his investment process is cursory and his analysis seemed a mile wide and a half-inch thick.  Examples will be discussed in part III.   He never promised that in his opening paragraph, but more experienced investors will then have little to learn from this book.

If you want to learn about the psychology of investing and trading then start with the classic, Reminiscences of a Stock Operator by Edwin Lefevre.  Tudor Jones calls it a textbook for speculation.

Another relatively unknown classic, Why You Win or Lose by Fred Kelly (1930) See a synopsis here:WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)

Investing is something you do. Like sex, reading about another’s activities will only take you so far in understanding it. You must apply yourself, actually invest, and review your results.

Two excellent books on having an investment process and managing emotions:

Trader Vic-Methods of a Wall Street Master and Trader Vic II-Principles of Professional Speculation by Victor Sperandeo.

Back to a hardcore value investor. Read, There’s Always Something To Do, The Peter Cundill Investment Approach.   Cundill was a Canadian Graham and Dodder.

An interesting romp through the investing world, The Money Game by Adam Smith.

Simple But Not Easy by Richard Oldfield is another interesting overview by an old pro.

Then if you want to understand why you must fit investment to YOUR OWN approach, read about all the different ways there are to trade and invest by reading the Market Wizard books by Jack Schwager or Free Capital by Guy Thomas.

Of course, go to the original sources and read all the investment letters from Buffett, Munger, Klarman, Tweedy Browne. Type in their names in the csinvesting.org search box and see where the links lead you.

In Part III, the “Ugly” I take off the gloves and point out the author’s fuzzy thinking regarding the financial crisis.

The Education of a Value Investor: Part 1: The Good

The-Education-of-a-Value-investor

The Education of a Value Investor: The Good, the “Bad,” and the “Ugly.”

Editor: In full disclosure I received this book from the publicist, and I actually read the book.

The title of this review has the words bad and ugly in quotes because I will define those words in part II and III of this review.

Part I: The Good

Here is a story of a young hedge fund manager on a Hero’s Journey (Joseph Campbell) to become a more integrated human being—to become, as the author says, authentic. Though managing money is the author’s profession there isn’t much in the way of investing strategy or techniques.  The author writes with honesty and humility about his journey through life starting as a young investment banker.  The author provides an example for investors and non-investors alike by taking responsibility for his failures and setbacks, understanding his weaknesses and then designing workarounds to improve his investing and life.  A person must develop self-understanding and go where his or her strengths can benefit.

Perhaps Nassim Taleb, author of Fooled by Randomness describes the main investing lesson I took away from the book, “We are faulty and there is no need to bother trying to correct our flaws. We are so defective and so mismatched to our environment that we can just work around these flaws. I am convinced of that after spending almost all my adult and professional years in a fierce fight between my brain (not Fooled by Randomness) and my emotions (completely Fooled by Randomness) in which the only success I’ve had is going around my emotions rather than rationalizing them. Perhaps ridding ourselves of our humanity is not in the works; we need wily tricks, not some grandiose moralizing help. As an empiricist I despise the moralizers beyond anything on this planet: I wonder why they blindly believe in ineffectual methods. Delivering advice assumes that our cognitive apparatus rather than our emotional machinery exerts some meaningful control over our actions. We will see how modern behavioral science shows this to be completely untrue.

For example, the only way for a chocaholic like me to avoid temptation is not to stop loving chocolate but to be kept here in a padded cell: http://youtu.be/pjProtBm4Dc.

Along the way, Mr. Spier shares life lessons such as:

  • The real goal, perhaps, is not acceptance by others, but acceptance of oneself.
  • Avoid groupthink—get out of the New York hedge fund vortex.
  • Environment trumps intellect—move to Switzerland
  • Turn off Bloomberg and check prices infrequently on Nestle, Berkshire and other global franchises.
  • Write thank you notes.
  • Surround yourself with people better than yourself.
  • It helps to know thyself—and to adapt thy setting accordingly.
  • If you don’t know your inner reality, you are likely to be mugged by reality.
  • Become more aware, strip away your facades, and listen to the interior.
  • Take a sincere interest in people. Value people as an end in themselves, not as a means to our own ends.
  • Try Tony Robbins fire walk—put your mind to it and unleash the power. https://www.youtube.com/watch?v=a2c8PMmQxJs (disturbing content, so children should not watch).
  • Play bridge because it is a game based on insufficient information like investing.
  • Try for a state of quiet contentment.
  • Think about your own investment processes in a structured, systematic way.  For example, gather investment research in the right order. Hint: start with the 10-Ks.  Less biased.
  • And finally, the greatest lesson Buffett taught Mr. Spier: “ The more you give love away, the more you get.”

Certainly, the above are excellent lessons, but information is not knowledge and wisdom may not translate into action. How to go from here to there?  The author suggests the Nike commercial, “Just Do It!”  If only action were so easy. But remember the author battles his own flaws and vulnerabilities not the readers’. You may be better off reading Dante’s pilgrimage in the The Devine Comedy. Perhaps Plato’s Dialogues or Nicomachean Ethics by Aristotle. My favorite: Watch Groundhog Day over and over. See:  http://youtu.be/6VF5P7qLaEQ (I’m serious).

There are flashes of good writing: “In hindsight, I can see with clarity that the real value to the firm of my Oxford degree and my Harvard MBA was to adorn its (D.H. Blair, an investment bank bucket shop) deals and documents with my pristine credentials. I thereby provided a kind of Ivy League fig leaf.”

But there are spots of overwrought description: “This book is about my journey from that dark place toward the Nirvana where I now live.”   Nirvana?  A tad over the top.

This is Mr. Spier’s particular journey and a beginning investor or those who need inspiration may learn how honesty and self-knowledge helped transform a hedgie into a better human being. Mr. Spier continues on that journey. Part II and III will describe a few of this reviewer’s disappointments.

More on Mr. Spier here:

https://www.youtube.com/results?search_query=mr+guy+spier

Greg_Speicher-Ways-to-Improve-Your-Investment-Process

2009.7.31_Guy_Spier_interview

The Last Bear Commits Suicide

suicidal-bear

Buy What is on Sale! CEF Discounts

PITSelling today in the pits-gold and silver

CEF BIG

Above is a chart of CEF, Canadien Gold (60%) and Silver (40%) bullion closed-end fund trading at a 6.5% discount today. ON SALE!  I have no clue if tomorrow the price will be higher or lower.

http://www.cefconnect.com/Details/Summary.aspx?Ticker=CEF

Note the premiums as high as 10% and currently 6.5% discount.

4-Gold-sentiment-data

Learn more about interpretating sentiment indicators: www.acting-man.com

Long term sentiment

gold Sent 1

Silver Sent 1

HYGI Sent

A Great blog, Down the Rabbit Hole: http://biiwii.com/wordpress/2014/09/10/sentiment-shifting-gold-bugs/

Though, I like miners more, but now is a good time to pick up tangible money at a discount. Pay 94 cents and get a dollar of gold and silver today–I will take it.  SOLD!  Miners make money on the arbitrage between their input costs and output prices. You don’t need a rising nominal gold price; you need a rising REAL gold price.

gold.cci_-600x264 (2)

Gold commodities

Now is the time for me to post on Yamana (by this weekend, I pray) because it is at a price $7.33 that I have purchased in the past and it may be a reasonable choice for a BASKET of miners.

Also, you want to see analysts pile-on negatively AFTER price has fully dicounted the news. I am not being contrarian or cynical, it is just how markets work–they DISCOUNT.

Yamana Gold suffers rash of stock price target cuts • 12:58 PM

Carl Surran, SA News Editor
  • Yamana Gold (AUY -1.2%) is lower after Morgan Stanley, Credit Suisse and Raymond James cut their price targets on the stock to $10.70, $10.50, and $10, respectively.
  • In the case of Morgan Stanley, the lower target still implies upside of more than 40%; AUY has said the Pilar mine in Brazil has shown improvements with output increasing M/M, but the ramp up is tracking modestly below expectations, thus the firm’s tempered outlook.
  • An update on Canadian Malartic and meeting quarterly expectations are potential catalysts expected over the next 6-8 weeks.

Read comments

Read the link below and the link within it to gain more understanding on gold and miners.

http://www.acting-man.com/?p=32809 

Li Lu’s Lecture; Value Investing Videos

Go comics 1

JUN 24, 2010

Li Lu’s 2010 Lecture at Columbia

Many of you enjoyed my previous transcript of a talk Li Lu gave at Columbia University. Thanks to Joe Koster, you can now view a more recent lecture he gave to Bruce Greenwald’s value investing class in April of 2010. Seen here: http://www7.gsb.columbia.edu/video/v/node/1365?page=26 Based on Berkshire’s investment in BYD, the fact that Lu manages Charlie Munger’s money, and that even Buffett would give money to Lu if he ever retired (according to Greenwald) makes me think Li Lu is an investor worth watching.

With that in mind, I believe it is insightful to study whatever you can find about him and his approach. I think this lecture from 2010 is great. The recording has some audio issues making it difficult to hear and I thought that some of you might enjoy reading notes from the talk. This is not a true transcript, but an approximation of what was said. I think it comes pretty close, having listened to the lecture a few times. I think you will find it helpful and Lu’s talk rewarding.

Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander of the Sequoia Fund. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.

http://streetcapitalist.com/2010/06/24/li-lus-2010-lecture-at-columbia/

http://www.bengrahaminvesting.ca/Resources/videos.htm#2006_Guest_Speakers

Letters to a young analyst (Great blog for books): 

http://www.readingthemarkets.blogspot.com/2014/09/brakke-letters-to-young-analyst.html

Scottish Vote on Independence: https://www.youtube.com/watch?v=PD5Imb7vWSc