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Yesterday’s David Tepper Moment

David Tepper is a very successful hedge fund manager who, in the fall of 2010, went on CNBC and explained, with a simplicity that the market loves, why you had to own stocks.

“Either the economy is going to get better by itself in the next three months…What assets are going to do well? Stocks are going to do well, bonds won’t do so well, gold won’t do as well,” he said. “Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE.

“Then what’s going to do well? Everything, in the near term (though) not bonds…So let’s see what I got—I got two different situations: One, the economy gets better by itself, stocks are better, bonds are worse, gold is probably worse. The other situation is the fed comes in with money.”

I am coining the phrase “David Tepper moment” to refer to a time when what appears to be the obvious thing to do is the right thing to do.  A moment when the correct action is “just that simple”.

I believe that yesterday was a David Tepper moment for gold stocks.

The Federal Reserve announced yesterday that they will be purchasing $40 million in mortgage backed securities (MBS) per month for an indefinite period of time.  The indefinite period will be continue until employment shows a “sustained improvement” for 6 months.  The Federal Reserve may add to its purchases with additional purchases of treasuries next year.  And it was implied that an inflation rate above 2% would be tolerated for some time in order to let the economy gain momentum.

Yesterday I lightened up on my gold stocks in the morning, not wanting to be too long gold if the Fed decided to hold off on QE.  But when the statement came out, I reacted quickly by buying positions in Aurizon Mines (AZK), Brigus Gold (BRD) and Lydian International (LYD).  I also added to my position in OceanaGold (OGC) and at the end of the day, to Atna Resources (ATN).

I noticed that there were bigger moves in the large gold stocks, Newmont, Goldcorp, Agnico Eagle, than the smaller one’s I tend to favor.  I think that is encouraging.  That the large gold stocks moved confirms that the big money agrees that the scenario playing out is bullish of gold shares.  The smaller stocks will catch up eventually.

To temper my enthusiasm, it is worth mentioning that this will be bad news for gold mining costs.  Oil prices are rising; they hit $100/bbl this morning.  And non-USD currencies are rising; this will hit producers outside of the United States.  The Canadian dollar was at $US1.03 last I looked; this is going to eat into the margin of companies like Aurizon and Brigus.

Yet I am willing to bet that the cost increases will be outpaced in the next few months by the gains in the price of gold.  I am also aware that even after the moves yesterday, you can buy stocks like Aurizon, Brigus and a host of other juniors at 20-40% discounts to where they were trading last summer.

I would be interested in hearing other names that I should be looking at.  In particular, I am not a huge fan of Aurizon Mines right now and would trade it out for another stock if a better producer can be recommended.  I’d like a producer with reasonably low costs and with growth on the horizon, perferably growth that doesn’t appear to be fully priced in.  I haven’t been looking closely at gold stocks for a number of months now, so I’m a little out of the loop with respect to what’s out there.

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11 Comments Post a comment
  1. You should checkout miningstockvaluator.com. Best site I know of for finding and comparing gold and silverstocks. I use it all the time!

    September 14, 2012
  2. JR86 #

    lsigurd,

    love the blog, thanks. i was wondering if you had any thoughts on the impact of QE3 on the mortgage origination market. initially it would seem the extra demand for MBS ought to raise prices for MBS in the secondary market, which ought to be a good thing for originators.

    then the question is, does the lower secondary market yield translate into lower 30 year origination rates, thereby reducing gain on sale margins (lower coupon = lower secondary market pricing given similar yield environment). or, is the 30 year origination market more a function of supply & demand for new loans, which ought not to change even w/ fed action?

    thanks,

    JER

    September 14, 2012
    • From what I have read origination margins are high because of the uncertainty around the business (risks with reps and warranties and regulatory) and b/c participants are leaving the market. I think that how these factors play out is going to have more of an effect on margins.

      PHH has had a good discussion on origination margins in the last couple of conference calls.

      September 15, 2012
      • JR86 #

        Thanks for the reply. Is the general consensus that origination volumes will plummet over the next couple quarters? Why might this be?

        September 18, 2012
      • Well I think there has been an expectation that the refinancing volumes aren’t sustainable and would collapse as soon as rates headed up. Maybe that’s what you have heard? The Fed easing takes the wind out of those sails for a while in all likelihood. And I don’t know how it plays out, if refi’s are slowing its because rates are rising and if rates are rising its because the economy is picking up, which will help the purchase side of originations. I have been wary of taking too large a position in PHH because of my concern about whether originations would drop. Same could be said about Impac, though in that case growth is so strong and price is still low enough that I don’t know if even lower volumes are priced in.

        September 18, 2012
    • This article, from the NYT last week, gave a few explanations as to why the spread between MBS and mortgage rates is as high as it is.

      http://dealbook.nytimes.com/2012/09/18/an-enigma-in-the-mortgage-market-that-elevates-rates/

      One explanation, mentioned in a Financial Times story on Sunday, is that the banks are overwhelmed by the demand for new mortgages and their pipeline has become backlogged. When demand outstrips supply for a product, it’s less likely that its price — in this case, the mortgage’s interest rate — will fall. There are in fact different versions of this theory.

      One holds that bank mortgage operations are still poorly run, and therefore it’s no surprise they can’t handle an inundation of new applications. Another says banks deliberately keep rates from falling further as a way of controlling the flow of mortgage applications into their pipeline. If mortgages were offered at 2.8 percent, they wouldn’t be able to handle the business, so they ration through price, according to this theory.

      Another backlog camp likes to point the finger at Fannie Mae and Freddie Mac, the government-controlled entities that actually guarantee the mortgages. The theory is that these two are demanding that borrowers fulfill overly strict conditions to get mortgages. Banks fear that if they don’t ensure compliance with these requirements, they’ll have to take mortgages back once they’ve sold them, a move that can saddle them with losses.

      September 23, 2012
  3. dcx #

    I prefer the simple GLD. It has been 20-25% of my investable assets for the past couple of years. Mining companies have way too many moving parts, too many ways to screw up. GLD may not have the leverage mojo that a mining company has, but if you need gold as a hedge, you might as well own the real thing.

    September 14, 2012
  4. Will Estes #

    So I am going to be cynical about this. First, let’s talk about the David Tepper moment. He made that comment in late 2010, but most industrial and commodity stocks then reached their peaks in January 2011 and have been in a firm downtrend since then. So really Tepper’s projection was right only for a few more months, and in fact he called the market Top, not the start of a new rally. Tepper missed the big picture that the Federal Reserve’s pumping was simply an asset inflation tool that had reached its practical limits. Ultimately the market could not grow beyond that point without the economy growing, and the economy is growing too slow. That was true then, and it is just as true now. Asset inflation can only take you so far up the chart, and after that you need real economic growth. And the US has very little real economic growth for the next three years.

    Then let’s talk about Gold. I acknowledge Gold will rally on Federal Reserve asset buying and money printing. However the David Tepper moment for these stocks was in July and August, for those insiders who knew the details of the Federal Reserve’s internal conversations. By the time the Fed made its announcement this week, all of these Gold stocks look to be 70% of the way through their moves. Without a Federal Reserve intervention, we would have had further deflation, and Gold stocks would have broken their July lows and would be moving lower still. So calling this without inside knowledge in July was just plain tough.

    To my eye the charts of most Gold mining stocks look to be much closer to a top than a bottom. I can see these stocks maybe challenging 2011 highs, but do you see them breaking up and resuming a year long uptrend?

    September 14, 2012
    • I’m going to reply to this in my bi-weekly update tomorrow. But I think you are touching on a distinction that I did not make in the headline or the post: not everything is going to go up.

      September 15, 2012
  5. I realize some try to influence you to look at stocks they hold. Rather than name any stock I think you should take a look at the junior exploration companies operating in the Dominican Republic. I own a small amount of one that has done very well since May and another that has done very poorly.

    September 14, 2012

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