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.