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Stages of a Gold Move

The gold rally so far has been on pretty limited breadth.  There have been some really great moves to new highs from the large and mid-tier producers.  But small, single mine producers, deposit holders and explorers have participated to a smaller degree.

That isn’t to say that the smaller names haven’t done anything.  They have had great moves – but in general the moves are not even to the highs they were at in early March, and often still some distance from where they were last summer.

I am reminded of what Rick Rule has always said about the gold miner bull markets.  They always unfold the same way.  First the large producers make their moves.  Then the small producers.  Then the developers and then the explorers.

I have seen this for myself on two occasions.  It is what happened in the 2004-2006 market.  And it is what happened in the 2009-2011 market.  I can only assume that Rule has seen this in prior bull markets as well.

Now is this actually a bull market?  I have no idea.  All I know is that gold forever disappoints, and so it would not surprise me in the least if this is yet another pop only to drop.

In that case the small and micro-caps will not participate any more than we have seen, and given the move we have already had in the larger gold names, all of these stocks are probably close to their tops.

But if this is truly a gold bull market, then the move we have seen so far is just the first act.  Next we will see the small producers move.  And if that is the case, now is the time to be researching companies with deposits and companies with good exploration teams, because they will run in the near future.

CARES Act and Consequences

I find the mREIT sector to be very interesting right now.   But, I have one big question.

What are the consequences of the CARES Act?

This article, which I tweeted this morning, explains the issue perfectly.  The number of people that aren’t going to pay their mortgage is going to be unprecedented.  While the numbers talked about originally were maybe 10%, as the article points out that is now looking like it could be 30%+ for Fannie and Freddie and 60% for Ginnie.

If those homeowners don’t pay their mortgages, the mortgage servicers have to.  That is a whole lot of money that has to be forwarded on by banks and non-banks like Mr. Cooper and New Residential.

The government seems to be not really sure how to deal with this.  Or is at odds with how to.

A really smart guy I talk to said it best I think – to paraphrase, he said: I don’t know how this plays out, but it is a big risk to owning anything mortgage related until it gets settled.

If this does get settled or if you want to take the risk it is going to get settled, there are some interesting opportunities out there.  There are agency mREITs that are way below their already reduced book values.  There are originators that are seeing great margins on refi’s.  There are whole loan mortgage owners which are really badly beaten up (but probably also very risky).  And there are servicers that are in the middle of the tsunami, but again, are very beaten down.  All could be very interesting in the right circumstances.  I added a couple small positions in the agency mREITs.  I’d like to make these much larger, and if there is some clarity on how these servicer advances play out, I probably will.



A Short Update

My portfolio did not trend up with the market last week because of hedges that went down on the rally and the Canadian dollar which corrected back up.  But whatever, I’m happy to sit this out.

Honestly, thinking too much about the market right now makes me a little ill.  It seems like a sideshow to the reality that is playing out.

But I said that I will write through thick and thin and so I will.   I’ve resigned myself to the fact that I’m not smart enough to figure out what the market does from here.  Its some combination of death tolls, hospitals being overwhelmed, drug and vaccine trials that I have no insights into, and how an economy comes back after being shut down.

And then there is the question of if you can go back to normal or if it just brings the virus back.  Not to mention how/if these huge government stimulus programs change the way things are when this is over.  Do restaurants open up again, do airlines fly, it just could be a totally different world.  Or maybe not.  I just don’t have a clue.

I have been surprised and not so surprised about the move back up in the market.  I mean the market was incredibly oversold.  So it was probably bound to happen.  But at the same time, I cannot share the optimism.  I think that the timelines for some degree of normalcy that being bandied about are optimistic.  Consider that here in Canada, the British Columbia health minister said yesterday that she thought any easing of restrictions before the summer was unlikely.  And that after British Columbia has said that there measures are starting to impact the curve.

It is the medical experts that have been most consistently right through this pandemic.

In Alberta, the testing has been excellent, social distancing has set in, and that (at least so far) has helped immensely.  Our cases have not gone crazy.

I did a few things with the portfolio in the last couple of weeks.  I made a couple of tiny trades on the tankers, buying DHT Holdings and Ardmore Shipping.  The oversupply of oil is going to be tremendous.

While the focus is on OPEC+ and the supply increase from Saudi Arabia, that pales in comparison to the demand destruction of the virus.  I don’t think anyone really knows how much demand is being lost but the numbers I’ve seen are anywhere between 15mmbbl/d to 30mmbbl/d.  In the Great Financial Crisis of 2008 it was 5mmbbl/d and that amount sent oil into free fall.

So quite honestly, I think that the Saudi’s are a bit of a sideshow here.  It is a nice story to talk about but would OPEC+ really cut 15mmbbl/d anyway?  Could they even cut that much without damaging the fields?

I also took a position in GoodFood. It has moved up a bit since I bought it (at a little under $3).  My thesis was basically how can this stock be worth less now than before the virus hit?  GoodFood provides meal ingredients and recipes, delivered to your home.  They operate in Canada.  Their counterpart in the United States, Blue Apron, is up six-fold since the virus hit.  GoodFood is flat.  Yet GoodFood is growing faster and has a better balance sheet.  Our family used GoodFood even before the virus so I am familiar with the product and its great.

As I have been scratching my head about why the market could be so strong, I also decided to add a little to my index hedges and shorts in the last few days.  All on the edges, but I just don’t see how we get out of this quickly.  There would also seem to be an outside chance that things really go sideways.  I do not see how the market is pricing that in at these levels.