Posts from the ‘Uncategorized’ Category

Apr 28

Week 95: Setting the table (hopefully)

Portfolio Performance

See the end of the post for a full portfolio breakdown.

Update

Since my last update I exited Radian Group, Arkansas Best and MBIA. The sales reflect a desire to redeploy cash in other opportunities as well as some lingering concerns about each company.

With Arkansas Best, its my uncertainty about the outcome of union negotiations. The negotiations were extended this week for a second time. An escalation to a strike does not seem out of the question. If a strike occurs the stock price may or may not get hit; while a positive resolution could be quite good for the stock in the long-run (see my original post about how Arkansas Best would benefit from a contract structured in a similar manner to the one that YRC Worldwide operates with) the uncertainty may drive panic selling. I’ve decided to wait this one out for a few weeks and see how it plays out. Read more

Oct 15

Week 67: Sitting Tight

Portfolio Performance

Volatility

I always have a volatile portfolio. I don’t think that there is any way to outperform the market and not be volatile. If there is I haven’t found it.

Two weeks ago it soared up 6%. Last week i gave back all of those gains.

Volatility is just something I have learned to live with. The important thing is not to let it shake you out of your positions prematurely. When you get skyrocketing stocks like Nationstar or Impac Mortgage they are bound to have fast and sharp corrections. What I have to try to do, and what can be very difficult to do, is to divorce myself from the immediate price movement and simply ask myself the question of whether the story is intact and whether the value is reflected.

I am reminded of the following excerpt from Reminiscences of a Stock Operator:

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight. Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.

May 23

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Exhausting Market, Pan Orient releases news, Gold stocks take off (again…)

Man is this ever a difficult market to invest in. Stocks are up, stocks are down. Gold is down, Gold stocks are down, oh wait now gold stocks are up. Oil and oil stocks are down, now oil stocks are up, now they’re down again. Mortgage stocks are holding up, now they are way down, now they’ve recovered it all and then some. Its quite insane.

All of this is because no one has any idea what is going to happen if Greece leaves. Well first of all, no one has any idea if Greece is going to leave. And if they do leave, then no one has any idea what is going to happen next.

Dennis Gartman wrote the following today:

Panic then is in the air. Confusion then reigns. Liquidity trumps all other concerns and in that environment we can imagine almost anything happening. We can imagine the Yen moving two or three Yen… higher and/or lower. We can imagine gold moving $50/oz.… readily… higher or lower. We can “see” the dollar moving 2-3 EURs… higher or lower, and in that environment we wonder what trades, if any, make even a modicum of sense?

He’s right. It’s a crapshoot right now.

Its binary. If Greece doesn’t leave the Euro then we can pretend its all good for another few months or maybe a year. If Greece does leave the Euro then its equallypossible that A. Nothing much of anything happens, at least outside of the Eurozone itself or B. Complete chaos ensues around the world. You can probably make the argument that the delta between A and B is +/- 20% on the markets.

It just isn’t something that can be accurately priced in ahead of time. The consequences of Greece leaving are, to put it in the terms Donald Coxe has used, existential. Yet this is the problem that the market is struggling with and the result is a rollercoaster and Im tired of it.

Pan Orient News

In the midst of the chaos Pan Orient released news today that they sold their 60% interest in a number of their Thailand offshore land blocks for about $170M.

Pan Orient has operated working interest in 4 offshore concessions in Thailand: Concession SW1 (SW1); Concession 44/43 (L44); Concession 33/43 (L33); and Concession 53/48 (L53). This sale was for everything but the L53. TheL53 concession is the concession that had the recent discovery that first excited and then disappointed the market.

In total Pan Orient had 19MMbbl of proved and probable reserves in Thailand at the end of 2011. I wasn’t able to find where they break out the L53 reserves from the other concessions but if I use a rough ratio based on 2011 production, somewhere around 17MMbbl were sold. This puts the selling price at about $10/bbl. That’s not too bad.

On a flowing barrel basis, according to the Annual Information Form these concessions produced 1,306bbl/d in the fourth quarter of last year. That would make the selling price $130 per flowing bbl, which again is not bad.

These blocks have not been given much value by the market because they have had production problems and reserve writedowns. These blocks are producing from volcanic formations that are not commonly oil producing rock, there was skepticism in the market regarding whether these formations would be able to sustain production, and that skepticism was proven to be valid when Pan Orient took a technical revision of 12.5MMbbl on their year end reserve report. To get $170M for these concessions now is really quite surprising. I was shocked. Honestly I had to read the news release like 3 or 4 times to make sure I wasn’t missing something. The blocks sold don’t even include the block that has had the recent discovery. Yet here you had a $2 stock that had just sold a piece of their assets, and not even really the core piece, for about $2.80.

Almost as shocking was that the stock opened after the halt at $3.25 and traded as low as $3.10. Have we reached the point where cash is not even worth cash any more? If you do the math Pan Orient had somewhere around $60M in working capital (mostly cash) before this sale. This sale adds about another $160M (after netting out the working capital changes) or so. So that’s about $220M total cash. The stock has 60M shares fully diluted so that puts cash alone at $3.80 per share. If the market wasn’t so awful and everyone wasn’t worried the end of the world was nigh I think the stock would be have traded quite a bit higher. I added some shares at $3.25 (though to be clear, as I wrote before I had sold some shares late last week when I sliced 20% off almost all my holdings, so these shares were essentially just adding back about half of those).

Gold Stocks rising? Maybe? Could be? Or more wishful thinking?

Also today, gold stocks took off. In my umpteenth attempt to time the bottom for gold stocks, I bought a few more Newmont calls, added to my position in Atna, and added a position in OceanaGold. OceanaGold is a trade, pure and simple. If gold falters again and the stocks look weak, its gone. If not I will ride it back above $2.

The action in the gold stocks has been interesting. There has been 4 days over the past two weeks where Newmont has risen while gold has fallen. I figure that is about 4 more days than that has happened in the previous 6 months.

I have no idea what is going to happen to gold or to gold stocks next. What I do know is that it makes sense that gold will rise in the face of a declining and potentially collapsing Europe. The recent response of gold to the Euro decline makes very little sense to me. Lately it has been that if the Euro falls then gold falls about 2-3 times more. Basically the market is saying that if there is a collapse of the Eurozone you would be better off going long Euro and short gold than the other way around. Clearly this is not a sensible conclusion. Gold should be, after all, the negatively correlated asset class paper currencies. As the faith in paper currencies decline, gold should rise. Look I’m not a gold bug. I have no idea whether a gold standard would succeed or fail. But I do know that gold should act in opposition to currencies, and this certainly seems like a rather good environment to be betting against paper currencies. And so it is that I make a bet on a few gold stocks once again.

Exhausting…

I have to say though that the stress of these swings is getting to me a little. With respect to Pan Orient in particular, I was quite worried that because the market is so awful and everything has been tanking on even the slightest bit of bad news that if Pan Orient released bad results from their Indonesian well (which is what I figured was the reason for the halt) that the stock would crater further. I really felt relieved when I read the news release and it was anything but bad. However I was a little surprised with just how relieved I felt. It was one of those moments when you kind of look at yourself and think wow, I’m really quite stressed about all this aren’t I. Not surprising I suppose.

The only thing I know to do to have less stress is to have more cash. Cash is, after all, the negatively correlated asset class to market stress. I’m 35% cash right now. I have said before that I want to be 50% cash by the Greek Election. I stand by that, and will be working to get there by selling into any rallies.

Apr 29

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Week 43: Up and down

Portfolio Performance

Portfolio Composition

Week 42-43 Trades

Biweekly Portfolio Updates

Those who read this blog regularly may have noticed that I have begun to post my portfolio updates on a bi-weekly basis. Every week was just too much. First, not enough happens to my portfolio every week to devote an entire post to it. Second, its a pain to copy and paste the pictures and update the chart every week. That is time that would be better spent doing research. Third, an perhaps most importantly, I have found that with weekly updates I was becoming a little too focused on my short term performance, and I think this was conflicting with my investment style.

When I think of how I have made money in the past, it has rarely been from making quick trades in and out of stocks. I generally make my money by sitting. Somewhat paradoxically my best investments have tended to go through a significant period of pain before eventually moving in the direction that I had originally expected them to.

I have to accept, and to some extent expect, that my portfolio is going to go through significant drawdowns at times. Those drawdowns are challenging. These drawdowns cause me to reevaluate, and either to strengthen my conviction in a particular position or to realize the folly. A lot of the time I waffle back and forth on a stock, buying and selling it at the margins, before finally coming to a conclusion on whether to keep it or not.

In the course of the last year I have found that there is extra stress associated with keeping a public portfolio, where the performance is there for all to see, even though most of the people that read this blog are strangers. I don’t want to make bad decisions. I feel like showing my portfolio every week may be affecting my decision making ability, at least a bit. So I am going to try showing my portfolio every two weeks from now on, as this will make the portfolio less of a focus of the blog, and will allow me to focus on the research topics that I really enjoy writing.

With that said…

Out of Aurizon Mines

Without of a doubt my most significant move over the last two weeks was to get out of Aurizon Mines. On the downside, I got out of Aurizon before it jumped this week and became one of the TSX best performers for the week. I’m not terribly upset with that because I bought Atna Resources, Keegan Resources, and Gold Standard Ventures with the proceeds.

The reason for swapping a producer for 2 development companies and an explorer was simply valuation. The explorers and developers have been hit extremely hard. I honestly never thought Atna would get back below $1. I mentioned Keegan Resources in a previous post, pointing out that I learned of the company from this Mineweb article, where they were listed in the table below as having one of the highest cash to market capitalization ratios of any of the juniors.

Its worth noting that Canaco Resources is also on the list with a 0.65 ratio. I bought Canaco back a few weeks ago at 85 cents and it has done reasonably well since then, trading back up to 95 cents. I would say that companies like Keegan Resources and Canaco Resources represent fairly low risk opportunities to take advantage of the current gold price environment. Both companies have 4x to5x more cash than their current yearly burn rate. Both companies have large deposits and they are actively exploring so there is the possibility of these deposits getting bigger.

The downside to both is that the deposits are so-so, and they are in Africa. Those are my only hesitation with these two stocks. But I am optimistic that the takeover of Trelawney may portend to a bottom in the deposit holding juniors. I was surprised that IAMGold chose Trelawney as a target. It was my impression that the deposit had disappointed and that it was going to be tougher to open pit than was at first suspected. It goes to show there is a price for everything. The price for Keegan Resources right now is hardly the cash in its bank accounts. Canaco is only a little better. I have to think that the mining intermediates must be looking at these possibilities with interest.

A future move that I could see myself doing in the next couple weeks would be to lighten up on these two companies a touch so that I can reinitiate a position in Lydian International. I sold out of Lydian when it looked like the gold sector was about to go into tank mode. I figured Lydian would go down (it did) but I also don’t believe that has anything to do with the validity of their project. The work I did on Lydian 9 months ago remains true today. The company could easily be a $7 stock if gold deposits began to be valued at $1500 gold. It has a much better deposit than either Keegan or Canaco.

I also added to my position in Gold Standard Ventures when they announced news of a second drill hit on their Railroad property. I listened to the conference call that was held that morning. It is still too early to know what Gold Standard has hit upon. What they know is that they have two large, long intervals about 300m apart, and they know from analogy that the mineralization and formation they are drilling into is consistent with some of the large Carlin gold deposits. The stock has a market capitalization of $200M now, so its no longer a cheap speculation; there is a lot of resource built into the share price. Still, I find it hard to lighten up at this point, when the evidence right now is pointing towards one of those large 5-10Moz Carlin deposits that would make a $1B market capitalization not out of the question.

Banks doing well… for now

The regional bank stocks that I have bought continue to perform well. I am going to write a more lengthy post reviewing the earnings of the 4 stocks that reported this week (RBNF, BOCH, BTC, and SHBI) so I won’t go into that detail here.

What worries me about the regional banks is that there is some evidence that the US economy is softening. In particular, the ECRI WLI, which I have been following for years, appears to have stalled out, and it fell for the 4th consecutive week this week. This softening makes me feel much better about the gold stocks I hold, but it gives me pause on the regional bank stocks.

Spain

Also making me feel much better about gold stocks are my worries about Spain. I now follow the Spanish 10 year and 5 year bond on a daily basis. Both are getting ominously close to crisis levels. It appears that my analysis from earlier this year (What is the LTRO going to do for Europe? And how does it affect my stocks?) is turning out to be correct. In it I wrote:

Like the Fed operations in 2008, the liquidity injections led to short term spikes but no lasting impact on the market. I am willing to speculate that the LTRO response with follow suit.

The ECB needs to provide further liquidity injections as the markets in Europe are rolling over. This time they are rolling over in response to Spain, which is somewhat more disconcerting than how they rolled over for Greece last year. I have been hunting the net for some recent Kyle Bass commentary on the situation, but I have not been able to find any.

Losing dollars because of the dollar

I am taking a haircut on the strength of the Canadian dollar. If you look at the difference between the Canadian and US dollar values of the account, you will notice that the Canadian dollar value is now a full 2% lower then the US dollar value.

More importantly, more than 50% of my investments are in US dollar stocks. The regional banks and mortgage servicers that I own suffer every time the Canadian dollar goes up. A move of the Canadian dollar to 1.10, which has been predicted by some, would hit the US stock portion of my portfolio to the tune of 10%, and my overall portfolio, in its current construction, by 5%.

I’m not ready to do anything about this at the moment. With the problems in Spain creeping up, I can imagine a scenario where the Canadian dollar corrects rather severely, and my US dollar assets act as somewhat of a hedge. But it is certainly something to keep an eye on. I would hate to see myself turn out right on my US stock holdings only to see the gains wiped out by currency movements.