Reminiscences of a Stockblogger

May 23

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.

May 20

Its a Shitty Time to be a Stock Picker

I find picking stocks to be a lot of fun. I run through numbers and sleuth out scenarios and wrap my head around business models, all in an attempt to predict the future and find that golden opportunity. I enjoy making spreadsheets and flow diagrams and all the other tools that I use to figure out how a business works.

There are few things as exhilarating as when you find an oportunity. When you run through a 10-K or an MD&A and the light goes on and you are like, holy crap, hasn’t anyone else figured this out? So you run the numbers again and read through all the releases again and you sit back in your chair and stare at the screen and say to yourself, “this is a gift.”

That’s good stuff and that is what makes the work worthwhile.

What is frustrating is when you do all the work, have confidence in what stocks should work well in the future, and none of it matters.

And that is where we are today.

On Friday I spent a few hours pouring over the Nationstar Mortgage Holding 10-Q filing. The company is a no-brainer. They are going to earn $3+ this year, maybe much more than that. Being a recent IPO offering, the market has only started to realize they exist, and so they trade at $17, when if you ask me they are worth $25+.

Earlier in the week I looked at Xerox. A beaten down situation, trading near the 52-week low, at a multiple of less than 8x forward earnings. Perfect stock to sock away and wait for it to get back into double digits.

This morning I listened to the Atna Resources conference call. They are on target with Pinson. The operational efficiencies they introduced at Briggs have started to pay dividends in the way of lower costs, and I think we will see further cost reductions going forward. The stock is trading at less than 2x what they will cash flow next year once Pinson is up and running.

Three great opportunities. Each would be solid bet.

But because of Europe, I feel foolish to bet too much on anything. I have to get smaller and smaller because no one really knows what is coming next.

I listened and read everything I could find on Europe last week. No one really knows how it will play out. Not Dalio, not Mauldin, not Novogratz, not Coxe, not Saut, and on and on. If you really listen carefully to each of the experts, they all hedge their bets in one way or another.

What do you do?

I raised cash on Wednesday, Thursday and Friday. My current cash level is about 25%. I raised cash by selling out of Gramercy Capital Corp and Bank of Commerce Holdings, reducing my position in Pan Orient Resources and Equal Energy (finally succumbing to the philosophy of doing less of what isn’t working), and taking 10-15% haircuts from most of the other stocks in my portfolio, including PHH Corp, Newcastle Investments, Atna Resources, and Golden Standard.

I hated to do it. The market right now is very oversold. The Dow has been down 12 out of 13 days. One would expect a market rally here at some point. Greece is still over a month off and its hard to imagine we only go down from here to there. Still, many of the stocks I own had held up well, had not yet broken down, and so I felt the necessity to act while I could. As I wrote on Thursday, the Novogratz interview spooked me into action. As it turns out, I was barely able to lighten up before the bottom began to fall out of stocks like PHH Corp and Newcastle.

The only stock I have not sold any of is Nationstar Mortgage Holding. I am watching it carefully. It has a lot of strength, and I think it may be under accumulation by larger funds. Being a recent IPO, its underweighted by everyone.

But even with Nationstar, I make no promises that I will continue to hold my position at its current size. In this environment I have to protect capital. You have to live to fight another days.

Its helpful to review this quote from Peter Berstein, during times like this:

After 28 years at this post, and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth). Look around at the long-term survivors at this business and think of the much larger number of colorful characters who were once in the headlines, but who have since disappeared from the scene.

There will be stocks to pick on another day.

May 18

A Light Goes On (understanding why Greece matters again)

I’m can be slow to understand the implications of things. I don’t immediately see what in retrospect should be obvious. Instead I have to get people to spell things out for me before I get it.

I think this is partially a consequence of not being able to spend as much time thinking about the world as I need to. I have a job, I have a family and so I really don’t get a chance to sit down and work out all the potential impacts on a regular basis.

I’ve been looking at some private equity stocks lately, trying to understand them better and determine whether they are buys. As part of this research I stumbled upon a market commentary from Michael Novogratz, a principle at Fortress Investment Group. He crystallized for me why we are seeing the carnage we are in the markets (you have to wait until about 4 minutes in).

The key moment in the interview for me was when Novogratz spelled out that the Greek election was a game changer. If Greece leaves the Euro it is, in his words, a Lehman moment. If they leave, we don’t know for sure who owes who what or whether they can pay it back or if the assets and liabilities of any particular entity are going to balance out. Novogratz is saying that Greece could breed the sort of counter-party uncertainty that could cause credit markets to seize.

That’s when I suddenly got it. Its not that anyone can say with certainty that its going to end well or end badly. Novogratz himself said that the ECB and the Europeans governments have been preparing for a Greek exit for months. Its possible that they have worked out all the contingencies. But at the end of the day no one really knows. If Greece leaves it all goes out the window. You are really just guessing to bet what happens next.

Just to throw out some of the uncertainties, there is the effect of funds and banks with mixed liabilities of Euro’s and Drachmas’. There are the TARGET2 balances between Greece and other Eurozone countries that now become debt. There is the strange consequence that a Greek exit destroys all the capital of the ECB. There are the cross-border balances of companies that trade across the Eurozone. There is the deep recession in Greece that results. There is the investor response to Portugal, Italy and Spain sovereign debt. There are simply a lot of moving parts and it is perhaps impossible to estimate how they all play out.

It has the same flavour of uncertainty as Lehman did. And one thing that I learned from Lehman is that the decision makers know far less about the consequences then I thought they did. They aren’t that much smarter than the rest of us. Nobody knew what was going to happen when they let Lehman go until stuff started to happen after they let it go. I think its the same thing with Greece.

Today I raised 20% cash. I just sold a bit of everything, and I sold all of Gramercy Capital (GKK) because I wasn’t sure about it anyways. It helped that gold stocks rallied. It hurt that PHH and Newcastle had bad days. Maybe this is a terrible time for it. We could rally because we are so oversold. But I feel like I have no choice. Now that it makes sense to me it seems like too much risk. I want to get back to at least 50% cash by the Greek election or until there is a resolution that makes it clear Greece is staying.

May 15

Was this why Atna was down yesterday?

In the last few months I have sold off most of my gold holdings, but I decided to stick it out with Atna Resources. That hasn’t looked like a terribly good decision these last couple of days, as the stock has been clobbered down to well below a buck.

Yesterday I looked at the stock thirty minutes before the market closed. It was at 94 cents. I was rather shocked to see later on that it had closed at 84 cents.

It being an earnings release day, I had already scoured the news release and determined it looked mostly benign. However I also know that Canadian regulations call for a filing of the Management Discussion and Analysis report on Sedar. The thing about Sedar is that these reports become available to paying subscribers a little bit before they do for the general public. When I saw the stock drop I wondered whether there was something in the MD&A that insited it.

This morning the MD&A was made publically available. Though I don’t think it is worthy of a 10% drop, I suspect that the following may have contributed to the drop:

The principal requirement within the next 12 months is expected to be funding development of the Pinson underground mine at a cost of $18 to $22 million. This range of costs is likely to increase when a new Technical Report is completed. Atna is considering additional sources of financing to address any potential contingent risk of having inadequate capital to complete the Pinson underground development in 2012, possibly to accelerate the development of Reward, and to ensure funding for the aforementioned projects.

Normally this might be seen as being fairly benign. In the current environment, where even good news is sold and investors are skittish that all gold stocks will soon be worthless, it carries a particular bite.

I always have known that Atna is skating on relatively thin ice with respect to the development costs of Pinson and the available cash on hand. The current report merely confirms that. I have to suspect that the reason the company has not released the technical report on Pinson (that they had originally said would be released at the beginning of May) is because they are trying to line up some financing to give the wiggle room they need. With the current share price depressed, I hope the financing is of the debt sort.

However before I concede yesterdays losses to this buried nugget of coal, it must be said that most gold stocks were down significantly. In fact it looked like a day where the larger institutions were throwing in the towel, with companies like Detour Gold and Osisko Mining down more than 10%.

It simply is a terribly time to own any gold stock. I had thought that the growth profile of Atna might overcome that gravity. Unfortunately that has not been the case.

The good news is that Atna is back to a level where it has completely unpriced Pinson from the share price. In other words, how much lower could it possibly go? You also have to wonder whether there are intermediates looking at the company. A company like Aurizon for example, with $200M in cash, could buy Atna, develop Pinson and have a growth platform for the future, all of which could likely be had for less than what they have in the bank.

I remain committed to my shares. The company has the potential to generate cash flow from Reward and Pinson next year that will match or exceed the current share price. Its too bad that the company hasn’t been a bit more prudent in managing cash levels and taking advantage of the $1.50 share price to raise a buffer of cash but that is what it is. The stock, like so many gold stocks, remains deeply depressed and it seems foolish to me to sell my shares at these levels.