Reminiscences of a Stockblogger

Oct 2

Crisis-Weary and I Why I still own some Gold Stocks

I’ve gotten tired of reading about Europe and sovereign debt and under-capitalized banks. I think I have read all I need to know to be able to make the decisions I have to make. I’ve already gotten out of most everything but my very core positions, with those being a couple of oil companies, a special situation REIT, and a few gold stocks.

Its the gold stocks that I am most interested in understanding better. While the gold stocks, particularly the junior and mid-tier one’s, performed terribly last week, I remain somewhat suspicious as to whether this under-performance can be maintained.

The gold stocks have a few tail winds in this environment that very few other stock groups have:

The price of the commodity they sell has risen dramatically in price. Keep in mind that at this time last year we didn’t even have $1400/ox gold. Many of the stocks I am investing in are trading at valuations cheaper than they were at that time.
The costs of production and the costs of construction have come down and, if this is going to turn into a recession, likely will continue to come down. This goes not only for oil, rubber, steel, but for labor too, as in most mining districts gold companies are competing with the gambit of base metal producers that will be less able to bid up for workers
For gold companies operating outside of the United States, in particular those in emerging economies like Brazil and Mexico, the currency headwinds that they have faced have subsided, and these companies should be able to enjoy falling cash costs in USD.
As I have said ad nauseum, the likely endgame for the euro-crisis remains likely to be the end of the euro. It is hard to imagine how the traditional store of value will not do well in an environment where the second largest currency ceases to exist in its present form.

So with those points in mind, and being somewhat euro-ed out from the past weeks of non-stop reading, I sat back this weekend and listened to conference calls and presentations from gold companies. There were a few that piqued my interest, many that provided nothing new, and a few that stood out. I’m going to spend the next few posts, which I will put out over the next few days hopefully, talking about 3 companies that stood out for me:

Argonaut Gold
Atna Resources
Jaguar Mining

Oct 1

Indaba Capital Values Gramercy Capital

Well it wasn’t a great week for my stocks, but there was a bit of interesting news after the bell tonight with regard to Gramercy Capital.

Indaba Capital filed a schedule 13-D. 13-D is a form stating beneficial ownership. It needs to be filed by any owner of shares with more than a 5% ownership. At times it is used as a way of publicizing letters to management. That was Indaba’s intent today.

Indaba published as an exhibit in the 13-D a letter with two objectives. First, it asked management to pay the accrued unpaid dividend to preferred shareholders and second, it made the first steps toward their nomination of a new board member.

I would expect Gramercy to begin to pay the accrued dividends at some point soon, but I can only speculate what managements plans are. As to the board member, I don’t really see this as terribly important to the stock price. So the essence of the letter was perhaps interesting, but did not seem to me to be terribly material to the near term future.

What was interesting were the exhibits provided in the appendix.

Indaba provided the details to a similar unit by unit valuation as what was done by Plan Maestro a few months back. They came back with very similar results.

So according to Indaba Gramercy is somewhere between 30% and 130% undervalued in comparison to its net asset value. Not bad.

I lightened up on Gramercy this week along with a lot of other stocks. But I have to say that I find the stock quite enticing still, its cheap, its value is more disassociated than most to the main driver of the market (Europe). With gold wobbling and my thesis that gold stocks would continue to do well even as the world does not wobbles with it, I think its worth me thinking about whether I should be reallocating capital back into Gramercy and away from some of these gold holdings.

Sep 29

Going to Cash

There was another fairly high profile figure came out with some less than inspiring comments about Europe yesterday. The following came from Attila Szalay-Berzeviczy, global head of securities services at Italy’s biggest lender UniCredit SpA. (UCG), as per Bloomberg.

“The euro is beyond rescue,” Szalay-Berzeviczy said in an opinion piece for index.hu., a Hungarian news portal, which he signed as former chairman of the Budapest Stock Exchange. “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”

There is getting to be a fairly long line of high placed officials giving extremely dire warnings about the outcome in Europe. Given the predisposition of people in high places to keep their mouth shut, this is more than a bit concerning. We also have the unnamed BNP Paribas executive:

“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.”

On the analyst side we had the following from Jefferies:

The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks.

And UBS:

It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

I don’t think that this is a time where you can reason out an end game. And you cannot look to the economy for clues. I remember saying over and over again throughout September 2008 that the economy looked fine. The numbers were fine, well they suggested slowing but they didn’t suggest a collapse. Coal imports were ok, ag trade was ok, oil demand was ok. You can go back and read my posts in Sept 2008 on the Investors Village vt.to board and see what I said, how I scratched my head over why there was no sign of what the market was pricing in, and how that turned out to be wrong.

In 2008 the stock market was the first thing to collapse and then the economy collapsed. There was no foreshadowing.

And remember, the stock market didn’t collapse until after Lehman. It wobbled and got volatile before Lehman, just like now, but it wasn’t until after Lehman that it really fell hard – I think that was because the market just can’t price in such a tremendous collapse until it actually happens. Until the probability is 100%. It would hedge its bets by falling some, but you can’t price in that kind of event until its taken place.

In my opinion this situation has the potential to have a similar outcome. If one of these sovereigns default and there is not adequate capital provisions and adequate emergency facilities in place then it could turn out badly. And I’m not so sure the market can price something like that in until it happens.

Of course this might not happen. If everyone is fully prepared and banks do not lose confidence in one another, then it may be a non-event. But how can you predict that? Who has enough insight into the banks in question, into the derivitives of the sovereign debt that they do or do not hold, to be able to conclude how it will turn out?

I sure don’t.

I sold a significant amount of stock yesterday. I managed to get out of some of the gold stocks before the price of gold fell further, and I managed to sell some Coastal before it began to fall.

I admit I have been wrong about gold. What worried me is that it is now behaving like a risk asset, like a commodity. Thats why I sold OceanaGold and some Lydian today. If the market isn’t going to view gold as a safe haven, then who am I to argue. I am still persauded by the idea that gold will be a safe haven as this crisis persists, but until it starts behaving like one again (and going up when bad news comes out) I am going to be defensive.

I am now am about 50% cash. And it could go higher.

Sep 26

Week 12 Portfolio Update: Smacked Down

I could be talking about what happened last week, or what happened to gold and silver overnight. My portfolio was doing quite well before Thursday, up since inception while the TSX and S&P were down substantially. Thursday and Friday knocked the wind out of me, and it looks like that might continue today. Mind you gold has come back from the truly panic lows it set in Asia overnight. If gold continues to fall I will be forced to lighten up on my gold stocks. In this market it is seeming more and more to me that I should just lighten up on everything to zero.