Reminiscences of a Stockblogger

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.

Sep 25

Gold Stocks: Am I Wrong?

Last week was playing out just dandy until about 7:30 am on thursday. That’s when the stock market opened and the gold stocks I owned fell along with the rest of the market.

Since the peak on Wednesday afternoon Jaguar Mining is down $1.10, or 16.4%. OceanaGold is down 0.65, or 23%. Argonaut Gold is down 14%. Lydian International is also down 14%.

Now I could write a post about how unjustified this is. How these 4 stocks, and gold stocks in general, never began to price in a gold price of $1500/oz, let alone $1800/oz. And about how in the case of OceanaGold and Jaguar Mining, the stock price is significantly lower then it was when the gold price was $1000/oz.

All of this is true, but its not necessarily helpful going forward. What is helpful is to assess the situation and determine if I am best to stick it out, or admit that maybe I am wrong about the direction of gold stocks.

I’ve spent most of the weekend pondering the reasons for gold stocks to go up and the reasons for gold stocks to go down.

I think that the basis of all the arguments for and against come down to the causation of the rise in the price of gold. Now maybe I am simplifying the situation too much, but think you can narrow it down to two contrasting views of why gold is going up. Each view leads to a drastically different opinion of what will happen to the price of gold (and the price of gold stocks) going forward.

These views are:

Gold has gone up on the expectation of Federal Reserve balance sheet expansion
Gold has gone up on fear of the disintegration of the Euro and the EU

The first argument is what is being bandied about the most over the weekend. Gold, and thus gold mining stocks, were pricing in QE3 and that didn’t happen. Operation twist is not quantitative easing. There is no expansion of the Federal Reserve balance sheet and there is none on the immediate horizon. So if the price of gold is a function of the Federal Reserve balance sheet, then gold must return to pre-QE3-anticipation levels. A good starting point would be $1400-$1500/oz. Or perhaps gold goes lower if it overshoots to the downside or if the Fed begins to gain credibility in its balance sheet management.

The second view was invoked quite often over the last month, but it seems to have fallen on deaf ears in the last couple of days. That’s because it doesn’t fit the evidence. the EU is still a mess. The price of gold is falling precipitously.

So does the move of the last two days mean that the Fed watchers are right and that the run in gold is over until there is at least some evidence of QE3 on the horizon? I’m not willing to say that yet. I’m going to re-quote what I paraphrased from Donald Coxe a couple days ago:

The investment case for gold lies in the 500 million people living within 17 different countries that have their savings, pay cheques, and pensions tied to a currency that was based on a theory and seems by the day to have less of a tie to reality.

This argument still holds a lot of water in my mind. There is still no good way to resolve the situation in Europe. As long as this is the case, gold should continue to have a bid. And I can’t see how this will stop being the case. There simply isn’t the money available to resolve the debt issues of the PIIGS. The only solution seems to be the extradition of at least some of the PIIGS from the EU. That is going to be such a messy process, with so many potential pitfalls for both the sovereigns and the banks, that I can’t see how gold would fall in such an environment.

But I remain open to the possibility that I am wrong. I will be watching the price of gold over the next few days and if the weakness continues I will have no choice but to cut my positions. In that regard, I will likely lighten up on OceanaGold first. Both Jaguar Mining and Argonaut Gold are in somewhat envious positions right now. Jaguars mines are in Brazil, while Argonaut Gold has its mines in Mexico. Both the Real and the Peso have been falling lately. This will help bring down Q3 costs and even more bring down Q4 costs.

OceanaGold operates in New Zealand, and while the currency there has began to weaken, it is still above the average levels of Q2.

Lydian I will continue to hold because the story there is really less attached to the price of gold then in the other cases. Lydian is moving forward an exploration project that will be profitable at much lower gold prices. At some point the company will be taken out. So that one I will hold as well.

We’ll just have to see how this next week plays out.