Asset Allocation | Margin Rich

Should the Investing Public Be Worried if Some of the Biggest Banks are Genuinely Scared?

Posted on January 26, 2016 by Margin Rich

Questions of investing and speculating always require context within time-frame. Players in all asset classes, professional or not, approach the game from their own perspective.

Traders surfing the waves of volatility may be looking only days or weeks out. Investment managers overseeing a growth-oriented portfolio may be looking ahead months or quarters while a value-oriented portfolio manager may be looking years out. The 401k-watching worker bee may be wringing their hands at every market move and every ignorant headline despite the fact that they have 30 more income-earning years left before retirement.

The game is tougher than ever even for the professionals and it’s difficult to decide a course of action with the information overload coming at market players. Determining what’s noise and what is actually valuable information is critical in making the right moves within your portfolio.

I have long been pounding the table on building cash reserves while staying invested in the markets. I’ve also stated that I thought the downturn of late 2015 was the start of the next major bear market. I think that dip and recovery in 2015 was the bear waking up and the poor start in 2016 is investor realization of that bear. However, because everybody now sees it, the markets aren’t going to execute a full-frontal stage-dive. That’s not how these things work, right?

I think we get a recovery into new highs followed by another much smaller correction and consolidation potentially followed by another new high. After that, I suspect all the bull energy will be fully used up and the bear will begin in earnest. Remember, these are simply my suspicions based on behavioral observation of the markets; nothing more than forecasts of potential outcomes.

It’s been a long time since I’ve hit readers with some good old chartporn, but I’m in the mood to throw a bunch of squiggly pics out there to possibly help the reader better assess the market situation in 2016. Observe a 20-year, monthly chart of the S&P 500 along with some relevant indicators.

Observe the long-term breakdowns in the indicators matching the actions of 2008 and 2000. Does that mean crisis is imminent? Nope, but I do think it reinforces my call that a new bear has started. Notice also in 2001 and 2008, we saw strong support and a bounce off of the 50-month moving average. Too many technicians are looking for that and thus too many algorithmic shops will be front running ahead of that signal, blowing out orders to drive the market higher.

I suspect this bounce we are currently in the midst of may be a bit stronger than people realize. Market players have been so used to the V-recoveries and yet they’ve already forgotten what they can be like. It appears that players are numb to the potential of a multi-week to multi-month V-bounce from the January 2016 lows. Despite what I surmise about a stronger than expected bounce, nobody can blame investors for either running for the hills or shoving their heads into the sand.

We’ve already seen the peak in net profit margins for this business cycle in the largest US corporates at the same time that markets continue to be overvalued, despite the corrective moves in December and January. Observe the following chart courtesy of ZH via Thomsen Reuters via Barclays. It depicts how the recession fuse has likely been lit.

And with recession generally comes a bear market correction. Or is it the other way around?

Regarding overvaluation, have a look at this comparison chart from AQR depicting market returns based on various starting points of the Shiller P/E. AQR is the shop that Cliff Assnes, billionaire hedge fund manager, founded and runs.

This coincides with GMO valuation models for future returns based on current valuations. There are plenty of Shiller P/E naysayers who believe that the indicator is bunk. The fact of the matter is that evaluating a normalized 10-year look at P/E ratios is a simple and intelligent way of quickly gauging valuation levels compared to prior periods. Of course every period in history possesses its own specific circumstances as the backstory of the valuation levels, but the raw Shiller P/E paints a clear picture for equity performance going forward.

Besides I don’t see or hear anybody calling Bob Shiller a dumb man. Despite what you may think of his ratio, Shiller is a respected academic even within the professional financial community.

Let’s take a look at a chart from one of every perma-bull’s favorite bear-shaped piñata, Dr. John Hussman. Unfortunately, Hussman catches a lot of flak. Less so after admitting to his analytical mistakes coming out of 2011 but I think he catches a bad rap for simply calling it how he sees it. Hussman’s analysis is based on a quantitative and thorough study of the markets. Can the same be said of a vast majority of the financial blogosphere? No it cannot, including myself. Observe the Hussman Hindenburgs. They nailed the current action coming into Q4 of 2015.

The criterion of the Hussman Hindenburg is detailed in the upper left corner of the chart. Dr. Hussman’s Hindenburg indicators proved to be quite prophetic in 1999 while essentially nailing the top in 2007. For your own long-term holdings, ignore these signals at your own risk. Dr. Hussman, like Dr. Shiller, is respected amongst fellow financial professionals. Have a look at Research Affiliates’ (“RA”) own analysis on current valuation levels.

In a research piece they published in July of 2015, RA evaluates the differences in relative valuation metrics (CAPE, Hussman, Tobin) and absolute valuation metrics. They came to the following conclusion.

Our answer to the question “Are stocks overvalued?” in the U.S. market is a resounding “Yes!” Our forecast for core U.S. equities is a 0.8% annualized real return over the next decade. The 10-year expected real return for emerging markets equity, however, is much higher at 5.9% a year. The return potential of the nondeveloped markets is so high, in fact, that the valuation models, warts and all, paint a very clear picture.

May want to rethink that lack of EM exposure going forward, depending on your time-frame.

Shall we move on to a couple of less orthodox indicators of potential trouble in the markets? Observe the two following charts which pertain to income as opposed to valuation or price action. In the first one, created by McClellan, we get an interesting correlation to total tax receipts for the US government as compared to US GDP.

Notice that in 2000, the US crossed the 18% threshold and stayed there awhile before rising even higher at the beginning of the market selloff. For the GFC of 2007, America almost got to 18% but not quite and we still literally almost vaporized the entire financial system. Currently, we’ve reached 18% but that may or may not mean anything. In each previous occurrence, tax receipts stayed at the level for months or even years so this is an indicator worth watching but only in conjunction with many others.

Interestingly, federal tax receipts as a percentage of GDP currently reached 18% right before the markets began selling off last year. Repeat after me. Correlation is not causation, but the timing is still interesting.

The other chart that doesn’t get a lot of coverage but is very well known is net worth of US households and non-profit organizations as a percentage of disposable personal income. You can find it courtesy of our friendly Federal Reserve Bank of St. Louis and their FRED tool. The grey vertical bars in the FRED charts denote recessions.

It’s been a clear indicator in 5 of the last 6 recessions and we also had that annoying fakeout in 1987. Much like the prior graph, this particular chart should be coincident with additional economic indicators if one is attempting to forecast potential economic as well as investment outcomes.

I want to move on to a particular area that everyone should be concerned about and that is nonperforming loans (“NPL”) at major banks. Not just at US banks but around the world. China’s commercial banks have raised fear levels in even the most seasoned professional investors due to their NPL levels increasing so drastically in 2015. I’ve long stated how debt levels in Italy have the potential to dismantle a good portion of the financial system because the Mediterranean Boot is such a key economic cog in the European Union. Some of the biggest commercial banks in Italy are on the verge of toppling during a period where now the ECB is less amenable to the previously used “bad bank” options. The pressure is beginning to mount for Italy’s leadership to formulate a strategy around potential bank failures.

You might be inclined to observe the following chart and think all is at least well for the US.

But take a look at the following chart in commercial-only loan performance and begin to understand why the total situation looks toppy from the economy to the markets.

For the record, commercial loans comprise approximately $2 trillion of the outstanding debt within the banking system. It is clear to see that a bottoming and an upturn occurred before the last 3 recessions and market dislocations. Now we are currently in the early innings of an upturn in NPL. If commercial loan performance behaviorally adheres to what we saw in the prior two recessions, we will see at least an additional 2% of total commercial loans become impaired assets. That’s potentially between an additional $40 billion to $50 billion at minimum that banks will have to provision for. No easy task in light of current leverage levels and collateral utilization across the repo and derivative space.

This is especially concerning because of the systemic importance of each bank to the entire financial system. Just look at the consolidation that has occurred since 1990.

Couple this concentration with a lack of regulation allowed by Gramm-Leach-Bliley and you can see that debt impairment at the banks is not going to have a happy ending. And if you think Dodd-Frank was the answer to all of our problems, I might stop laughing sometime in March.

What would work to alleviate a lot of the financial pressures around the world in the short term is a weaker dollar. I don’t say that as a proponent of a weaker dollar. Rather, I am stating that currency exchange due to a weaker USD could help sugarcoat revenue reporting across international corporates. It would relieve pressure in the management of reserves for countries with an excess of US treasuries. The oil price could stabilize temporarily but it is well-documented that abundant supply and less-than-expected demand is still the story. Commodities could lift and thus commodity producing countries who are already fighting with their reserves issue could see a double-positive impact. All these effects would be temporary as world debt levels are at unsustainable levels and a bear market for all assets has potentially already arrived. It just has yet to completely sink its claws and fangs entirely into the world’s financial system.

Coming back to the initial question behind this post. Should the investing public be scared? Maybe not scared. Let’s call it aware. They should be aware of all the happenings that are occurring right now. Cash levels should be raised. Certain assets should be paired down depending on losses, gains, and risk exposure. More importantly it’s time to take stock in your own investing psyche. If you are building cash levels, will you have the courage to act at the appropriate time? That’s what raising cash boils down to. Do you have an understanding of the intrinsic valuation levels of specific asset classes that will motivate you to put cash to work?

Aside from brushing up on your ability to properly assess valuations, take a look inside yourself and evaluate your ability to deploy cash when fear is running rampant and the nadir of multiple markets appears to be nowhere in sight.

Believe Your Eyes and Ears, Not the Data

Posted on October 29, 2015 by Margin Rich

The evidence continues to mount that the US is entering into a recessionary environment. Really, it’s old news however it’s also unsupported by official data. It’s a slow descent into a recession, because we know that the “data” will not be displayed to show the recession in real time. It will be ex post facto revisions from the BEA that finally let the cat out of the bag, so to speak, sometime next year by my estimation.

When it comes to markets and macro-data, people often assume that a forecast of possible events means the event is absolutely imminent. We are moving into a recessionary environment in total and even if this is yet to be supported by official government data sources, the real-world business data is painting a fairly clear picture. Caterpillar has been tanking for how many quarters now? Fastenal, a leading industrial supplier with close to $4B in revenues, recently had the pleasure of having its newly promoted CEO, Daniel Florness, exclaim to the investing world just exactly what kind of economic environment the company is currently operating in.

In a recent Q3 conference call with analysts, Florness unleashed the following gems, “…I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment…The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do.”

Want a larger business as proof? Take Grainger’s guidance then. Grainger is in a similar business however they do almost 3 times as much revenue and own a larger share of the MRO (maintenance, repair, operations) supplier market. Additionally, a full third of Grainger’s business is earned via government, retail, and commercial businesses versus just manufacturing and other industrial segments.

Grainger has lowered earnings guidance after each quarter in 2015. Their margins are being squeezed and they’ve comped down again in Q3 top line sales. The CEO, Jim Ryan, continues to communicate that Grainger’s results “reflect the challenging industrial economy in North America.”

Opposing opinions will point to the 2 very obvious elephants weighing down US economic results, which are the continued rout in petroleum energy and the strength in the US dollar. The fact of the matter is that petroleum-based energy sources are not the only commodities sold and moved through the US. Self-evident? Sure energy companies have taken a major hit, but look what cheap oil and gas has done for everybody that uses the product. Wasn’t the savings from cheap gasoline supposed to drive retail sales? Are airlines not actually producing record profits on the back of cheap jet fuel?

Let’s take a look at the AAR monthly rail traffic report through most of the 3rd quarter.

Observe how carload and intermodal traffic are beginning to tip over. For the sake of unfamiliar readers, carloads are what commodities such as coal, grain, etc. are transported in. Intermodal is utilized for consumer goods like appliances, TV, clothes, and all the other goodies that credit cards get maxed out for. If you visit the AAR site and just drill down on carloads, the data is significantly more alarming. The funny thing about commodities is that they’re the input that the manufacturers consume in order to create an output the end-users consume. Reduced end-user consumption, reduced commodity consumption. Basic economics, right?

The drop-off in traffic for carloads only is vast. Intermodal continues to grow but how much of that traffic can be attributed to excess inventory buildup for a holiday sales party that may never materialize? Come on Black Friday don’t fail us now!

I know how important energy is to total market earnings and how petroleum has skewed the data downward. That data is readily available for all to see the impact.

However, the rail traffic, commodity prices, wholesaler and retail sales are supposed to simply take a backseat to oil and the dollar when it comes to analysis of the US economy?

Wal-Mart rocked the entire stock market single-handedly when it guided that 2016 profits would drop by as much as 12% next year as the behemoth spends heavily to increase wages, improve the store experience, and build out and expand its online presence, all while dropping a cool $20B over the next couple years in share buybacks…which is not to support earnings of course. Managing earnings would be unethical. Putting salt on the wound, management also shared that they expected sales to be flat as opposed to previous estimates of 1% to 2% sales growth.

Let’s find a bright spot somewhere. Do a dance around your sombrero for Mickey D’s reporting positive comps in sales, finally, of less than 1% but I’d still be a whole lot more worried about what Wal-Mart’s performance in Q4 could mean from a macro standpoint.

All the information examined so far is widely reported, but let’s take a closer look at a less orthodox indicator. The hospitality industry, specifically hotels, reports all sorts of proprietary business information. One of the leading aggregators of this data is STR Global. They produce reports that can be drilled down to specific markets and segments.

As these reports are proprietary, STR of course sells this information to whomever would find it useful and are known in the industry as Star reports. Some of the specific knowledge shared is figures on Average Daily Room Rate (“ADR”), Revenue Per Available Room (“RevPAR”), and Rooms Available (“Supply”). ADR is a simple calculation of the average rate paid for rooms which is calculated by dividing room revenue by rooms sold. RevPAR is similar in that it is the total guest room revenue divided by the total number of available rooms, but the sticking point is “available rooms.”

Hotel properties can report to STR that they have decreased their supply of rooms. This will of course positively affect a property’s STR revenue-based metrics. How is this done? Simply. Let’s say a hotel has 500 rooms on the property. Business may be exceptionally slow and cannot support current labor levels. So the GM simply puts 250 rooms out of service indefinitely. Now when data is uploaded to STR, room supply is halved but ADR and RevPAR at the very least maintain but more probably improve due to a lower bar being set for occupancy based room supply.

Where does this begin to affect the greater economy? In the suppliers to the hospitality industry. Less rooms in use means less cleaning supplies needed, less turnover in linens & terry, FF&E investment diminishes and so on. But what’s worse is that suppliers, whether they are manufacturers or wholesale suppliers may create or modify business operations based on STR market data. Revenue goals at suppliers may be maintained at artificial levels despite decreasing occupancy levels in various hospitality markets. There are continued knock-on effects to be rationalized. I leave those effects to readers’ imaginations.

Do you think this is not happening, that rooms are simply identified as “out of service” so that results can be manipulated? I assure you this is happening. Room supply is one of those very important pieces of information that gets completely overlooked as long as ADR and RevPAR are steady or increasing. It’s absurd. You’d think sharp, experienced minds would see through this kind of thing but it is regularly glossed over, much like budget timing cycles in evaluating an underperforming sales person who may simply be having a tough time attaining goals due to the timing cycle after coming off of a monster year, as opposed to an actual lack of effort or skill.

I have multiple, highly reliable sources that have assured me of this practice but it’s not like it’s a secret or some sort of industry cover-up. It will be openly talked about if addressed by the appropriate parties. None the less, this behavior of massaging hospitality data can be misleading in one of the US’s leading service-based industries.

For an idea of how important hospitality is to the US economy, have a read of the following blurb right on the front page of the Select USA travel, tourism, and hospitality site administered by the Department of Commerce,

The travel and tourism industry in the United States generated nearly $1.5 trillion in economic output in 2013. This activity supported 7.8 million U.S. jobs, and accounted for more than 9 percent of all U.S. exports. One out of every 18 Americans is employed, either directly or indirectly, in a travel or tourism-related industry. In 2014, U.S. travel and tourism output represented 2.6 percent of gross domestic product.

Hospitality matters and data integrity across all industries and entities is critical in making accurate business and economic assessments. But let’s come back to the larger markets.

I would venture that there are only a handful of quarters left at best where debt issuance will be seen as “cheap and easy” in order for companies to fund share buybacks. Once that jig is up, then actual sales, profits, and responsible allocation of free cash flow will have to continue to push that game forward. You willing to continue betting your hard earned cash on the responsibility of corporate CEOs in a world already overflowing with debt?

The question, as always, is how is all this actionable? And the answer is that inaction is the action. Continue raising cash. I’ve been sharing that same tired message for a little over 18 months and I’ll continue to reiterate it. I’m still highly allocated to the equity markets. I continue to actively trade albeit much, much more selectively now. The strategy is not go to all-cash, it’s raise cash. There is little doubt in my mind that cash-poise will be rewarded with asset-prosperity.

Coming back to what all this data talk is focused on, the BEA releases the advance estimate for GDP tomorrow morning at 8:30am EDT. Let’s see if a convergence begins with the real world compared to official-statistics world. The 3.9% revision in Q2 from the negative Q1 was eye-opening. I’d say get ready for some volatility tomorrow either way the estimate reads.

Potential Snapback or Another Sign of Market Deterioration

Posted on August 6, 2015 by Margin Rich

Look out below!

Disney (DIS) took a header yesterday. I’ve written about these moments before for various high-quality stocks. Inevitably, every year like clockwork the stock markets decide to put high quality businesses on sale in an overreaction to this, that, or the other. The reason for Disney’s 9% nosedive was a falloff in top lines from analyst expectations and fear for their cable revenues. Utter nonsense.

Last time I checked Bob Iger was still running the place. This man cut his teeth at Capital Cities and is as gifted as they come in the media executive space. Just look at his track record since taking over. By fully capitalizing on the cheap-money era, Iger has guided Disney into 3 of the smartest acquisitions that could possibly be conceived. They picked up Pixar, Marvel, and Lucasfilm. These 3 properties will generate tens of billions in licensing revenues and over the next couple of decades will have cash flowed billions of dollars with all the ways the IP can be distributed. And because this quarter only saw $13.1B in revenues as opposed to an expected $13.2B, Disney is somehow 10% less valuable in a single day? Weighing and voting, weighing and voting.

Disney is a high-quality choice for a long-term addition to a retirement portfolio. It generates immense amounts of free cash flow and possesses arguably the most recognizable portfolio of multimedia assets in the world. I’m a fan of the company’s tremendous cash generating abilities, however, even after the 9% drop today they are still richly valued by virtually any standard utilized.

What needs to be ascertained is whether the move down was the beginning of a stronger move lower or an overreaction? Is yesterday’s selloff an opportunity to add to a portfolio? How ripe is a snapback trade, potentially?

Let’s look at the facts about Disney’s fiscal Q3 results. They beat on earnings which were up 13% from Q3 in 2014. The YoY revenue comparable from end of Q3 2014 to end of Q3 2015 saw a 5% rise in topline, despite analyst projections. Who cares about Wall St. analysts? They are literally paid to miss the mark and then sell their misses like it’s valuable knowledge to the investing world. For the nine months ending, revenues and earnings are also up nicely. Free cash flow is down quarter over quarter but still up for the nine months ending over last year so I wouldn’t be surprised to see another year of over $6B in free cash flow.

One of the major worries about Disney is the falloff in broadcasting revenues and how they can adapt ESPN’s model to the cord-cutting trend. My stance is who cares? Is it really worth worrying if Iger is going to figure out how to fully monetize ESPN and the other broadcast assets in light of the shifting environment for cable revenues? The answer is no because Disney is just milking the current model for all that it’s worth. They’ll adapt with the cultural and secular shifts in consumer trends and continue to generate incredible income from their broadcasting portfolio for years to come.

A gambler may want to consider playing the snapback with an aggressive option strategy as asset managers potentially step in to buy Disney shares in what could be perceived as an overreaction by Mr. Market. However, breadth has been severely deteriorating underneath the market. Additionally, AAPL may have set an example for what may occur. Observe the chart below.

Despite the current VIX reading, there is a lot of fear in the market. Sentiment readings have made it palpable. Now you have two mega-sized conglomerates showing incredibly weak market action. Is the price action of AAPL and DIS a precursor to something larger? Something of the summer of 2011 variety? Hell, I don’t know. Who does? If you want some actionable advice, I’d say do what the pros do and wait for confirmation. Trying to trade in front of a trend change has depleted the bank roll of many a trader. If you want to trade the potential of a snapback without waiting then I’d suggest keeping a tight stop on whatever medium you use. For longer term allocation, if you liked DIS at $120 but were waiting for a better entry, well then I’d say a quick 10% haircut is a better entry. Remember, DIS is richly valued right now and rightfully so in light of their IP and cash flows.

There are plenty of ways to gamble long or short on the current price action in Disney, hopefully making traders dreams come true.

Geological Assays, Biological Assays, Speculating Like an Ass, Hay! – Part 2

Posted on June 18, 2015 by Margin Rich

So now we move on to junior precious metals companies. Aahhhh, precious metals related companies. To speculators, they’ve been neither precious nor have they proven their mettle since the gold correction began in 2011. This post will be focused on lottery tickets should precious metals ever make that long-awaited turnaround for which goldbugs around the world have been so highly anticipating. For the sake of ease, I’m going to simply use “precious resource” as the proxy for the entire precious metals sector of gold, silver, and the platinum metals group…might as well add diamonds in the mix, too. For the most part though, this post is focused on gold. Part 2 will be significantly longer than Part 1(biotech) as I explain the rationale for constructing a junior resource portfolio. Additionally, there will be a short commentary on each portfolio member which will significantly lengthen the post. Before getting started, there will also be a lot less pretty little charts in this particular post, but there’s still a few. However, I will provide plenty of links to relevant information that will supply you with a plethora of pretty pictures and charts.

Long time readers know that even though I’m not a goldbug, I’m still a believer in the thesis for holding gold. Additionally, I do believe that precious metals will probably be trading at multiples of the current price at some point over the next several years. Did I stake my family’s entire financial future on it? No, but as I rationalize the current monetary and economic systems of the developed world, it’s difficult not to think that gold will have a more integral role in the coming years. I can’t completely envision that role nor can I speak to the timing of the world integrating the planet’s oldest money in some shape or form into the international monetary system. All I can do is observe gold for a bottoming process and select equities that offer a highly asymmetric risk/reward profile if gold begins a serious advance.

That’s where the juniors come in. Junior precious resource explorers have essentially been left for dead, and for good reason. For many actual producers, All-In-Sustaining-Costs (“AISC”) of mining are at or above the spot price of the base product. The efficient producers are able to produce at lower AISC or at least have scale to continue operating with solid margins. Often companies with a significantly lower AISC have ancillary mineral offsets that reduce the cost of mining the primary reserve. For example, a gold company may operate a gold mine that has significant silver and copper resources, as opposed to a gold company that may operate a mine that only possesses gold reserves. The point is that if producers are having a hard enough time in this environment then consider the bloodbath for the explorers i.e. the “liars standing next to holes.” Observe the HUI, the major gold company index, and the TSX Venture, where a majority of junior explorers are listed.

A great deal of the junior explorers on the Venture exchange are just “zombies” surviving on nothing but crumbs from the executives to keep the lights on. Potentially even worse, it appears there continues to be complete nonadherence to exchange policy by the exchange’s executives for holding these companies accountable and de-listing. Have a read of this Financial Post article for additional details on the TSX/Venture Exchange’s “Walking Dead” companies.

We’re not looking to track zombie companies with worthless holes in the ground. We’ll be following companies that have continued to show quality exploration results and who have come out the other side to obtain financing for: construction, permits & studies, and expansion. We want companies that have engaged management who’ve already proven themselves as rainmakers in the resource sector with the ability to attract high-level key investors. Additionally, we want companies that operate in safe jurisdictions, for the most part, where the rule of law is generally observed.

But why now? Gold is still down and feels like it could go lower in a final washout, so why look at the smallest and riskiest gold-related companies with no upward catalyst currently in sight? It’s because there have been signs of life recently in gold price calls around the financial web. Dr. Steve Sjuggerud, of Stansberry Research, is touting the cracking of the “gold code” in his True Wealth Systems service that has purportedly identified all of gold’s major upside turning points since the 70’s. Apparently, the “gold code” is indicating that now is the time to take advantage by positioning into smaller, quality gold equities to leverage a potential move in gold. For the record, I am not a subscriber to True Wealth Systems.

King World News (“KWN”) has had numerous recent guests throwing out $20,000 to $50,000 an ounce for gold. Nobody of course ever has a timetable, but these numbers are simply outrageous. If you want gold zealotry and price hyperbole, then KWN is your site. I use it more to un-quantitatively gauge the despondence or maniacal sentiment of guest commentators. KWN does a good job catering to its specific target audience, but opinions can be a bit hardcore for my own tastes. None the less, I still frequent the site to get a feel for the extremes in thought processes out there.

Avi Gilburt, of Elliott Wave Trader, penned an article for MarketWatch opining that his analysis shows gold could surpass $25,000 an ounce. Granted, he said this looking out 10 years and beyond(as in 4 additional decades) but it’s still a wildly optimistic projection in light of current sentiment. Curious about Gilburt’s experience prognosticating? Have a look at his track record. Mark Hulbert, also via MarketWatch, threw some cold water on Gilburt’s prediction stating that there are still too many bulls in this bear market for gold. However, Hulbert did state that his analysis was based on indicators that work in the short-term and alluded that higher prices could be in the works based on longer-term sentiment readings.

Dr. Sjuggerud is the real deal. He provides legitimate quantitative analysis via his trading research services. Even his entry level advisory, True Wealth, has provided a very consistent track record of low-risk, high-reward investment options that tend to be a little bit off the beaten path as well. If there was ever an analyst whose experience and track record lends any real credence to a call on gold, he’s about it. And I’ve read virtually all of the opinions from alleged gold experts such as: Sinclair, Fields, Lassonde, McEwen, Aden sisters, Turk, Leeb, Celente, Maguire, Sprott, Rule, Embry, Greyerz, Zulauf, Dines, Polny, Doody, Stoeferle, Hathaway, Giustra, Faber, Nenner, and on and on and on. One thing I know for sure, nobody has a clue where the price of gold is going nor do they know when or if a turn upward is ever going to come. That being said, I still think a final washout in gold may still be in the offing. Have a look at this long-term chart for gold and its Fibonacci retracement levels.

Actually, I take that back about nobody knowing. Apparently, Ron Rosen knows. First let me state, no disrespect is intended to Mr. Rosen. He has 6 decades worth of experience in the markets. That’s to be commended and I can truly appreciate how he puts himself out there, especially since he’s probably at or approaching 90 years of age. I just cannot get with the timing “deltas”, Elliott waves, and Gann cycles to look into the future. Have a look at his outlandish projection for a probable gold price in the 2nd half of 2016, because according to him, Mother Nature has already declared it.

The price is the price and the action is the action. That’s all there is to believe when it comes to gold and any asset, really. Following prognostications off of what you read on the web is no different than visiting your local fortune teller and throwing away your money. I do believe gold will move substantially higher in the coming years. I don’t have a time table, neither does anyone else. I have gone on record as stating that I thought the fall or winter of this year would present the beginning of the turn in precious resources and larger stock markets. However that is pure supposition derived from a couple of different price cycles.

The true anti-gold pundits see this chart formation below and think gold is on its way to the $700 area where it will either languish or continue to sink over the ensuing years based on the tendencies of bearish descending triangles and a “strong” dollar.

If I had to purely speculate on long-term price movement, I would guess we get the $900ish washout followed by some as yet unknown catalyst that will then begin to drive gold in its potential multi-year ascension to between $6,200 and $9,800. There is nothing quantitative in my projections. The low end is a rough projection based on the gold move from the 70’s with the potential for an overshoot near $10,000 on the high end. Let me repeat, this is a guess pulled right out of thin air with no supporting data; just slight modeling off the 70’s mania. Believe me typing out potential future prices like that seems pretty far-fetched to me too, but all my fairly intense research continues to lead me to this conclusion despite all current evidence to the contrary.

Ok, ok, let’s get to the damn stocks already, am I right? For any players with experience in this sector and exposure from the last run-up in gold, these names should come as no surprise. They’re survivors because they have the right property managed by the right people making the right financing deals in the right jurisdictions. We’ll be tracking 8 companies in the junior portfolio but we’ll keep an Honorable Mention Watch list of an additional 10 companies. Additionally, we’ll track a handful of ETFs for comparison purposes. Six out of the eight companies we’ll be tracking operate in either North or South America while the remaining two operate in Africa. If jurisdiction was so important in choosing these companies then why are two of them focused on African properties? It’s because of the people, the management.

Aside from the resource potential, the people at the top of a project are probably the single best indicator of the potential success of a junior precious resource company. The resource rainmakers know how to get it done in any jurisdiction because they know and understand how and who to partner with, which our two African players have abundantly made clear time and again. So without further ado…

The first junior precious resource player (“J-perp”) is Lake Shore Gold (LSG). The good thing about them is they are already producing. Tony Makuch, LSG’s CEO, is an underrated mining executive. He certainly takes his fair share of pay but he has earned every cent of it when you compare Lake Shore’s performance the past few years to the rest of the precious metals complex. Makuch has skillfully grown the operation and responsibly taken on debt while then quickly paying it down. Lake Shore’s projects are in the Timmins gold camp which is one of the most prolific gold producing areas in the world. In 2014, they produced 185K ounces and are on track to become a steady 200K oz./year producer. They’re sitting on $77M in cash and gold in their kitty so plenty of financing is accessible for efficiency upgrades and continued exploration, of which there is no shortage. As far as major players with a stake in LSG, Van Eck owns approximately 7%. Hochschild, one of the more well-known international silver producers, owns around 5%. Franco-Nevada, Sandstorm, and Goldcorp all have royalties with LSG so this little producer is definitely on the radar. With exploration being reduced by the senior producers and juniors running on fumes, a high-quality 200K oz./yr. operation is going to smell mighty good as bigger players begin to get hungry for growth, especially for stuff off the dollar-menu. Here is their most current corporate presentation.

Our second J-perp is Kaminak Gold (KMKGF). This company is only an explorer right now, but there’s just too many big-time players involved to doubt the potential of Kaminak and its Coffee deposit up in the Yukon. The CEO is Eira Thomas. If you’re unfamiliar with her story, in Canada she’s known as the Queen of Diamonds. While at Aber Resources, Eira helped her grandpa, Grenville Thomas, discover the Diavik diamond strike for which Rio Tinto ended up purchasing a majority stake. Aber then worked out a direct distribution deal with Tiffany’s and ended up purchasing Harry Winston. Diavik and the Ekati diamond strike, now 90% owned by Dominion Diamond which is formerly known as Aber Resources, helped loosen the stranglehold on the De Beers international diamond monopoly. Eira’s very, very experienced for her relatively young age and she’s very, very connected.

Oh yeah and Kaminak happens to also be sitting on a very nice resource of 4 million ounces in its Coffee project. There are multiple discoveries within the overall Coffee deposit. The 2013 maiden resource estimate came in at 3M oz., which I think opened the eyes of a lot of J-perp investors. In only a couple of years, they’ve already added another million ounces to resource estimates. The beauty of the Coffee deposit is that the grades are steady and fairly high while being near the surface with high oxidation. Not that I know the first thing about geology, but what that last sentence basically means is that gold production can be brought online relatively cheaply and quickly for a heap leach operation. I happen to think that Kaminak is sitting on a lot more gold than anybody realizes and with the vast exploration potential of Coffee, I think that will be borne out in the coming years.

Aside from the leadership and resource potential, the major investors are what add some real buzz about Kaminak. Less than a year ago, Lukas Lundin and Ross Beatty each acquired 10% stakes in Kaminak via private placements. Those are awfully big stakes but the capital outlay was very modest for both investors. None the less, it is a huge signal of confidence in the potential of Kaminak when two resource investing Hall of Famers add their stamp of approval. Vanguard, the multi-trillion asset manager, owns 10% as well in their $2B Precious Metals Fund. For more details on Kaminak, have a read of their most current corporate presentation.

The third J-perp is McEwen Mining (MUX). The name should say it all. It’s Rob McEwen’s personal baby. McEwen helped found and build Goldcorp into the gold giant it is today. After 13 years as CEO, he struck out again on a new challenge and created US Gold Corp. in 2007 then changed the name to McEwen Mining in 2012. I have to admit. This was a rough one to add to the portfolio. Unlike LSG, MUX had a very rough 2014. They were kicked out of the GDX index. They got robbed by a damn drug cartel in Mexico and then good old Robbie was accused of just laughing it off on tv, despite the fact that employees’ lives were threatened. I know it’s a cost of doing business in Mexico, but if you’re going to comment on television about an incident of that nature, you might want to show just a little more sensitivity to the plight of your employees who’ve had assault rifles shoved in their faces.

MUX is producing. It is more of a silver producer right now but gold equivalent ounces come out to about 140K ounces of production in each of the last 2 years. The properties across Mexico and Nevada have solid production as well as exploration potential. Hochschild controls production at the San Jose mine and provides nice cash flow to MUX. The gem of the assets, based on potential, is Los Azules in Argentina. Los Azules is an exceptional copper deposit that has the potential to be one of the largest and lowest cost, open pit copper projects in the world. It also has over 3 million ounces of gold and over a 100 million ounces of silver, which as I previously explained, will offset the cost of production of copper. The catch? Initial costs just to build the mine are estimated at $4 billion, while the mine owner/operator would also have the pleasure of dealing with the dangers and hassles of the Argentinian government. Copper prices and demand are soft. Everyone knows that McEwen wants to monetize Los Azules and take his money to go acquire bolt-on gold producers. The problem is that nobody is going to pay McEwen what he wants for the privilege of being crapped on by the Argentinian government and the struggle of finding at least $4B to build out the project, despite its potential.

Anyways, betting on MUX is simply betting on McEwen to replicate the success he had at Goldcorp. He takes no salary and has a 25% stake in the company. You either believe he can responsibly use equity and debt to build another gold major if the gold bull resumes or you don’t. Have a look at the most recent corporate presentation.

J-perp number four is Romarco Minerals (RTRAF). This little puppy is sort of a well-known, unknown. There are monster asset managers, such as BlackRock and the Norges Bank (central bank of Norway), with stakes in the company. Part of the reason for the semi-anonymity is because even though the people involved with and running the operation have great, successful experience, there are no superstars on their roster. Additionally, they’re operating in South Cackalacka, which is a little bit odd for a US based gold operation. Most of the best players are in Nevada, Alaska, or at least west of the Mississippi River. Romarco is sitting on a 5 million ounce property in the South Carolina woods at their formerly-producing Haile Mine. Two million of that 5M are already actual reserves, which is just outstanding.

This company is locked, loaded, and ready to begin mining. They have every necessary permit and clearance needed to begin construction. All the construction equipment is essentially situated. And just this month, Romarco finalized all the financing required to complete construction and begin mining at Haile. The total capital needed to fund the entire pre-production process is about $400M and through cash, debt, and equity, Romarco has approximately $450M to get the job done. Their creditors did not force them to hedge the gold, which is great, and Romarco did not sell any royalties or streams on the deposit. When it’s finished, Haile should be one of the highest grade, lowest cost open pit gold operations in the world. They should be producing 150K oz./yr. right out the gate. I postulate that through efficiencies, expansion, and exploration, Romarco has the strong potential to ramp up to 200K oz./yr. production but we’ll have to wait and see how aggressive management becomes. They’ll need to focus on driving down debt at first, but I really like Romarco’s potential for not only growth but to be bid up in a potential M&A war by senior producers that want to buy safe, cost-effective production. Observe Romarco’s own exuberance via their latest corporate presentation.

The fifth J-perp takes us to a platinum opportunity with Ivanhoe Mines (IVPAF). Two words. Robert Friedland. This guy is a candidate for Most Interesting Man In The World, at least in mining. Comes from money so he had all the opportunities that is afforded one born into it, but he’s had a roundabout path to mining success. Friedland was expelled from the first university he attended for possession of $100,000 worth of LSD in 1970, which was enough to get him a 2-year stint in federal prison. I don’t know but to me that’s kind of funny. Does his time and heads off to Reed College where he graduates with a poli-sci degree but not before becoming the student body president and befriending Steve Jobs. What?

Anyhow, what makes me so enthusiastic about potentially riding the successful coattails of Friedland is that this is the guy who gets to take credit for finding the monstrous Oyu Tolgoi project in the South Gobi Desert of Mongolia. Oyu Tolgoi is one of the top 8 biggest copper and gold mines on earth that took close to $7B in capital to bring into operation. It’s ridiculously huge and it’s sitting on approximately 46M oz. of gold and 40B pounds of copper, which is the primary product. By the time production ramps up to full capacity and exploration increases the scale, I have no doubt it will be a top 5 mine. Friedland still has a stake in the Oyu Tolgoi via Turquoise Hill, but his focus is on bringing Ivanhoe’s South African Platreef Project into production. He also happened to be Chairman of Potash One when they sold themselves for a nice 30% premium to Germany’s K + S, the largest salt producer in the world and one of the largest potash producers, too.

Platreef has the potential to be the most prolific platinum mine in the world as it ramps up to full capacity over the next 15 years. However, even the first phase of mining, for which they’ve already begun construction, will produce approximately 430K oz. of platinum per year. Additionally, Platreef has exceptionally high levels of nickel and copper concentrations within the ore, which again, significantly lowers the cash cost of mining the primary commodity. Platinum, although precious, is a little bit different than gold in its supply/demand fundamentals. Most of platinum group metals are utilized in automobile manufacturing for catalytic converters, as opposed to only basic use in jewelry or as a money alternative. This fundamental difference has the potential to provide an additional wind in the sails of platinum, should gold resume a bull advance.

Here’s a few key additional notes about Ivanhoe. Platreef should be a mechanized mine. Meaning union influence is significantly reduced. Minimal human accidents or loss of life. They also own the Kamoa project which is the largest high-grade copper deposit in the world. It’s in the Democratic Republic of Congo, which is a bit unsettling as far as jurisdictions go. But there are some definite positives regarding Kamoa. It has over 40B pounds of high-grade copper. They did not announce additional minerals at the deposit that could offset the cost of mining, or if they did I have been unable to find it. However, Zijin Mining, China’s largest state-owned gold producer, owns a 10% stake in Ivanhoe Mines. Additionally, they bought a 49.5% direct stake in Kamoa which says to me that there may be significant gold mineralization in the deposit but I recognize that Zijin may simply be looking to diversify its portfolio of metals, as copper does represent 23% of Zijin’s operating income. Lastly, Zijin is not the only large Asian entity involved in helping to finance Ivanhoe as Friedland was also able to negotiate the involvement of a mega-Japanese industrial consortium to acquire a 10% direct stake in Platreef to help alleviate financing risks for the project. Friedland is a super-major, wheeler-dealer who takes mega projects with high-risk/high-reward profiles and then turns them into piles of treasure. For more details on the Platreef and Kamoa projects, have a read of the latest corporate presentation.

Our next J-perp is a diamond producer. Had to have at least one. Lucara (LUCRF) is currently mining, not just exploring, as an active mid-tier diamond player. They are based in Vancouver, Canada but their assets are in Africa. They only possess one producing asset and it is the Karowe Mine in Botswana, but it’s a very nice asset. It produces about 420,000 carats annually, with some of the largest stones in the world being tendered for sale the past couple of years. Karowe is relatively small compared to Diavik, Ekati, or larger established operations in Africa, but Lucara is majority owned by the Lundin family as part of the Lundin Group of Companies. The Lundin’s are a Swedish family worth billions. Their little empire of natural resource assets was created by Adolf, the late father, but Lukas is the magic making member of the family who has guided the ship into its billion dollar successes. They own assets across the entire spectrum of commodities from yellow cake to oil & gas to copper, gold, and diamonds. The Lundins know value when they see it.

Lucara purchased its main asset on the cheap. In 2010, they exchanged 80,000 shares for the Karowe mine, which at the time was named AK6. So that’s zero cash used to acquire the 100% interest in the property. A private placement here, a private placement there, and boom; they then had the capital for the $120M cost of constructing the mine. By 2012, they were in full production albeit with no cash earnings for the year, but by 2013 EBITDA for Lucara was $102M and in 2014 it was $175M. Sure there was some dilution, which I deemed unnecessary, but getting the funds together coming out of 2009 to complete a successful diamond mine in Africa is pretty impressive. Even more so when considering the price paid for Karowe. Lundin has worked his magic with the Candelaria acquisition from Freeport and he undoubtedly will continue to create wealth in the natural resource sectors. William Lamb is the very capable CEO whom Lundin was able to procure from De Beers. Originally, Lamb was brought in as the GM of the Karowe mine but has proven to be a very competent and successful company leader thus far.

Where some hidden value may be in the future for Lucara is in a potential merger with a little diamond explorer up in Canada called North Arrow Minerals (NHAWF). Now the Lundin empire doesn’t actually control North Arrow, but they do have a significant stake of 20% in the company. Additionally, William Lamb is on the Board of Directors. The controlling stake in North Arrow actually belongs to Grenville Thomas, Chairman of the Board for North Arrow. That’s right the grandpa of Eira Thomas, CEO of Kaminak, is making another run at a huge diamond discovery. Eira is actually an advisor to North Arrow, but Grenville owns 20% of the equity shares and another 10% potentially through convertible securities, giving him 30% control. Just for good measure, J.P. Morgan has their grubby hands on a 10% stake in North Arrow, too. Obviously, Grenville will work closely with the Lundins should they discover any economic kimberlite pipes. With the Thomas/Lundin connection in North Arrow, I can see a peaceful merger of the two to compete with the larger diamond operations of the world. Again, this is probably only if an economic kimberlite pipe or pipes are discovered and developed to production. Lucara’s cash flow could come in handy to avoid dilution, excessive debt, or unfavorable royalties for the Canadian explorer. In North Arrow, Lucara would be buying potential growth in a safer jurisdiction. Here’s a copy of Lucara’s latest corporate presentation.

The seventh J-perp is Pretivm, pronounced Pret-ee-um (PVG). This company is barely a junior. It trades around $5/share. It’s very well known by every gold investor alive and virtually every gold fund in existence owns shares or has owned shares in Pretivm. Not only does it have Bob Quartermain, of Silver Standard fame, at the helm, which is a positive catalyst in and of itself, but it has an embarrassingly rich deposit in the Brucejack project which covers approximately 250,000 acres. The grades and tonnage show mega-potential for an operating mine at their Valley of the Kings deposit within Brucejack. It’s just silly when compared to any other project in Canada, except for maybe the Malartic. Even then, the grades at Valley of the Kings are just off the charts at 15 g/t in gold blowing away the Malartic’s single gram per tonne. Pretivm’s properties of Brucejack and Snowfield are in northern British Columbia. Snowfield runs right into Seabridge Gold’s KSM property and both companies continue to work on a plan to possibly co-develop the properties as one mega-project allowing for significant cost efficiencies.

The Valley of the Kings mine is going to get made. It’s a matter of when not if. Pretium states they can do it for $750M. I don’t see how. Even after reviewing the PEA, my gut tells me to expect significant cost overruns. Despite this deathly market for gold exploration and even if there happens to be significant overruns, financiers are going to be lining up to own the debt on an asset this exquisite. Pretivm expects that at least half the initial CapEx needs will be financed with debt while the rest will probably be some combination of equity, royalty/stream, and convertible securities. Even using a base case model of $1,100 gold, Pretivm will average operating cash flows of approximately $365 million for the first 10 years of the mine’s life. Imagine the potential if or when gold resumes an upward advance.

As for major investors, Van Eck has a 7% stake which is the same percentage they own in LSG. Silver Standard Resources, a major silver player, still retains 13% equity in PVG subsequent to the spin-off. Interestingly, Silver Standard used about 215,000 shares of Pretivm, or about 0.15% of outstanding shares, to exchange for an 8% stake in Golden Arrow Resources. Golden Arrow has some very promising silver properties in Argentina but we’re getting off track here. Guess who’s back to take a major stake in a foreign explorer? It’s Zijin Mining, China’s largest state-owned gold producer. They own approximately 10% of Pretivm and you can be sure they’ll do anything they can to obtain a higher percentage direct stake in the Valley of the Kings deposit. Just bringing Valley of the Kings online makes Pretivm an instant, high-level midtier producer pumping out about 500,000 ounces annually. You can gather additional details on Pretivm’s progress with their most recent corporate presentation.

Our last J-perp is a royalty play. You can’t be speculating in gold equities and not own a royalty company. It’s like a J-perp sin of some sort. The final pick is Sandstorm Gold (SAND). They had a relatively fast start out of the gate. Sandstorm’s CEO, Nolan Watson, was the celebrated boy-wonder of the mining world for a time. He was hand-plucked out of the accounting world by Silver Wheaton to become the first employee ever hired at Silver Wheaton. His experience and success at SLW molded him into the player he would become to successfully branch out on his own to co-create his gold streamer. Everything was just dandy for a while, but reality catches up to everyone and no company, especially a young one, is infallible when it comes to deal making.

Sandstorm IPO’d during one of the worst times in financial history so they’re to be commended for facilitating such a smooth start to the business with relatively quick cash-flowing gold streams. They reached a bit too far with the base metal company. Not that a base metal royalty company is bad idea. It’s an area of natural resources that is virtually untapped for a royalty/streamer. Basically, Altius is essentially operating all by itself in the space for now and they’ve done exceptionally well over the years. Sandstorm Metals & Energy had to be folded back into Sandstorm Gold, as they simply didn’t pick up the right assets at the right time. That’s ok, cash was still flowing from the other assets.

Then there was the Colossus debacle. Now we have the Aurizona debacle with Luna Gold. They get a slight free pass on Luna because they were able to generate $50M in cash flows from them, but what the hell happened? At this point, I’d tell Nolan and the team to just steer clear of Brazil for a while. There’s plenty of untapped potential elsewhere, especially right in their backyard in the Yukon. When Sandstorm originally began operating, they lacked personnel with any true technical experience. Watson and David Awram, co-founder, were relying on their experience to fish out quality projects and it worked for a bit. As the company has grown and some mistakes were made, Sandstorm has added 3 highly experienced geologists as senior technical advisers to provide a qualified and nuanced perspective on potential investments.

Watson claims that deal flow continues to be robust. I really like the acquisition of the diamond royalty on the Diavik mine from IAMGOLD corp. Had to potentially give up a little dilution as well, but the 1% royalty on Diavik is going to produce nice steady cash flows for many years as Rio Tinto and Dominion exploit additional production opportunities on new pipes. The merit of the Karma royalty from True Gold is debatable, but I really appreciate the effort in showing that the royalty companies can cooperate as a syndicate on a project. I’m also confident that establishing a working business relationship with Franco-Nevada will help contribute to the long-term growth plans of Sandstorm.

Originally, Sandstorm wanted to stand alone in their niche as the primary gold streamer. With growth came difficulty in finding projects that move the needle and royalties needed to be added to the portfolio. Streams are great, but I think Royal Gold and Franco-Nevada have proven that royalties are pretty great, too. The purchase of Premier was an intelligent move to continue to drive up cash flows and attributable gold production.

I’ve pointed out several negatives about Sandstorm and some of Watson’s decision making. Despite all that, I’m still a very strong believer in the future of Sandstorm and where they can be trading if gold reverses into a super-major bull market. I view what Sandstorm has experienced as simply speedbumps on the road to success. Watson and company already have some great accomplishments under their belt. A turnaround in the gold price will right a lot of the past wrongs, as a rising tide lifts all boats. Their portfolio in a rising-gold environment will become very enticing to investors who are looking to place money in the precious metals space and want to do it with a growing company that inherently mitigates mining risks and does it with thick operating margins. At the current share price, they are a good long-term purchase for any portfolio even if gold stagnates for several more years. For an updated perspective on SAND, have a read of the most current corporate presentation.

Are you sick of reading yet? It would be understandable if you are, but a relatively high level of detail is warranted in explaining the opportunities behind each of these companies. Precious resources are not in a boom like biotech. The biotech portfolio is simply a free ride on the expertise of some major investors inside of what could be the bubbliest of bubbles within equities over the next 1 to 3 years. Let me provide you with the comparison investments against our J-perp portfolio.

We’ll track against the gold proxy, GLD, to see how the J-perps perform against the actual metal. I also want to track against the closed-end fund gold proxy, CEF, in light of the differences in perceived safety compared to GLD. Our actual benchmark will be against the GDXJ from Van Eck, which is the most liquid of the junior ETFs with about $1.6B in AUM. We’ll also track against the Sprott junior ETF, SGDJ. Despite its large size, I want to track against the Vanguard Precious Metals and Mining Fund (VGPMX) because it has such a high concentration of its own J-perps. The leveraged comparison will be against JNUG from Direxion. It’s a 3x leveraged play on GDXJ. Lastly, we’ll use good old Franco-Nevada (FNV) as our final comparison investment. FNV has performed relatively well during this gold bear and I’m curious to see if it outperforms a select portfolio of high-quality juniors if the gold bull reasserts itself.

As for that watch list of Honorable Mention companies, we’ll track that too. It will be made up of the following companies:

1. Columbus Gold – Paul Isnard project in French Guyana, a Giustra brother is running the show, Nord Gold is positioned to take it over

2. New Gold – Top mid-tier producer positioned to increase production up to 1M oz/yr, huge growth profile, Pierre Lassonde a director

3. Yamana – Already a smaller, senior producer cranking out over 1M oz/yr; trades for the same price as New Gold; huge growth profile

4. Seabridge Gold – KSM is massive, like ridiculously massive, high potential to be acquired in an M&A war if gold bull resumes

5. Novo Resources – Newmont already owns 30%, founder thinks potential to be a 2nd Witwatersrand, Lucky Creasy the Aussie prospector involved

6. North Arrow Minerals – Read about Lucara above

7. ATAC Resources – Continues to claim to have Carlin-style mineralization in the Yukon

8. Western Copper and Gold – Yukon property directly adjacent to Kaminak’s Coffee, huge copper & gold resource, need $2.5B to build

9. Wellgreen Platinum – Another Yukon prospect, high-grade cheap open pit potential in Nickel and Platinum, only need $600M to build

10. Platinum Group Metals – Huge platinum resources with approximately 30M oz of plat., 5M reserves, Japan major partner in development

There are some things that I want readers to definitely keep in mind regarding this portfolio of J-perps.

I want to reiterate for the umpteenth time in this post that our portfolio only has the potential to perform well if the world sees a renewed gold bull; plain and simple. If gold languishes for years around a $1,000 an ounce or drops like a stone to $700 or lower and stays there, then this portfolio will be less than worthless. Which gives you essentially 3 options in regards to allocating capital. You can sit back and watch while never taking a position, visiting Marginrich.com every now and then to check performance. You can begin to position now in anticipation of a turn in the price of precious metals, although there is absolutely zero current evidence pointing to a turn. Or you can set aside cash now but wait to allocate until an honest-to-goodness golden up-move has asserted itself, which if you are interested in speculating in the J-perp portfolio, then this is the safest route. No matter what, the J-perp portfolio is simply an experiment. It will not be a real-money portfolio for me, but as always, I fully reserve the right to position into any of the ETFs or equities written about in this post as I see fit and without disclosing the position. It’s not like I’m charging here for the information. At the beginning of the month, I’ll add a new link on the menu bar to an updated tracker of all the investments.

I also want to remind readers that owning a J-perp is not the same as owning the actual resource, whether that be in physical form or a paper derivative. J-perps are essentially leverage on the base commodity but without taking on margin debt. I do not claim to be an expert or professional whatsoever when it comes to commodities of any sort or the companies that produce them. I’ve obtained my education on J-perps during the run up last decade and into the beginning of the 20teens with a ton of reading and research, but no formal education or experience in mining, geology, or finance. I have my accounting degree and am an experienced investor/speculator relative to the general population but that is all I have that qualifies my opinions in this post. If you’re expecting trading results like the pure luck I had with Duluth, then you’re going to be waiting a while.

A deep, broader market sell-off will take J-perps down with it. They are not immune because of the underlying commodities. However, if precious resources begin to catch bids during a deeper stock market sell-off, then related equities will recover much faster than the rest of the market. That kind of price action can put a strong wind in the sails of the J-perps. If you don’t believe that this market is extended in any shape or form or that we’re still in the beginning innings of a secular-bull market, then I’d like to share yet another chart. Unlike all the charts that have been put out there in the blogosphere recently about valuations using the Case-Schiller or the Tobin or something else, this chart simply displays all M&A action since the year 2000. It comes courtesy of Jeff Hirsch, the Almanac Trader.

You can clearly see in the left-most column, that over the last 20 years, the last two major bear market in stocks ensued once we’d seen the annual nominal value of M&A deals clear the $1 trillion mark for 3 consecutive years. We are clearly on trend to crack a trillion sometime in the third quarter or early fourth quarter. Still think the markets are as rosy as ever? I don’t think a major crash or bear market is imminent in the greater stock markets, but I do believe you’d have to be a fool if you don’t think some caution with long-term capital is warranted. Remember, gold will need some sort of catalyst probably in conjunction with a general stock market sell-off. It can be anything, but once it occurs, that’s when we’ll possibly begin to see the spark in the J-perps. I’ll leave you with a recent quote from Ray Dalio, master of the hedge fund universe, when he spoke to the Council on Foreign Relations and was asked he if was allocated to gold, “If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it.”

Geological Assays, Biological Assays, Speculating Like an Ass, Hay! – Part 1

Posted on June 12, 2015 by Margin Rich

Two sectors of the equity markets that always attracts free-wheeling speculative capital like a moth to a light is early-stage biotech and junior precious metals companies. This will be a two-part posting; the first for biotech and the second for precious metals. Like I did for the “Sample ETF Portfolios”, I’ll keep separate running portfolios for the sectors against benchmark ETFs, leveraged ETFs, and stocks.

As I’ve stated in a previous post, I think biotech could end up in a huge, mega blow-off due to the M&A activity that will continue to get larger and more irrational as the equities bull market ages. Another reason M&A activity will spike is because the players who have access to easy credit to fund a debt driven shopping spree will want to get their hands on as much capital as possible before conditions tighten. Double-digit returns are obviously a whole lot easier on purchases with WACCs that are sub-4 or 5%.

I thought that biotech may be leading a potential larger market sell-off but the sector continues to show resilience. Right now IBB is consolidating and has bounced off the 50 and 100-day EMAs with ease during its ascent in 2015.

As I said before, the conservative play is to simply buy and hold onto this bull and ride it for what it’s worth, bucking and all…but conservative isn’t fun. Yeah, yeah, I know that prudent capital allocation is not supposed to be fun. It’s about responsibly stewarding capital into intelligent investments to outperform the markets over the long term. Fine, but there isn’t a speculator, investor, or market player alive today that doesn’t get a thrill out of watching their holdings outperform the market. With that in mind let’s look at how we’ll construct a speculative portfolio of biotech stocks.

Now I’m not a biotech expert by any means. I gave up trying to cash in on the next big thing in medicine last decade in and around the time every American became an expert in real estate. For the most part, that’s been the right move but there’s always opportunity costs. In February of 2012, a friend asked for my opinion on PCYC when it was trading for a little under $20. He had shared with me some quality insight into the potential value of the company but my bias caused me to advise on passing on it. This was even after the deal with J&J. My name is Mud.

This was a ten-bagger mistake by allowing my previous experiences to misguide. Speculating in biotech is a slippery slope, though. One can get a taste of easy, probably lucky profits and think the process can be replicated, only to have hopes and trading account balances dashed.

Which is why we’ll simply piggy-back the experts. Baker Brothers and Orbimed are two of the premier investment operations that specialize in biotech. Orbimed possesses approximately $15B in assets under management. Baker Brothers manages slightly less but has a higher profile with the public, especially after their huge billion-dollar gains in Synageva and Pharmacyclics in 2015.

It’s the old 13-F strategy made a little simpler. Instead of combing through their 13-F’s at the SEC site, I just hit the NASDAQ instead. There you’ll find the institutional portfolios, free of charge, of both Baker Bros. and Orbimed. They are updated as of Q1 2015. My logic is to simply cross-reference Q1 additions for each fund of the same companies, whether they’re a new position or an increase to an existing holding. The thesis being that if it’s good enough for both these guys then it’s good enough for me.

Bear in mind this is generally not a sound way to invest by any means. Sure there are dozens of sites dedicated to cloning professional portfolios by using 13-F filings, but blindly following a pro is just unsound. It always pays to conduct thorough due diligence. Gleaning ideas to further research is very different from blindly following a respected professional into a position. The thing about 13-Fs is that you never know how the pro is actually playing the position. How are they hedging? Are options involved? You just never know. With that being said…

The following are the stocks we’ve come up with from cross-referencing the Q1 additions.

This will not be a real-money portfolio for me, however, I reserve the right to position as I see fit should I be so inclined. If you want to take a flyer, without putting in any work, at higher biotech returns as M&A finally supercharges the sector then this little portfolio is as good a gamble as any. We’ll run this portfolio against five other investment options for biotech exposure.

The first option will be IBB, the all-weather biotech ETF with the most assets under management that has extensive coverage and great liquidity. IBB will be the benchmark. The next option will be LABU, which is the Direxion Daily 3x leveraged ETF of the S&P Biotech Select sub-index. This is our leveraged play without the margin. It’s very new; less than a month old. Trendy ETF creations that hop aboard trains which have already left the station have had a fairly consistent tendency to signal that the destination may soon be reached. As noted countless times though, “soon” is a relative term.

The third and fourth biotech investment options are the BioShares ETF offerings from LifeSci Index Partners. Paul Yook is the co-founder and portfolio manager for LifeSci. He came from Galleon as a portfolio manager and analyst. Despite the downfall of Galleon’s founder, it was still one of the more powerful hedge funds during its prime. You can garner some additional knowledge via this May ETF Reference interview with Yook. The thing that is nice about these two particular ETFs is that LifeSci offers two levels of risk. They offer BBC which takes positions in biotechs at the clinical trials level and has the potential for higher reward. Then there is BBP which only “invests in biotechnology companies with lead drugs already having received FDA approval.” In theory, BBP should reduce some of the risk and volatility compared to BBC.

The final investment option will be Ligand (LGND). They are basically the only publicly traded royalty play in biotech. They’re essentially modeled after the natural resources royalty players. Think Franco Nevada or BP Prudhoe Royalty Trust but with a wide-ranging portfolio of medicinal therapies at varying levels of clinical stages. LGND possesses a portfolio of over 120 partnered programs with biotech players ranging from the highly speculative to the most established in pharma. A position in Ligand is a bet on management’s competence to expose investors to some of the best profit generating opportunities in biotech while de-risking the investment, so to speak.

Be warned though, LGND has seen its share of volatility. Yes, it has treated shareholders exceptionally well for those who have been able to buy and hold over the last 5 years, but it hasn’t exactly been a one-way ticket to Profitsville. There’s been a few stops to Correctionville along the way including a recent 45% haircut through most of 2014.

None the less, as the only royalty option in the biotech sector I still want to track it against our speculative portfolio, volatility-warts and all.

I’ll post portfolio updates once a month. You’ll see a new link on the Marginrich.com home page around the beginning of next month. The tracking page will maintain nominal dollar gains and percentage gains as well. They’ll look exactly like I what used before with the Sample ETFs.

So there you have it; multiple ways in which to capitalize on what could be an explosive rise in biotech as M&A potentially rages out of control. If you’ve missed this several hundred percent move off the 2009 lows, then here is a perfect opportunity to get positioned for the final blow-off which should come just as it always does for every biotech boom. I don’t think this blow-off is imminent so please don’t misunderstand what has been written. I just feel very strongly that biotech M&A will catapult returns in the sector based on what we’ve seen in every other boom over the last 15 years. The timetable, as with all speculation, is the real question. This portfolio will be tracked indefinitely until we see signs of a legitimate trend-ending correction. Come back often to track the results.

One final note before signing off. For the truly conservative investors out there who visit this site, I just wanted to offer a quick update on one of the funds that I highlighted in my post regarding the emergency fund. It would appear that now may be an opportune time to position into the muni-bond closed-end funds. My preference happens to be NEA but there are a multitude available. Most of them happen to be at their 52-week lows in regards to their respective discounts to NAV. The 10-year Treasury yield is bumping up into what appears to be stiff resistance while at the same time hitting a 61.8% retracement off the Dec. 2013 highs to the Jan. 2015 lows. Additionally, NEA has retraced 38.2% off of its Dec. 2013 lows to Jan. 2015 highs while currently trading in a price range where it has tended to bounce off of. Three out of the last 5 times we saw the price action dip like this to the $12ish range we saw a relatively quick bounce back up into the $14ish area. The two times NEA went lower than $12 and took longer than normal to bounce back up over $14 were aberrant situations like the GFC of 2008 and the huge muni-selloff of 2013. It looks like a good time to take advantage of some great tax equivalent yield with the potential for some decent share price gains.