the market has priced in world peace and prosperity for the next 20 years
12% up in 7 days; 3% down in 1/2 a day. Where fair value is hard to determine anymore. One can't make too many investment decisions when market driection is determined by latest pictures from Iraq and not business prospects.
Imo, his methods of evaluating Gold miners are worth the price of admission.... <gg>
Contrarian Chronicles Don't confuse this rally with a new bull market The market's big gains will surely generate a lot of talk that the bull market's back. While I don't know how long this rally will last, I do know it will end -- and end with a thud. By Bill Fleckenstein
The war rally that we have been expecting has just begun. What is not knowable at this early juncture is how far it can carry. The trick will be in determining that, because when the rally peters out, the next slide is liable to be quite brutal. In this week's edition of the Contrarian Chronicles, we'll take a look at all the ramifications, and, for those who have an interest in gold, I'll share my thoughts on how to value gold stocks.
A month ago, I talked about why we could expect a war rally. Last week, when war news was finally on the table, expectation became reality. Now, I'm shifting gears, from talking about the case for a rally to debunking the notion that this is anything but a rally -- and not the start of a new bull market. That's what plenty of people will be proclaiming as the rally unfolds, so right off the bat, here's advance warning on that score.
To step back a minute, I had said on Feb. 24, "We could expect a rally on the back of war, just because people now have an excuse to rationalize all the weakness we have been seeing." Last Tuesday, it was easy to see rationalization in action. The prior evening, Tech Data (TECD, news, msgs), the second-largest distributor of technology products behind Ingram Micro (IM, news, msgs), preannounced for next quarter, but folks just shrugged that off. In fact, the stock was up nearly 10% at one point during the day. Likewise, Applied Materials (AMAT, news, msgs) rallied 2.5%, even as it followed up its preannouncement from a month ago with the news that some 15% of its employees would no longer be material to its workforce.
That bad news doesn't matter right now is one ingredient of what I expected to see during the war rally period. To repeat, people who are still in denial about our real problems will turn war angst into an all-purpose scapegoat, a rationalization to go out and buy stocks. So, with the excuses already being made up and believed, it was perfectly "logical" why Tech Data and Applied Materials were able to overcome bad news last Tuesday. In view of this, as well as other examples of bad news being ignored, it seems very clear to me that for now, the risk/reward is against the bears, certainly in technology stocks. That said, we don't know yet how much bad news will continue to be ignored on the back of war angst. That's why trying to gauge how far this rally will go is not possible at this point.
Active duty for denial Similarly, we don't know if there will be a lot of good news emanating from the war. If the war goes as swiftly as some people expect, President Bush will look better. His platform to push for another tax cut, which many people consider bullish, will be bolstered. People will talk about oil prices getting crushed as a form of tax cut. (Editor's note: crude prices dropped nearly 30% from March 12 to March 21.) Then, of course, all the technicians will be chirping about how we've successfully tested the lows, etc., etc. At this juncture, it is not possible to gauge the amount of bullish spin that good news on the war front could produce. But for now, people who want to rationalize away our problems will find plenty of ammunition. I bring all these examples up now so that people can assess them before momentum gathers further, and to know that it was possible to see this coming.
Meanwhile, depending on how things shape up, it might be possible to make money on the long side. I could make a case for a rather prolonged rally, which might be profitable to trade from the long side, or for a brief rally, which wouldn't be. At this moment, I do not have an opinion, though I'm sure I will have one before too long. (Of course, it will just be that, my opinion.) One complicating factor in trying to estimate how long and how far a rally can go is that the war has just begun. The course of events in the war will probably dictate how wild and crazy the second-half stories and the (erroneous) new bull market theses become. In any case, let me just state here my willingness to give the bulls plenty of rope, and to note that I am in the mode where I am not short.
Abstract on the extract
That brings me to the long side, where I recently added to my position in Newmont Mining (NEM, news, msgs) at a price of $25. For readers who are considering purchasing gold stocks, I thought I might take a moment to explain how I approach the subject of valuation. To begin with, I don't think price-to-earnings ratios are particularly meaningful, which is also often the case with cyclical stocks. (Though gold stocks aren't cyclical, they do share some of the same characteristics.) The important thing to focus on is that when you buy shares of a gold company, what you are buying is gold in the ground. You have to ask yourself, do I want to buy gold bullion, or do I want to buy gold in the ground via a gold stock?
We know what the price of gold bullion is. It's quoted on a regular basis. (It was $326 on Friday.) But determining the value of a mining company's gold in the ground is, at any moment in time, not so clear. Proven and probable reserves are pretty good estimates that also are a function of the price of gold. Often, a mine will see its proven and probable reserves go up as the price of the commodity goes up. That is because there is a cost associated with yanking this stuff out of the ground, and the higher the gold price, the more "higher-cost" ore can be mined. When the gold price drops, this process works in reverse.
Plus-and-minus mining
With Denver-based Newmont, the world's biggest gold producer, trading at $25, you're paying just under $120 an ounce for its proven and probable reserves. The estimated cash cost for Newmont's gold production is around $195 an ounce, meaning that when you "buy" the reserves and combine that with the cash costs to mine the metal, you're basically paying something on the order of $305, plus or minus, for an ounce of gold. However, the analysis cannot stop there, because in fact, cash costs are not the only costs associated with mining. There are exploration costs and the costs for amortizing equipment, not the least of which is the mill to process the ore, etc.
But on the other hand, you have a land package. Each mine and its adjacent land package are different. One has to make a mental tradeoff between those non-cash costs, and the value of the land package and whatever exploration may go on. This is something of an oversimplification, but that's how I look at it. So, the choice today is, do you want to buy Newmont at an imputed price of, say, $305 an ounce, plus or minus, or do you want to buy gold at $326 an ounce?
The gilt pre-catapult
There's no point in acting as though these estimates for Newmont or any other company are precise; they are not. Also, there is no rule that says you must insist that the imputed per-ounce price be less than the spot price of gold, though obviously, things are more compelling when it is. However, doing the math can provide a framework for further analysis, and it can help you to get a better sense of which companies look cheap and which look expensive vs. each other. I would just note that with respect to smaller companies or exploration plays, in particular, the estimates obviously go out the window, since you can't know what you're going to get. Those companies can be wildly overvalued and attract a lot of hype, sort of like we saw with Internet stocks.
In any case, I have settled on Newmont as my gold pick to click, in large part because of its top-notch management team that came over in the acquisition of Franco-Nevada. Most people who run gold businesses do not focus on return on capital. They're more engineers than capitalists. Throughout the 1990s, most of them just chewed up capital. (During that time, Barrick Gold (ABX, news, msgs) did not, but I don't like this company because of its hedging program.) Meanwhile, for folks who want some able assistance in beginning their own research, I recommend the work of John Doody, who, in my opinion, is the best gold analyst. His service, the Gold Stock Analyst (see link at left), is $350 per year, but it's a small price to pay for high-quality research. So, for what it's worth, that's my quick and dirty on how to look at gold companies.
Bill Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney site. At the time of publication, Bill Fleckenstein owned Newmont Mining. His investment positions, however, can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money.
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March 22, 2003 -- Quite a week! Following two 90% down-days, on March 17 we got a 90% upside day. Prior to that we saw an important non-confirmation with the Dow refusing to confirm the downside penetration of the Transports. On March 17 my PTI turned bullish. On the basis of all that technical evidence, I suggested that subscribers, who wanted to get in the game, buy the QQQs with a stop. I picked the QQQs based on the fact that the Nasdaq had advanced above both its 50-day and 200-day MAs.
But hold it -- where are we? Here's where I believe we are. I believe we are still in a primary bear market, and I believe that stocks are still chronically overvalued. The very basis of Dow Theory is values. At a bull market top, stocks become highly speculative and overvalued. As far as I'm concerned, we're still there. Stocks are speculative and stock values continue at an extreme of overvaluation. When this primary bear market finally hits its low area, I'm firmly convinced that we'll see stock values comparable to what we saw in 1949 or 1974 or 1982. Right now, we're not even close.
As of last Friday, we were in what I call the "war rally." It looks, so far, as though the war will be "a piece of cake." All, except for the expenses, which promise to be huge. On top of that, we have the "after-war expenses," and nobody knows what those will be.
But the war rally has lifted the S&P 9%, the Dow up 9.6%, and the Nasdaq up 10%. Furthermore, oil prices have dropped 20%, the yield on the 30-year T-bond has risen 40 basis points, taking the long bond yield to over 5%, and the dollar rallied against gold, the euro and the yen.
For the year the Dow is now up 2.16%, the S&P is up 1.82%, and the Nasdaq is up 6.46%. The Russell 2000 average of lower priced stocks is still down 1.79%.
The secondary trend of the market was confirmed as up (by my reckoning) on March 17 when my PTI turned bullish.
The question is -- what do we do or should we do NOW?
Here's where you've got to make your own decision. Nobody on the face of this earth knows how far this secondary bull trend may carry. Remember, "the market can do anything." Yeah, I know very well that there are huge problems in the US economy that have not been solved. The debt and deficit situation is so bad it's ridiculous. Mr. Bush has not explained to us how all his plans and tax cuts are going to be financed. I could write a book about the problems we face. But "the market can do anything."
Right now, it seems to me that the market wants to go up. It's conceivable that we could have a 1967-68 situation where the Dow (within the context of an ongoing bear market) actually runs up to new highs.
So you've got to make a choice. Will you be willing to sit and smile if that happens now? Or will you kick yourself because you were "too damn conservative" back in March to make a move? I have a lot of subscribers who want to play it safe, and they're willing to sit with cash and a 10% gold position, and they don't care where the market goes. I have other subscribers who are more aggressive and are will to take a position and are willing to take a limited loss if they are wrong.
I have subscribers who can sleep through anything, and I have subscribers who "toss and turn" if they are down 3% in their assets. Nobody knows you better than you do, and nothing I write can apply to everybody. It just can't be done.
The market is now heavily overbought. Chances are that there will be a correction, maybe just a minor correction, coming up soon. That will give you an opportunity to make your move, assuming that you want to make any kind of a move. The move I suggest is buying Diamonds (DIAs) which are a proxy for the Dow and Spyders (SPY) which are a proxy for the S&P.
This is an interesting decision. It's a decision that may have to do with how much you have in assets. What do I mean by that? For a subscriber with $10 million, he might want to skip the whole thing. After all, who needs it? It's just a play on a secondary advance in a bear market.
For a subscriber with say $100,000 in assets, such a play might be worth it. After all, if he can pick up five or ten grand, fine, every dollar helps.
Well, that's one way of looking at it, and a lot depends on your ability to take pressure, and what I term your "greed quotient," and your "patience quotient."
A lot of people wonder why I write on the Internet six times a week. I do it because I like to write, and I do it because I have ideas every day, and I like to express them. And I do it because the market is there every day.
Speaking of the market being there every day reminds me of Warren Buffett's concept that investing in the market is like a player in a baseball game. If he doesn't like the pitch he skips it and waits for the next pitch. And if he finally strikes out he knows he'll be up again on the rotation, and he'll have another go at the ball.
The market will always be here, and if you don't like this situation, well, skip the damn thing because there'll be something else in a month or six months or a year.
Some investors, and I'm one of them, believe that the secret of investing is "risk management." That means never taking the BIG HIT, and always knowing what your potential loss is in every move you make. The real disasters in this business come from taking huge risks -- and losing.
I used to work for a boss who always concentrated on what could go wrong. One day I asked him (and he was a multi-millionaire, he made his money in the Depression), "Mr Weiss, why are you always so negative about a deal, even though in the end you do the deal?"
I never forgot his answer -- "I'm not negative, I'm just figuring what happens if I'm wrong. The good things take care of themselves, it's the bad moves that can sink you."
The week ended with the S&P selling at a still sky-high 31.99 times earnings while yielding a minuscule 1.82%.
The Confidence Index rose from last week's low 64.5 to this week's better, but still-low 66.8.
The true (common stocks only) advance-decline line for last week was March 17 minus 4.40; March 18 minus 4.28; March 19 minus 4.15; March 20 minus 4.01; March 21 minus 3.57. Breadth was up every day last week.
For those who hold gold and are wondering what's going on, an interview with Ray Dalio who founded Bridgewater Associate ends up this way.
"Question -- What's your approach to gold?
"Answer -- We approach it two ways. We approach it as a proxy for global liquidity, so the more monetization there is, the more we would be inclined to own gold. We also approach it simply from a supply-demand basis. Who are the producers? Who are the sellers? We believe that China will increase their gold reserves, which represent about 2% of their total reserves. The central banks which has been selling will be doing less selling."
Russell Comment -- Monetization, count on it, there will be a LOT of monetization just to handle the gigantic deficit that the US is running. And Europe will be next as they seek to stimulate their sagging economies. The world will be flooded with paper.
Good morning ml, This is a good one..... Bolding mine.
Russell & Faye on Monopoly Money Richard Russell Dow Theory Letters March 25, 2003
Extracted from the 24 March 2003 issue of Richard Russell's Dow Theory Remarks
An article by Jim Grant in today's New York Times (op-ed page) caught my attention. James writes:
The United States at the millennium is an historical oddity, not only a great power but a great debtor. It consumes much more than it produces. It imports much more than it exports. And it owns much less of foreign assets than foreigners do of American assets ($2.3 trillion less as of the end of 2001). In 2002 Americans imported about $500 billion more than they exported -- that being the size of the current account deficit -- a comprehensive measure of the net flow of goods and services between the US and the rest of the world. It is useful to think about this deficit in terms of the current defense budget: it is 35% bigger.
Most countries would jump at the chance to get into this kind of fix. But they can't. And if they did get into the habit of consuming more than they produce, they would quickly have to earn their way out -- by consuming less and producing more. No such imperative is yet felt in the country, however, We conveniently finance our deficit with dollars.
So I had a little argument with my corporate lawyer wife this morning.
Me -- Is it logical that a nation can pay off its debts by printing its way out?
Faye -- Logical is the wrong word. You mean, is it sustainable?
Me -- No I mean logical. Is it logical that a foreign nation will sell us its products and services for a currency that cost us nothing to manufacture. In effect, we're getting something for nothing. Isn't the US actually living off the proverbial "free lunch?"
Faye -- I still say you're not talking about logic. This situation will probably end at some point, so the real question is -- is it sustainable? And we don't know the answer to that.
Me -- Well, to me, if I can get something for nothing I'm defying logic.
Faye -- You say "for nothing," but a dollar is something.
Me -- It is? Then what's your definition of a dollar? You can't give me a definition, because there is none. As far as today's fiat dollar, you can only talk about it in terms of another currency. It takes so many dollars to buy a euro. There are so many yen to a dollar.
Sure, at one time a dollar was defined in terms of a specific amount silver or gold. But without being able to define a dollar in terms of something tangible, you're just dealing with "printing press" or "monopoly money." We're buying foreign products with "monopoly money." I maintain that it defies logic, and if it defies logic it can't last.
With that we halted our debate.
But I maintain that the Achilles Heel of the US economy at this time is the dollar. I believe that the value of the dollar in terms of other currencies can't be maintained. And that's the reason why we have to hold insurance. The best insurance against "fantasy money" is real money, and real money is gold.
There are endless arguments regarding whether gold is being manipulated by various interests. Obviously, if gold begins to rise relentless, then questions about the dollar will arise. The Fed and the central banks of the world (who hold huge reserves of dollars) cannot allow the dollar's "value" to be questioned. Thus, we can expect pressure on gold to continues. It's a battle of the "inflation masters" against the reality of real money. I can tell you that real money will ultimately win the battle. But unfortunately, I can't tell you when.
This brings up the question -- Should we time our buying or selling of gold? You can try, and many do, and some reap profits from their timing. But for the vast majority, I say, "Take your position in gold and gold shares and forget it." You don't buy and sell your life insurance, and I feel the same way about gold. Furthermore, the odds are that when the dollar starts to unravel and gold starts to climb against the dollar you'll have traded yourself out of the metal and out of the gold stocks. Take a position you can "sleep with" and forget it. That's my advice.
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