An update on the mining bust...
An update on the mining bust... More readers making money selling puts... Why we 'SUCK'...
Editor's note: Regular readers know our Friday Digests usually include a timeless educational piece from our founder, Porter Stansberry. For example... last Friday, he explained how to use a "regression analysis" to find bargains in the stock market. You can read it here.
Porter's out today. But keeping with tradition, Editor in Chief Brian Hunt wrote today's Digest about one of the biggest boom-and-bust sectors of the market – junior resource stocks. And he wrote it from one of the capitals of resource finance, Vancouver, British Columbia.
Part of your Digest team is in western Canada for the Agora Financial Symposium. It's one of our industry's largest conferences, held in one of the world's greatest cities.
Longtime S&A readers know Vancouver is one of the world capitals of natural resource finance. A huge number of natural resource firms make their headquarters here, along with brokers, fund managers, and analysts.
The natural resource industry is one of the biggest "boom and bust" sectors in the world. Most resources – like copper, uranium, and oil – go through cycles of low prices, which spur increased use of the cheap commodity and decreased production. Those periods are followed by stretches of high prices, which spur increased production but also lead users to seek (cheaper) alternative resources.
The up cycles produce gains of hundreds – even thousands – of percent in natural resource stocks. The down cycles produce losses that can destroy businesses, investment funds, and individuals. The key here is to get into the booms early and avoid (or even short) the busts.
The natural resource industry is also a magnet that attracts liars, promoters, and frauds. Remember Mark Twain's classic definition of a gold mine as a "hole in the ground with a liar on top." Most people will do well to view mining investment as a professional football game. Fun to watch, but not worth getting in there and having a 250-pound linebacker knock off your head.
But just like the liar-and-fraud-filled Wall Street, the resource industry has its share of good guys. You want to trust your money with these guys. They can make investors hundreds and thousands of percent gains during the upswings. For example, during the 2010 bull move in resource stocks, Phase 1 Investor readers made more than 500% in the Canadian gold-exploration firm ATAC Resources. That kind of gain turns every $10,000 into $60,000.
These days, those types of rallies have been few and far between. Resource shares in general have endured a horrible 17-month bear market. Small firms, middle-sized firms, and giant firms have all been hammered. Back in 2011, I "sounded the alarm" at the beginning of this move in my DailyWealth Market Notes column. I noted the weak price action in the S&P Metals & Mining fund (XME)... and I noted the terrible price action in Brazilian shares. Brazil's economy is heavily levered to commodity production... so it's one of the best "pure play" commodity positions a trader can take.
My alert came at a good time. While we can gauge the price action in natural resources and natural resource shares in many ways... one of our favorite benchmarks is the S&P/TSX Venture Composite Index... called the "Venture." The Venture is sort of the "Dow Industrials of speculative resource stocks." It's a good gauge of the resource market.
As you can see from the chart below, the Venture enjoyed a huge rally off its 2009 crisis lows. This move culminated in a massive rally from mid-2010 to early 2011. The Venture ran from 1,400 to 2,400 (70%) in less than nine months. It then entered the aforementioned bear market.
This decline has taken the Venture below 1,200... a level we haven't seen since 2009. In response to the European crisis, the weak U.S. recovery, and the slowdown in China, investors have dumped assets seen as "risky"... or leveraged to global economic growth.
Remember... that decline in the Venture is the broad index. Many companies have fallen 80%-90%. Some have gone broke. Most are getting desperate for capital to keep operations going. This situation has our friends in the resource investment business very excited. Our friend and master resource investor Rick Rule, for instance, is one of the few people who can provide these small businesses with a substantial amount of capital.
With one side of the negotiation desperate and nearly broke and the other side patient and flush with cash... who do you think is going to come out ahead? We'll guess that Rick will prove once again that at the bottom of the market, "cash is king."
As you can see from the chart above, the Venture is in the pits. Share prices are deeply depressed. Companies are becoming desperate. There's no guarantee we're at the absolute bottom in resources. But if central bankers are able to "reflate" things for a few more years, these depressed resource shares could stage a huge rally. Contrarians take note... It's time to "nibble" in this sector. The smart, patient money is starting to pick up bargains. More on this trend soon...
In keeping with our quixotic efforts to "teach" on Fridays... we remind you that we've conducted several great educational interviews with our best contacts, like top resource financier Rick Rule and top gold-stock analyst John Doody. To succeed in the boom-and-bust resource market, it's essential to keep these ideas in mind.
You can read Rick's interview on "hoarding" here.
You can read Rick's interview on resource cycles here.
You can read John's interview on royalty companies here.
And you can read my interview on "picks and shovels" here.
These interviews will give anyone a solid knowledge base to successfully operate in the resource market.
A quick Stansberry Radio programming note: On this week's podcast, Porter speaks with former Major League Baseball pitcher John Rocker. Rocker is now a real estate entrepreneur and columnist at WorldNetDaily.
This is classic John Rocker – an unrestrained, "tell it like it is" interview. John gave Porter and co-host Aaron Brabham an insider's perspective on steroid use, retired athletes struggling financially, and his movement to get immigrants to adapt to their surroundings. You won't want to miss this conversation.
To hear the show now, click here, and to never miss another episode of Stansberry Radio, subscribe here.
New 52-week highs (as of 7/26/12): Anheuser-Busch InBev (BUD), PepsiCo (PEP), Two Harbors (TWO), and Wal-Mart (WMT).
In today's mailbag, great feedback on selling puts and one of the funniest e-mails we've received this year. Give us something to read over the weekend... Send your e-mails here... feedback@stansberryresearch.com.
"While your subscriber yesterday was quite verbose in his description of his put-selling strategy, I hope to be more terse. While I agree that the advice in the newsletters from Doctor Eifrig and Mr. Clark is useful, the overall package of S&A Flex Alliance Membership has given me the know-how to see opportunities that might not make it into their respective newsletters.
"I have shifted from a call-buying strategy to a put-selling strategy and the recent bad news from McDonalds prompted immediate put-selling action that took a day to play out correctly but now leaves me with a position with both inherent value and time value. I could buy, to close, that position now for a 27% return in three days, or I can hold on for decay to produce an even bigger return. Hopefully your readers are getting more out of their subscriptions than just marching orders!" – Paid-up subscriber Alex Wade
"I've been selling puts for the last 40 years! Done the right way it's found money. I still wonder why people will give me money TODAY to buy their stock, not at today's price, but at a lower price that I think is more reasonable. I hope put buyers never get tired of depositing money into my account. To all you put buyers out there I say 'thank you.'" – Paid-up subscriber Joseph Bisignano
"You want vitriol? You SUCK because you're so much richer than I am (not that I'd subscribe to a poor person)! And you SUCK because you're so much smarter than I am (not that I'd subscribe to someone stupider me)! And you SUCK because you won't just give me the next hot stock tip on schedule, dang it! What am I paying you for? And you SUCK because you're always trying to teach me something new (how DARE you!?!)!
"And you SUCK because your political views differ from mine! If you don't see things my way, you SUCK! And you SUCK because your personal religious views differ from mine! And you SUCK because you have an opinion on [insert wildly successful investor here] and I personally know that they are an ASSHOLE! And you SUCK because you tell the truth about things like Social Security and have therefore offended my ignorance (bliss), asshole! And you SUCK because you're trying to educate America on the End of America by spending untold amounts of your own personal money (you rich asshole)... oh, and because you're CAUSING the end of America (and also Europe)! What's happened to your patrioticness, SUCKTARD?!
"And you SUCK because you rate your own newsletters and have possibly the best performing financial newsletters in the history of financial newsletters! And you SUCK because you're so fraudulent by having the same name, address, and phone number for decades; I smell a RAT! And you SUCK because you're willing to refund me all my money and part as friends. Buy high! Sell low! SUCK IT!" Signed "Idiot Um Subscriber"
Regards,
Brian Hunt
Vancouver, British Columbia
July 27, 2012