'I don't like the implications here'... Gold stocks crushed... Fed sits still, for now... Euro hits new low... Italian yields rise... Our greatest short ever?... Does GLD have the gold?... Biblical investment recommendations...
"I don't like the implications here," S&A Resource Report editor Matt Badiali said about today's rout in the junior mining sector.
Markets are selling off today on worries about the euro and the Federal Reserve's lack of action yesterday (more on both of these later).
Junior mining stocks in particular are getting hammered. Almaden Minerals (AAU) is down 9.5%. Kaminak Gold (KAM.V) is down nearly 6%. Gold, the commodity itself, is down around 5%. It's a classic "risk off" day, when traders flee anything they perceive as risky.
Junior exploration and mining companies epitomize risk... They're capital-intensive businesses with no guarantee of pulling resources out of the ground. And most have no tangible value... They haven't discovered anything yet, or have only begun the work to ascribe value to what they have discovered. Because they're speculative, it's a volatile sector. When a selloff occurs, juniors get hit hard. But today's selloff is particularly ugly, Matt said.
As you can see in the chart below, the TSX Venture exchange, the bellwether index for mining stocks, bottomed in October... then recovered. We're close to retesting that low. "If it breaks through, who knows where it'll go," Matt said.
"I thought we were out of the woods with juniors after that October 1 bottom," Matt said. "Now, I'm seeing companies with assets... with real value... getting taken to the woodshed."
To grasp what Matt's talking about... look at Kaminak, the stock we mentioned above. Kaminak is a $136 million gold exploration company based in Vancouver, British Columbia. Unlike many of its peers, Kaminak offers investors some tangible value on which they can base their investments...
Kaminak's value lies in its Coffee gold discovery in the White Gold district of the Yukon. This is the same area that produced Underworld Resources' White Gold Project, which led Kinross Gold to acquire the company for about $140 million.
Coffee is a 150,000-acre property that produced drill results of 45 feet at 0.53 ounces per ton. That's a spectacular drill hole. But more important, huge portions of Coffee contain ore-grade gold. While the company hasn't officially calculated how much gold Coffee likely holds yet, those results indicate it's likely to be more than 1 million ounces with attractive grades.
On the strength of data from Coffee, Kaminak held up well during the October selloff... but it's plummeting now, along with the rest of the sector.
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We've written about junior gold stocks in the Digest before... But right now we're avoiding the sector... There's no point in trying to catch a falling knife. Eventually, though, these stocks will be a bargain. For example, there are currently 17 companies on the TSX Venture exchange trading for less than cash on the books. For more of Matt Badiali's views on the junior mining sector, please read today's Growth Stock Wire.
Last week, we noted the many failed attempts to bolster the European market and the subsequent "yo-yoing" of European stocks. If you simply sold on any good news out of Europe, you've made great returns over the past month.
But the time for half-baked euro bailouts has passed. Increasing the European bailout fund by a few hundred billion euros didn't work. Boosting International Monetary Fund capital by a few hundred billion dollars didn't work. Giving European banks access to dollars via a dollar swap line didn't work. The life span of these bailout attempts is abysmal.
Eventually, the Federal Reserve will bring out the elephant gun – its ability to print unlimited amounts of money and buy any asset it chooses. At yesterday's meeting, the Fed noted an "apparent slowing in global growth," adding "strains in global financial markets continue to pose significant downside risk to the economic outlook." We'll get an update when the Fed reconvenes on January 25. But for now, the European situation is still deteriorating...
The euro hit an 11-month low today, falling to less than $1.30. And 10-year Italian bonds reached a euro-era high of 7.09%. (Seven percent was the point at which Ireland, Greece, and Portugal failed.) If the next European stimulus effort doesn't involve trillions of dollars, it too will only be a "blip" on the stock chart.
Porter first shorted solar-panel maker First Solar (FSLR) in his January 2008 newsletter. The stock was trading for more than $225 a share at the time. He wrote...
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What will actually happen is what always happens to very expensive stocks. Things go wrong. The price of oil and energy in general falls as the world slips into recession. Suddenly, the idea of paying for solar panels seems dumb, given the low cost of energy and budgetary constraints on governments around the world. The global-warming fad fades. People forget. And First Solar ends up like so many other promising tech startups – busted. |
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Maybe I'm being too pessimistic. Maybe solar power will finally break into the mainstream. Even if that happens, it will be a very competitive business. It won't be easy for First Solar to grow its revenues this fast for long. The realities of manufacturing will manifest themselves. Growth will slow; margins will shrink. I'm happily willing to bet that First Solar won't earn $1 billion in net income in my lifetime. – Porter Stansberry, Stansberry's Investment Advisory, January 2008. |
Today, First Solar lowered its 2011 sales and earnings guidance for the second time in two months. And it forecast 2012 earnings below Wall Street estimates. And an article on First Solar's announcement that the financial network CNBC ran on its website stated, "[First Solar], long the darling of the solar industry, has suffered with the dramatic drop in the price of solar panels that has nearly erased profit margins in the sector." A glut of solar panels has sent prices down 40% already this year... just as Porter predicted.
The company said it expects net sales of $2.8 billion-$2.9 billion in 2011, down from its October forecast of $3 billion-$3.3 billion. It forecast earnings per share for 2011 at $5.75-$6, down from $6.50-$7.50. And these forecasts don't include expected charges related to layoffs and other cost-saving measures. All this comes on top of the company ousting its two-year CEO, Robert Gillette, in October.
Shares plunged more than 20% today. If you held the First Solar short since January 2008, you would be up 85%. Porter most recently shorted First Solar again in his October issue. If you opened your short position then, you'd be up 40%.
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Short-selling stocks is something many subscribers find uncomfortable. But it is a critical tool for managing risk in volatile markets, like now. Porter has made short selling a critical component of his model portfolio. And he has repeatedly advised subscribers if they aren't willing to try shorting stocks, they should be out of the stock market entirely right now (and take a 50% U.S. Treasurys/50% gold position). To learn more about Porter's strategies for shorting and to see which stocks he is short right now... click here.
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New 52-week highs (as of 12/13/11): Eli Lilly (LLY), Altria Group (MO).
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"You chaps are behind the times with your gold and silver recommendations. The Lord told Joshua after he had destroyed Jericho and slaughtered all the inhabitants to collect up all the gold and silver and store it all in the house of the Lord. Even the lord knew something in those days." – Paid-up subscriber G.B. Dawson
"Why didn't you explain that the drop in gold prices would be one of the outcomes of the Euro crisis? Those of us with little resources have taken your advice and put our meager savings into gold and now it seems we going down the "plug hole"." – Paid-up subscriber Margaret McPherson
Goldsmith comment: Perhaps you didn't read yesterday's Digest... We were reiterating our advice from November.
Regards,
Sean Goldsmith
New York, New York
December 14, 2011