Sunday, July 15, 2012

The State of the S&P



Ok, so a few notes on the S&P as we await next weeks open.  We had ourselves a little panic, as predicted.  If you remember my chart of the S&P from the post "Long way down"  back in late April, we knew it was coming.  The S&P's numerous QE induced rallies all had certain things in common.  When they broke their up trend lines it always corresponded with weekly MACD turning lower.  The result on each instance was a nasty move down.  This past one followed the exact same format.  The only question left now is, is it over yet?



Above we will start with the daily chart which erased all of last week's losses on the single move it had on Fri.  There will likely be some follow through on that.  It appears as if it has made a bottom and is attempting to trend higher.  From this we can see an upwards bias with a logical target at the major resistance point and upper trend channel line near 1400.  MACD has just about turned back up after a slight dip below the signal line.  It remains above 0 which is bullish.  That's pretty much the long and short of it involving the daily chart.


What I want to focus on on this is the weekly and the monthly.  The weekly is what gave us the signals to see this past sell off coming so lets look at that.



All though the ability to hold an upwards trend so far is good, and the long tail on last weeks candle, which even managed to turn green is encouraging, there is nothing to write home about yet.  MACD looks as if it wants to hold above the 0 line and cross over the signal now, but this is the same move it attempted last summer before we had one final, ugly spike low to shake out the last of the weaker hands.  We also did not test the lower trendline, which isn't necessarily a bad thing, but it does leave some air below us, so consider what you COULD lose before getting too excited.  The most important thing on this though is the volume.  As predictable as possible.  We can see spikes in volume that typically precede bottoms by only a few weeks.  From there, volume trends lower as price moves higher.  When price breaks up trend line, sell off ensues.  Sell off bottoms shortly after volume spikes.  Lather, rinse, repeat as needed.  This occurred at the major bottom in 2009.   Volume declined as price rallied until it spiked higher when the market sold off in Spring 2010 (Flash Crash).   Price found bottom, trended higher, volume trended lower.  Price broke trendline in Spring 2011, market sold off.  Volume spike lat Summer 2011, price bottoms shortly after.  Price trends higher, volume trends down.  Price breaks uptrend April 2012,  Market sells off, volume...does nothing.  No notable move higher.  In fact, volume for the sell off was near the avg it had been for most of the rally.  This has me asking, was that the bottom?  My guess, No.  Which means we could still see our bottom, accompanied by a volume spike and a test of the lower trend channel.  Which unfortunately is currently at about 1225, and that indeed is a long way down.

Ok, so we got the daily saying short term target of 1400, the weekly saying maybe a test of  the 1225 area in a more intermediate term, but what about the long term?  We know the S&P is currently about a little more than 10% away from its all time high...We also know because we are not morons, that the US and for that matter WORLD economy is far from 10% off its all time high.  So there is a divergence, which I have explained before will continue and be based solely on currency devaluation compensation.  Earnings support my theory.  Coca Cola might be earning 10% more than they were 10 years ago, and therefor their stock price is up, but can they buy any more with that 10% more money now than they could then?  Probably not. I know one thing, the price of a coke is more than 10% higher than it was then.  so could we see 30k on the Dow?  Of course, it will coincide nicely with about 50 on the US dollar index.  I digress, lets just look at the chart shall we?


Don't ever dismiss the monthly charts.  This picture is 20 years in the making.  Although as I said, we could see 30k on the Dow, I would expect this massive consolidation after a big move higher to break up, but lets just look at whats happening now.  We can see MACD is trending lower and butting heads with the down trend line.  Both MACD and the signal are about flat.  They remain above zero which is a plus but we need to consider, that if the weekly does have another move down, the MACD on the monthly could cross lower as well and make any sell off that comes, that much deeper and more painful.  We can see from the Fibonacci lines that the next big level doesn't come into play till just above 1000.  That would hurt.  A LOT! And it would likely signal a recession.

Now, let me say I don't think that that will happen to that extent.  We live in a crazy world cause this whole thing can be turned to look completely different with just a few words from Ben Bernanke.  (or a few letters for that matter).  I believe that will happen sooner than later.  Sept by the latest I'd say.  But we can't dismiss these charts and simply invest based on hope that he'll print.  Betting on that is betting, not investing.  So lets take all these things as they are and figure this; The S&P will likely test 1400 soon, from there, a failure to move higher could spell out trouble and we could see a move to as low as 1225.  If Bernanke doesn't print, we could see lower than that.  Prepare for the possibility.  Are you comfortable in you positions?  Square them away in the event a move lower does ensue.  Leave yourself room to breathe and in the event this takes down gold to a spike low say at 1450, be prepared to buy physical with both hands.  It, won't last long.

As I said, I don't expect a catastrophic sell off.  Things are different then in 2008, Bernanke can react with what he knows works faster, and he will.  But at least know the risks, and watch those longer term charts they've served us well in the past.

-J

Monday, April 23, 2012

Devil's Advocate

I can't help myself, I have to put the other side of the coin up for you to ponder at as well.  The Aussie dollar and the S&P have moved almost perfectly together for the last few years.  When looking to that currency to get an indication of the next move in stocks, I see a VERY different picture than what I do looking at the S&P index alone.  The Aussie looks like it could be bottoming from a slide it's had at or near these levels, and could be forming a sort of cup and handle.  A break above it's highs I think could send it to a 20% premium over the greenback.  If THAT were to occur, you could be certain this is only a pause in what will be yet another leg higher for stocks.


-J

Long way down

We've all heard the saying "If you don't study and learn from history you are destined to repeat it."  Rarely though, do historical similarities make it as blatantly obvious as the chart I am about to post.  I know its very convoluted, there is a lot going on there, but it was necessary.  please take a moment to REALLY LOOK at this chart.


Pretty telling huh?  You've probably heard me or someone else refer to the market as on a "sugar high"  and that is essentially the best metaphor.  What happens if you give a 6 year old Coco pebbles covered in Maple syrup with a can of Coke for breakfast?  The result is a kid who will spend the hours of  8am till 11am running around like a maniac and by 12, they will fall dead asleep where they stand.  Sound familiar with this market?  It's been a fairly straight forward system. 

Step 1.  Pump market with QE, rally is induced.
Step 2.  Market incapable of trending higher forever, breaks up trend line, MACD rolls over
Step 3.  Market makes another attempt to move higher, reaches previous trend line, fails.
Step 4.  Nasty correction ensues.
Step 1.  Pump market with QE, rally is induced...
...and on and on and on.

So were we currently stand is Step 2, market incapable of going up forever, breaks trendline right at the exact same point MACD rolls over.  This untouchable, floating up on a cloud, market that a few weeks ago you wouldn't dare short unless you had a death wish, just started revealing some MAJOR weakness.  The worst part of it comes when you consider the big banks that helped fuel this rally with access to insanely large amounts of money available to them at 0% interest, whom, now want to lock in those profits quickly.  And in MASS size.  From top to bottom a return of about 40% was possible on just the S&P index (Not counting some high flying individual stocks one may have owned, but just going by the index itself.)  That's a serious return for the last 9 months.  On an index no less.  Now consider the mass money they have put into stocks recently.  Numbers that you and I can't fathom.  Now consider the algorithmic trading programs they have that can execute trades in nano seconds, again numbers we can't fathom.  What you get is INSANELY large amounts of money being taken out of the market at INSANELY fast speeds.  By the time you and I realize it may be time to sell, they already have on a massive scale and left for us a market down 800 points already to sell into.  Thanks.  Profiting on our backs once again.  The bailouts continue.

Listen, the market is up, a lot from the lows (in nominal terms I mean).  We really aren't that far from the all time highs. (There's a concept that makes sense.  GDP is anemic, unemployment is still through the roof, the housing market is down across all regions in the realm of 30% from it's highs...all great arguments for a country's stock market to be nearing all time highs.  Ya know, another younger and dumber version of myself can't help but ask if you can share some of those drugs because they MUST be the good stuff.)  I digress, the point simply is there is a lot of money at stake here.  There is a lot of profit that doesn't want to be lost, there's a lot of money that is still hurting from 2008 that is not going to be very flexible with the market and it's mood swings.  It's a LONG way down, so be VERY careful.  Everything from now on will be bigger and faster than it was in the past.  The technology is advancing rapidly, and so is the money supply.  Below is the exact same chart as above, with a superimposed idea of what I THINK will or at least could happen.


If this played out we could see and easy drop to 1200.  That certainly would hurt if you didn't see it coming. Elections in Nov, you can be assured we will see "operation kill the evil monkey"  or whatever they come up with to disguise saying printing money this time around.  The S&P WILL reach, and even break it's all time highs at some point, but understand it will be a currency event not an economic or even a corporate one.  Simply put, as the S&P hit 1500, for the first time in 2000, $1500 would buy you a hell of a lot more than 2012 $1500.  The numbers will need to adjust simply for a rapidly devaluing currency.  When you account for that, what you see in real terms is a market that crashed in 2008 and every rally has been a minor blip as it dredges across the bottom.  So for all of you out there that have been expecting gold to soar and the market to crash hard, congratulations, you were right in real terms.  For all you hyperinflationists who think all asset classes will go up to compensate for a rapidly declining currency, as we can obviously see, you too were right, as there is no way 1400 on the S&P is reflected in any corporate or economic data whatsoever, leaving massive currency devaluation compensation to be the only thing to explain such an anomaly. 

Anyway, I digress again.  Gold is due to rally, but no one is certain of the catalyst.  Gold rallied in the face of a major market correction last year, which went against the grain as people sought safety in the dollar as well seeing both assets spike higher.  This could be the catalyst.  Gold investments I feel are safe so long as they are unleveraged.  Other commodities will likely follow the market so I'd be wary on them.  Most stocks wont buck the trend if it repeats in even a slight way as violent as last summer.  A smart approach, the approach to this I look to be taking is waiting for step 3, which is a rally after the initial trend break and MACD roll over, that will likely take us back above 1400.  I'd then look to liquidate any long positions you want to cash out on when that rally occurs.  You may want to use this opportunity to buy a small short position on the market as a whole or a particular stock you feel might be very vulnerable.  It's the end of April.  A rally to retest the highs could come for most of next month and the crash that could follow it may really cement the phrase "Sell in May and stay away" into some peoples heads.  The initial crash down will likely be quick, and the majority of the losses could be had in June alone.   The consolidation that follows could take us through the rest of the summer.  The fall will likely bring more easy money and a rally to follow it.  Physical Gold and silver look strong.  The miners are weak.  Decide now which ones, and how much money into them you want to have, or can stand to I should say.  A overall market take down with the miners so weak could achieve bottoms that are equal in size to 2008.  Some have already reached there.  It will be painful, there will be blood.  In such a situation as this we need to preserve what we have to take advantage of the situations in the future.  That means physical gold/silver, the miners you know you want that you can stand a little blood in,  NO LEVERAGE, and a possible small short position on equities.  Good dividend companies will be sought for in a big pullback, this will cushion their falls to an extent, and overall outperform the indexes.  Be smart, you have a few weeks to do some spring cleaning in your portfolio.  Cash is king.  If history repeats its self again, I'll meet you back here this summer for some really great, cheap buys.

Hang in there and as always, be careful... especially now.
-J

PS Because of the title of this post and the fact that it's in my head now, I have to post the Goo Goo Dolls song.   :)  

Thursday, April 5, 2012

If you don't study history, you are doomed to repeat it

Man is that ever true.  A quick look at the past in the metals here to get an idea of what the future may hold.

The first picture I am going to provide is the consolidation under $1000 in 2008-2009.

As you can see after hitting an extreme low, gold rallied to retest it's major resistance point, then retraced about 50% of the move hitting a low in April of 2009.  It later climbed back up to that major resistance and shattered it in the fall of 2009, running up over 20% in only a few months.


This is gold today forming an almost exact replica of its 2008-2009 formation in a slightly more condensed fashion.  Note,  after hitting an extreme low, gold rallied to retest it's major resistance point, then retraced about 50% of the move hitting a low in April of 2012...  Yes, I just copied and pasted the same sentence from above and changed the date to 2012... because I can...because it applies.  We are now at the equivalence of the 860 bottom we saw in April of 2009.  By May, gold retested just shy of $1000 followed by our typical summer doldrums and a break of $1000 by fall that shot up an additional 20%.  If past is prologue, expect at least 1800 by May or so, followed by a pullback this summer to around the 1700.  If things light on fire as they typically do this fall, a 20% break above 1800 puts us at 2160.  A 20% break above 1900 puts us at nearly 2300.

If you haven't read Bob Hoye's latest on 321gold comparing today's action to that of 1979s, here it is.  http://www.321gold.com/editorials/hoye/hoye040512.html

I think Bob is dead right on this and there are a few points I wanted to add.  Well, really a table of the junior miners returns in the time that followed.


I've posted this before but wanted to add, it wasn't until gold began to go parabolic.  Gold saw a glimpse of such a move top going into 1975, but that was just a warm up for the major parabolic move it made after that.  I believe we saw a glimpse of such a move in 2011 as we rocketed to 1900.  I think a clean break of that level, through the 2000 area will be the beginning of a parabolic move.  And again if past is prologue a similar move on the GDXJ would bring it to 500.  (the avg appreciation of the 15 stocks listed was 2300%.)

Ok everyone thats all.  Nice and quick.  Be sure to read the Bob Hoye article, and as always (especially now)  be careful out there.

-Jonathan M Mergott

Saturday, March 24, 2012

Some kind of Monster...

Ok.  A quick moment to talk about energy.  We are not going to get into the fundamentals of things too much, we are just going to look at the charts.  We already know the QE and inflation side of things.  Dollar goes down, things priced in dollars go up.  As for the aspect of a growing world population, or the extent of the supply of crude on earth,  or the costs to produce it, or alternative energy, or it's ability to be economical on some timeline, or anything else of the like, we are going to leave out right now and just look at what the charts tell us.

Technical analysis is one of those things, people either love it or hate it.  No one ever seems to think its just "ok".   Which ever side of the fence you fall on, just think about this:  In 2010, 70% of all the trades done on a given day on the NYSE were done by computer programs.  Computers that are emotionless, and think and analyze hundreds of different scenarios on thousands of different stocks, in a matter of mere seconds.    Those computers aren't analyzing PE ratio's when they buy stocks,  they're analyzing support and resistance points, moving averages, oscillator crossovers, etc... Technicals.  Charts.  Let's face it, we humans got a major handicap.  But knowing ahead of time what they're looking for is a big help.  Look, sometimes technicals run for a while with no fundamentals behind them, so you never buy something only because you "like the chart", you will get burned.  (Netflix?)  But fundamentals never run without the technicals. It's impossible when you think about it.  If the fundamentals are there for a bull market eventually it will translate into a pretty damn good looking chart. Personally, I don't like dead money.  So when I am reading up on say a stock that I like, the first thing I do is look at the chart.  They could have so much great stuff going for them when analyzing the balance sheet and assets of the company, but if it's not translating on the chart, I guarantee that you will probably be sitting on stagnant money for longer than you would like to.

Quick story and 2 charts of why I do things the way I do  (I assure you there is a method to my madness, even if I am the only one who might understand it.):  I know a man who has been an avid gold bug, long before most of us.  A real Original Gangster.  As the national debt skyrocketed to insane levels he was purchasing gold over the course of about 10 years, starting in the mid to late 90's at prices in between $250-400/oz.  He has probably averaged about $300 for all the oz's he owns, so obviously, he has made a few dollars off that idea since then.  Problem was, his money was tied up for a decade in an investment that was not performing.  He was buying into a bear market.  The end of a bear market mind you, but there is a difference between a bear market end and a bull market beginning, and often a limbo in between.  Below is the weekly gold chart dating back to 1995.  The red box surrounding the gold price is where my friend purchased his gold over the course of a decade.  The blue box is where I would have purchased my gold.  By about 2002 gold had bottomed and began trending higher.  In the time from then till 2006 you could purchase gold for an avg of about $400/oz, meaning you paid about about $100 more for each oz than my friend, but you didn't tie up your money for nearly as long.  You waited for confirmation from the chart that this market was beginning to go somewhere and began to see returns on your money much quicker than my friend.  At current price you would have made over $1200 in profit for each ounce you owned, while my friend made $1300 per oz.  Seems negligible now doesn't it?


So now as we look at this and realize that the 6 years of dead money is a much bigger deal than the extra $100 in profit we missed out on, this begs the question, what should you have done with you're money in 1996 as you waited for bull market confirmation in gold?  Well, below is one idea.

In 1996 the Dow was at about 5,000.  It was trending upwards and  monthly MACD had just crossed over, which is very bullish for a long term time frame.  By about 1999 to 2001 the Dow began trending downwards and MACD rolled over giving a pretty clear sell signal at least for the time being.  No worries, because you just doubled your money over that 5 years while my friend's money just sat there.  More than doubled it if you had everything on dividend reinvest.  Now you have a lot more money to pour into that gold market which is now starting to bottom and trend up.  Meaning, the more money you now have kinda makes the extra $100 in profit you missed REALLY negligible as you can now buy much more gold than my friend.  Point is, technicals are important.  Hide your head in the sand if you like, the world will trade around you.  Your only hurting yourself.

Ok, now I have digressed greatly.  It makes sense to me at least, I will tie this back in at the end, we will see if you can follow my schizophrenic thought process.

The following is the Weekly chart for West Texas Intermediate Crude... Have you clicked it yet?  I'll wait for you to stop hyperventilating.  We can see what looks like a text book MONSTER inverse head and shoulders on crude oil.  You hear these terms everyday, so lets go over the psychology of its significance for a minute.  In May of 2011 Crude bears knocked price from the lofty 115 mark down to about 90 only a month and a half later.  Some bears cashed out on their profits, and some bulls came in to buy the pullback rallying Crude back to 100 before the bears came out again and pushed things all the way down to 75.  After a couple of months of deliberating between the 75 level and the 90 level, bulls came in strong and crude trended back up, pushing through resistance at 90, (the support point of the left shoulder) and finally 100 a few months later (forming the right shoulder).  So now here we sit.  The bulls have had a good run from 75, pushing crude up about 50% from that point, and the bears made some nice profits on the way down when that lasted.  Now price sits near the neckline that was the level prompting bears to get in short.  This is the level from a bulls perspective that they previously lost money at and may look to sell at.  If the sentiment is overly bearish at this point, prompting bears to come in short again and bulls to cash out for fear of lost profits, this chart formation will fail and send prices lower.  If bulls refuse to let go of their long positions, and bears, feeling beaten are forced to cover, price will break out above the neckline area.  But how high?  There is a formula for that.  Take the neckline break out point which sits at about 110-115.  Then take the depth of the head which bottomed at 75 (you can go buy closing prices to be more conservative on your targets, no one ever went broke doing that.)  Then calculate the difference.  (we will use 75 and 110)  The difference here being 35.  Add that to the break out point (neckline) at 110.  You have a target of about 145 that will probably materialize in the same time frame it took for the formation to be built.  ( so a year long chart pattern would target 145 by about spring next year)  Now are you hyperventilating?  People have been speculating for quite some time what would happen if crude went back to it's all time high.  It would obviously be bad for consumers, but now with gas prices rising, concerns in the middle east, and a technical formation on the crude chart that has a break out target of, oh yeah, EXACTLY what the all time high of crude oil was, I am beginning to fear that the possibility of such an event is much higher than just "speculation".  Coincidence maybe?  That the target of this formation is the all time high for crude?  Sure you can go that route of thinking.  I suppose it was also a complete coincidence that as MF Global went down in flames, 1.2 billion dollars of client money coincidentally disappeared. We now know that to not be the case.  My view on coincidences, they don't exist.  If it seems like a pure coincidence, it's probably only because you have yet to find the link between the two.

Ready for another "coincidence"?  Below is the Brent chart.  It is similar to crude, but different.  On the brent chart we can see what looks like a cup and handle forming.  Cup and handles and inverse head and shoulder formations are extremely similar, and can often be mistaken for each other.  For example, the above Crude chart could be painted with one big round bottom as well and we could call that a cup and handle.  The Brent chart however is not a head and shoulders.  Kinda like in geometry, a square is always a rectangle but a rectangle doesn't necessarily have to be a square.  Well, this head and shoulders on crude, could be a cup and handle, but the Brent chart is not a head and shoulders.  Now that I've officially confused you, it doesn't matter.  The psychology behind the two formations are virtually identical anyway.  This brent chart shows a break out point at 125 and a depth of the cup of 100.  The difference between the two is 25. Add that to the break out point of 125 and you get a target of 150, also just about the all time high for brent.   Let's also keep in mind the DEPTH of these formations.  If they were to pan out they would call for the price of crude to rise about 50% higher than it currently is.  I don't know about you but my wallet is already black and blue.

So how's those coincidences working?  We got rising gas prices, a falling dollar, an anemic recovery (at best) and two long term charts for both brent and crude BOTH foreshadowing a run to all time highs in the same time frame.  I'm finding a lack of reasons to argue a test of all time highs won't occur.  The real problem is, that if this were to occur it will not be a parabolic run to simply "tap" our target price and then run away as it did in 2008.  No, it will most likely stay in a range with a low of the breakout and a high of the target price for quite some time.  So when you hear people say "Can the American economy handle $4/gallon gas?" realize that they are asking the wrong questions.  You could survive naked in Siberia ya know.  If we were only talking about a few minutes.  Can the American economy handle $4-5/gallon gas?  Sure, for the month of April maybe, but on average for the next year or so?  Now you have a whole different monster.

Let's change gears a bit and look at Nat Gas, which has done nothing but free fall.  This energy source, which is a viable alternative to crude has had price kept under a lot of pressure do to the enormous supply of it.  Tying  back into the "dead money" concept, this is not a market I would be getting long here.  Calls for Nat Gas to fall to $1-$1.50 in my opinion are just plain ridiculous but I wouldn't be surprised to see it trade under $2, and stay dormant for quite a while before moving higher, especially if it continues to not be utilized to even a fraction of it's ability.  When you account for currency devaluation, Nat Gas is probably cheaper than it ever has been in history.



Not to get too political, as that is not the point of this, but I want people to realize how quickly technology can advance.  In the year 2000, chances are you had a cell phone that looked like a paper weight, may or may not have transmitted harmful radio waves that will give you massive brain tumors, and sounded something like this. (there was supposed to be a link here that played that annoying "Nokia Tune" but oh well) In 12 short years, your cellphone ringtone is now Katy Perry's new single that was just released 15 min ago, which plays when your friends you haven't seen in a decade post pictures on Facebook they took from their cell phones of the restaurant they're at and how good the chicken francaise is, while you calculate your taxes from it and email them to your accountant all while on the train ride home from work.  This isn't isolated to today either.  In 1885 Karl Benz patented his Moterwagen, a 4 stroke cycle gasoline engine on a platform with 4 wheels essentially.  It was a revolution and since then the world has used this model as the main source of transportation on the ground, replacing horses.  17 short years later, the Wright Brothers took a similar engine idea, added a propeller and wings and we were flying with the birds.  (An additional 17 years after that and flying ace Manfred von Richthofen, AKA the Red Baron had utilized the airplane in combat to shoot down more enemy planes than anyone else had at that point (80) turning what was a crude idea in 1902 and officially solidifying flying and piloting as a science and artform and future mode of transportation.)  Somebody born at the end of the civil war could have lived long enough to sell their horse they used to get around for most of their life for a car in their 40's and could have traveled in later life across the country in an airplane.  What a concept!

Nat Gas is not an indefinite solution to our energy problems, but it is a better alternative to what we have.  I am not knocking anyone's beliefs on alternative energy, you might be a big fan of solar or wind, and that's great.  I have no idea what we will be using for energy 50 years from now, but what I do know is that it will be abundant enough to be cheap for consumers, but still able to produce profit for the energy producer.  Currently, no alternative yet fits the bill, that's the fact of the situation and why nothing has yet worked.  Maybe we will use Solar, maybe Wind, most likely something none of us have even thought of yet.  The point is to be patient, it will happen when its ready.  In the mean time giving consumers a choice helps everybody, and will certainly help keep this energy situation we have from turning into some kind of monster.

-Jonathan M Mergott

Monday, March 12, 2012

A hell of a lot of miners


As promised, an article on the miners.  I will try to cover as many as I can.  Brace yourself, this will be long.

But first a moment to remember why we care, (as we all know they haven't given us many reasons recently.)

A $3,000 investment in Homestake Mining in 1925 would have bought you about 60 whopping shares at $50 a piece.  That same $3,000 invested in the Dow at 150 in 1925 would be 20 shares.  10 years later the $3,000 investment in Homestake was worth $30,000 AND paying a 5% dividend that would be $1,500 a year, which was the average salary in 1935. (And gas was 19 cents!)  The $3,000 in the Dow, if you managed to hold on to it in the years that followed, after seeing your money more than triple only to then lose 2/3 of it 3 years later, would be worth still only $3,000.  I am unsure of what the yield was on the Dow in 1935 but being that it was a depression and being that your money is still only worth $3,000, whatever it was, was not enough to help much.


That is an example of a well run major miner.  In the 70's we saw what power some of the juniors can have. Some of the returns made on these are literally unfathomable, especially considering the short period of time in which they did it.  Here are a few.


Are you foaming at the mouth yet?  Alright, lets get on to some miners that may have there own shot at such killer returns.

GG
Goldcorp is now the second biggest gold miner by market cap largely thanks to Mr. McEwen at the reigns when no one knew or cared who they were.  Mr. McEwen's leadership is a perfect example of how good management can be extremely beneficial.  Here is a story of two gold miners:  One miner was a rather large company, the other in comparison, not.  As the gold market continued to go no where fast the smaller miner's management, all believing in a coming massive bull market in gold, began stock piling a portion of their production in anticipation of higher prices in the future.  The larger miner took a much different approach, and hedged their forward production at a measly $400/oz.  The smaller miner was right and sold a large amount of gold at now higher prices while the larger miner sold shares to cover their asses. And today, that smaller miner is only smaller than 1 other gold miner.  

All in all,  I believe Goldcorp to be a good company and I think Mr. Jennings is doing a good job.  Their monthly dividend is the only monthly among the majors, although the yield is ...*yawn* around 1%.  I do believe it will be increased however, likely soon as it has been about a year and all the miners are in a keep up with the dividend frenzy.  Some of their recent acquisitions that were heavy in the silver department have allowed them to write off the silver and are now mining for relativity cheap gold costs.   But don't take my word for it, take a look at the company yourself, here is the website.  http://www.goldcorp.com/

My call: HOLD
My 1yr Target: $60-62

And now for the other miner in our previous story...

ABX
Barrick Gold, or F***-S*** Gold as I like to call them (Peter Munk, the founder of Barrick who is Hungarian, when asked what they will call the company remarked  by cursing in Hungarian,"Call it Barrzak, call it szarick, call it barrick for all I care" ... Loosely translated then the company literally means F*** S***.  Just wanted to share that useless trivia with you.) has given us a perfect example over the years of what not to do.  I personally have never owned a share, although companies I work for have. Regardless, they're the biggest gold miner so they must be included, but if you want my advice, if you some how acquired stock in Barrick for free, sell it and buy Newmont.  Do your own due diligence though, here is the website link. http://www.barrick.com/

My Call: SELL
My 1yr Target: $45-55

NEM
Newmont is by FAR my favorite miner of the majors.  Management has been true believers in a gold bull market for over a decade and have proven it in with their actions time and time again.  (Like never strangling themselves to death with hedges at $400/oz) They have taken they Homestake Mining play book and are running with it being the first company to implement a dividend that increases as a direct result of higher gold prices.  They are the only gold miner in the S&P 500 as well, which means funds buying the S&P have to buy NEM.  With over 90 million ozs in reserves and 450 million shares outstanding, each share represents 2/10 of an oz of gold.  2/10 of an oz is currently worth $340.  When you account for the $500 oz cost, there is a profit for those 2/10 of an oz worth $240, or over 4x it's current share price.  It is selling for a forward PE of 10.7 with a yield of 2.5%, by far the best in the industry.  Management has spelled out their dividend policy, which will increase 30 cents for every $100 gold goes up from $1600-2000 and 40 cents for every $100 from $2000 and up.  At $2000 an oz gold, NEM will be paying a dividend of $2.70/share or 5% on what it is currently selling for... roll that up and smoke it.   http://www.newmont.com/

My Call: HOLD/BUY
My 1yr Target:  $75-80


AEM
Oh, Agnico Eagle, you use to soar like an eagle, now trying to find people bullish on AEM is becoming as endangered as eagles.  Agnico's whole claim to fame was the La Ronde mine in Canada.  The silver they had there was able to drastically reduce their costs so they could mine gold for about $100 an oz or so.  They never had a massive production, they never had massive reserves.  Their shares outstanding is relativity low.  The high flyingness of this stock was due to it's very low costs.  The following chart is what happens to a gold miner that has basically nothing else going for them other then very low costs, when those costs begin to rise.  I am not a fan of this one at all anymore.  Luckily I got out before the onslaught.  Some weren't so lucky.  You may try and play this for a bounce, but I wouldn't expect to see tests of the all time high near 80 anytime soon.  Again though, make your own assessment.  http://www.agnico-eagle.com/ 

My Call: SELL/HOLD
My 1yr Target: $50


AUY
I have owned Yamana in the past but sold it in 2009 for something that I believed was a better use of my money.  It was at the time, but that has now changed.  AUY has been shaping up and looks like it wants to challenge it's all time high in the near future.  With a 1.1 million oz a year production and cost expectations this year of around $250/oz, it's no wonder it's doing better.  The dividend is about 1.3%.  They have are actually a larger company then you might think as they have 745 million shares outstanding the third highest in the industry, giving them a market cap around 12 billion.  I don't keep too on top of this one anymore so be sure to check out the website.  http://www.yamana.com/

My Call: BUY/HOLD
My 1yr Target: $20


IAG
Iamgold was the "better use of my money" I was referring to.  It was at least at the time when both it and AUY were 6.  It certainly had the better things going for it, and share price quickly reflected that.  Recently though, IAG has been tanking while AUY has been going up.  I am dismayed at it's performance but I still think the company is doing very well.  The Westwood project opening next year in Canada boarders Agnico's La Ronde mine and I expect similar results that could put some downward pressure on costs.  Also adding 250k ozs a year in production would make it a solid new major property for them.  They also currently have the second best dividend in the industry at 1.7%.  http://www.iamgold.com/

My Call: HOLD
My 1yr Target: $20


ANV
Allied Nevada is another example of flying high with low costs.  Silver at their Hycroft mine has made them able to produce gold rather inexpensively.  The result is this stock soaring 9x higher than it was 3 years ago. Not one I watch all that actively, so I'd pay attention to the trend line to see if it holds.  Also keep a VERY close eye on their costs going forward and see if it can be maintained, or you could have an Agnico situation and see this $30 stock go right back down to $10.  http://www.alliednevada.com/

My Call: HOLD
My 1yr Target: $45


NGD
New Gold has been a very good performing intermediate gold producer.  Costs remain relativity low to some other producers at around $400/oz.  They have a lot of interesting properties including a 30% stake in El Morro with Goldcorp.  They have almost 8 million in reserves and a production expected to be just above 400k oz for this year.  A solid company.  Look to see if support holds in the 9-10 region.  http://newgold.com/Home/default.aspx

My Call: HOLD/BUY
My 1yr Target: $14


RGLD
Royal gold is the leader of the royalty companies hands down.  After getting beaten around a bit 10 years ago it has exploded due to the profitability of the royalty model.  If you have a gold mine these days, chances are you are paying Royal Gold to have it.  As an alternative to issuing stock to pay the bills, companies have used royalties to fund new projects.  RGLD being a very simple operation, has very little overhead costs and they are not affected by rising costs of the miners. http://www.royalgold.com/

My Call: HOLD
My 1yr Target: $85



FNV
Franco Nevada has been around a bit but just recently moved to the NYSE.  Now, RGLD has competition from another royalty company on a NY exchange.  If you are a gold miner, and you some how made it without having a royalty with RGLD, you probably have one with Franco Nevada.  The royalty model is a great way to profit from a gold bull market as people are quickly finding out.  Mr. Oliphant who sits on the board of directors is also CEO of NGD.  It currently has a 1% yield and is the only gold stock other than GG to pay monthly. Find out more here http://www.franco-nevada.com/ 

My Call: BUY/HOLD
My 1yr Target: $48-52

SLW
Silver Wheaton, everybody's favorite silver company was one hell of a good buy at $2.50.  At the 2008 low, one share of Silver Wheaton was worth less than 1/3 of an oz of silver.  Currently 1 share of SLW is worth $2 MORE than 1 oz of silver.  And it pays a dividend of about 1%.  With basically a similar business model to RGLD and FNV, SLW sees nice profits with no concern to them of higher prices.  SLW's cash costs per oz have been under $4 for 7 years straight.  For a list of all their streams and more details go to the website.  http://www.silverwheaton.com/

My Call: HOLD/BUY
My 1yr Target: $48-50

MUX
McEwen Mining, formerly US Gold and Minera Andes is Rob McEwen's new company and he even had the balls to put his name on it.  One thing about Rob is, he will always go all the way on something he thinks is good for the shareholder and in this company puts his money where his mouth is by taking no salary as CEO and owning 25% of the entire company.  The merger provided this new McEwen Mining with Minera's silver production and US Gold's reserves.  2012 expected silver production is 2.8 million ozs and 50k ozs of gold.  2015's expected silver production is 7.8 million ozs and 150k ozs gold.  With a CEO that has proved he is one of us, you really should pay attention to this.

My Call: BUY
My 1yr target: $8-10

AG
First Majestic you can't help but love if you bought it back at $3.  Not only does AG get the periodic symbol on the NYSE for the metal they produce, they can say they are the purest silver producer with a higher percent of there money coming from silver sales as opposed to by product.  (Gold, lead, copper, zinc...)  AG's earnings are expected to almost triple from last years and production of 8 million ozs in 2011 is expected to double to 16 million ozs by 2014.  Also, CEO Keith Neumeyer has said many times that as soon as their exploration costs are finished with, their #1 priority is a dividend.  He has said in interviews before the board will discuss it 1Q 2012.  http://www.firstmajestic.com/s/Home.asp

My call: BUY/HOLD
My 1 year Target: $25-30

FSM
Fortuna is one of my favorite silver miners.  With production set to increase to 6 million ozs this year vs 4 million in 2011, FSM is clawing their way up the silver miner food chain. 1 of their 2 operations mines silver at a negative cash cost while the other, the San Jose mine in Mexico adds a nice 2 million oz production for this year.  Fortuna recently said at the PDAC conference that they are eyeing acquisitions and want to reach a 14 million oz/year production within 5 years.  With a forward PE of about 10, this one you should watch if your into explosive earnings growth.   http://www.fortunasilver.com/s/home.asp

My Call: BUY
My 1yr Target: $9-12

GPL
Great Panther went screaming when silver took off last year which coincided nicely with them moving to the AMEX.  The result?  Rocketing from about $1 to $5 in a very short period of time.  It has been in a downtrend ever since though that should resolve higher in the near future.  GPL mines a silver equivalent production of 5 million ozs a year, that is broken down to 70% silver, 20% gold and 10% lead and zinc. This is a good one if you like silver but want a little bit of gold in the mix as well.  Robert Archer, CEO whom I have had the pleasure of meeting is a smart guy and I'd feel confident as a shareholder with him running the company.  http://www.greatpanther.com/English/Home/default.aspx

My Call: BUY
My 1yr Target: $4-5

AUN.V
Aurcana corp is probably my favorite miner right now, and anyone who knows me, that doesn't come as much of a surprise.  AUN.V's shafter mine is going to produce 3.8 million ozs of silver this year sending their annual production sky rocketing from 1.7 million in 2011 to 5.5 million in 2012.  That would make their production larger than even EXK.  Their current market cap is around $400 million making them drastically undervalued based on their production vs some of their peers market caps.  (For example AG's 8 million ozs last year gives it a market cap of currently 2 billion.)  CEO Leo Rodriguez personally owns 3% and certainly understands how undervalued his company  is.  (Meeting him last year he was short a straw hat and a margarita but he seemed like he was already counting his money.) For a stock that is selling for a whopping $1 a share it is easy to pick up some for fairly cheap.  The pennies it was selling for only a short time ago will be eclipsed by it's earnings in the future.  http://www.aurcana.com/s/Home.asp

My Call: BUY
My 1yr Target: $1.50



SSL.V
Sandstorm Gold is currently the only gold streaming company in existence.  After Franco Nevada took over Gold Wheaton, SSL.V has been in a class of it's own.  The CEO Nolan Watson is the former CFO of Silver Wheaton and their geologist is SLW's former director of IR so they know something about the streaming business.  SSL.V has 7 current streams including the Aurizona Mine stream on Luna Gold that  gets them 17% of the life of mine gold at $400/oz.   SSL.V has a monthly cash flow of $3 million, $25 million in cash and $50 million in available credit so they certainly have the money for moving forward.  This is an obvious take out target, likely for RGLD.  http://www.sandstormgold.com/s/Home.asp

My Call: HOLD
My 1yr Target: $2-2.50

TRX
I was debating whether I should put up Tanzanian Royalty, but a lot of people follow them so I guess I have to.  But be sure to read the disclosures at the bottom. The short version is I work for TRX doing investor relations.

Jim Sinclair is certainly not remaining idle with this company now.  After acquiring the Buckreef project they now have a 43-101 proving 2.2 million ozs on that property alone with the hopes to expand that to 3-5 million in a couple of years.  Production is expected to be 100-150k ozs a year within 2-2 1/2 years.  Their Kigosi project is just "money in the bank" as Jim puts it as they expect the property to provide cash flow on it's easily produced surface rubble.  From a technical aspect it has bounced very well.  Today it sits above the 200 day MA.  If it is able to maintain these levels a shot at 5 would be obvious.  http://www.tanzanianroyalty.com/

My Call: HOLD
My 1yr Target: $6-$7.50

Well, that about wraps it up.  I hope 18 miners was enough for you.  An important side note on the miners though, as all the bigger producing companies scramble to keep up with NEM on their dividends you are really doing yourself a disservice by not having any miner you own on dividend reinvest.  Most companies paying a dividend now have only a measly 1% yield but as we obviously believe both share price and dividends will increase in a few years you could have that stock go up 5x higher than you paid for it and have it still paying a 1% yield.  That would be the equivalent of a 5% yield on what you payed for it.  Might as well utilize that money to buy more of the stock at these low prices.  Take what I said at the top about Homestake Mining and factor in a dividend reinvested for 10 years on the way up.  Yup, much nicer return.

Ok people enjoy, and as always be careful out there.

-Jonathan M Mergott

[Disclosures as only Jonathan M Mergott can provide:  I personally or for a company I manage, own, have owned or could own again at any point in time all of the companies listed above.  In addition, members of my family own, have owned or could own again at anytime some of the companies listed above.  (As resident Financial Adviser for my family, I'd be a dick not to have their money in them.)  Also, I work for LH Roth Investor Relations, an IR Firm currently employed by TRX.  I am compensated for my work with them in cash and stock.  I am not being compensated by any company for writing this.  These are my own personal opinions based on my fundamental and technical analysis of the companies.  Do your own due diligence.  Jonathan M Mergott is not a registered financial adviser and is not responsible for any money lost.   Does that cover it all basically?]

Saturday, March 10, 2012

Two sides to every coin

Is it just me or has it been a LONG week?  I'll make things rather brief so we can cover the technicals, in what is my probably my first post in about 3 months.  After reaching just shy of 1800 a little over a week ago, the powers that be decided to play around with gold smashing it $100 in one day.  From there the bears got the short term momentum on their sides and an ugly chart to paint some more.  Gold fell an additional $20 from its spike low to hit $1666, and ended the week with a bit of a bounce that has maintained above the 200 day MA.    Now, I have seen a lot of people shouting "inverse head and shoulders" on the gold chart because of this and they may be right, I am certainly not saying they aren't in fact I hope they are, but a lot of times people tend to see what they want to see in charts and it's important we get both sides to the coin in order to make a fair assessment at whats likely to happen and to not be completely caught off guard in the event that chart pattern we saw doesn't pan out.  Lets start by looking at the head and shoulders that is at least for the moment, appearing on the daily gold chart.


We can see where the right shoulder is forming if this were to keep this pattern.  So far it will have a low on the right shoulder that is higher than the low on the left, which is text book for a inverse head and shoulders, and speaks of the psychology behind the market.  As I have said a thousand times, psychology makes these chart formations.  The significance of the right shoulder having a low higher than the left isn't just a coincidence or some crazy idea a bunch of chart guys came up with that has been generally accepted over the years.  The significance is this: it shows a move downwards on the left shoulder, than a rise to a resistance point (which for this is currently 1800).  Then there is a deeper move lower for the head followed by a rise to the same resistance point.  Finally, there is one more attempt by the bears to move things lower which ends in a higher low than the first move and a rally to the resistance point that, if all goes well should break and lead to higher prices.  The psychology is that people are thinking 1800 is a good selling point, that is obvious from this picture, but as moves downward continue, people are less willing to wait for prices to dip further to come in and buy.  They are obviously seeing a good amount of value in gold near the 1700 mark, unlike previous dips.  The growing enthusiasm to buy is what will take out the 1800 mark.  That is the psychology behind why this chart formation is significant.

Ok, so lets say this pattern holds, what's our game plan then?  Well, ideally we will consolidate in this area for a bit before trying to establish a trend higher that will take us back to 1800 that should now break. There is not much standing in our way after that other than the all time high, but we should keep our eyes open to see if resistance develops at the 1850 area, as that does coincide with a Fibonacci level.  So as we consolidate, this would be a good time to buy.  Assuming however that this is the chart that is the be all and end all and will dictate further price action.  Lets move on to another chart with a different outlook.


Ok, so above is the weekly gold chart with the trend lines that have kept price in check from highs to lows for about 3 years, until it broke above the upper trend line and rocketed to 1900.  After an initial sharp decline and a bounce, gold found a low at 1521, amazingly right at the trend line that previously marked lows.  Coincidence?  Sure, if you believe in them.  Gold then rallied up to nearly 1800 a week ago and then got smashed back by $100 in a day.  Where is 1800 located currently?  Right at the upper trend line.  That's already too many coincidences for me.  So, are the previous trend lines back in play?  Are the powers that be trying to enforce them in order to keep prices at bay for a bit?  Regardless, this picture would more likely spell out a test of the lower trendline after just failing at the upper one, which could send us down to 1600.  RSI is anemic, but that doesn't mean it can't go lower, and MACD after having a bullish cross over a couple weeks ago is flat lined waiting for some direction either way.

So what's the game plan here?  Well, you'd want to wait till closer to 1600 before really loading up, and you can then expect resistance later this year at our previous all time high around 1900.  Depending on timing, we could see 2000 this year and still stay in these trendlines.

So which one is right?  Probably a combination of the two, but in case our one scenario doesn't play out, we have a second picture to look at to see if that is the one that is dictating price action. Point is, don't buy like crazy here thinking that 1600 is impossible, it's not and you could get burned badly.  Likewise, don't sell all your gold expecting to buy it back at 1600, you might not get it.  Being comfortably long here is a good strategy.  Ok, onward to silver.



Silver is a mixed bag,  MACD crossed over on the weekly chart, and is at a similar depth to where it was at the 2008 low, but is now fizzling a bit.  The break of our downtrend line was quickly fought, pushing us back into our wedge.  Could price fall as low $26?  The chart seems to say it could, but it is unlikely.  Even a move downward in gold to that 1600 mark where our trendline is would likely still not result in $26 silver.  A low near $30 is more likely, but then again never rule it out.  The daily chart which I am not going to include is similar to gold's.  There is an inverse head and shoulders of sorts, even though it looks like some one hit it with a lead pipe a bit.  Obviously the psychology is the same for the two, but silver's #1 priority is breaking this trendline and holding above it for a bit to keep it from being painted again.

Below I will include the $HUI because I usually do, but I am going to try and write a bit about some individual stocks in another post if I have some time, because looking at just an index weighted mostly in Goldcorp and Barrick doesn't nearly tell the story of whats going on in the gold stock world.  



There really is not much to get excited about looking at this picture, although to be a bit more rosy, I'd like to point out that over the last 10 years or so, MACD has typically found a bottom at the 0 level to the -10 level with 2008 being  the only exception. We are currently at -8 which makes me think it would be impossible to see this floor break at 500 when we have 1700 gold.  I also would like to point out that if nothing else, buying near 500 and selling near 600 has generated you a trading profit of 20% which is nothing to sneeze at.  If that's all you do your doing ok on the miners.  Yes, we all know that eventually that cap at 600 will break and miners will go insanely higher which would be nice, but even if you sell at 600 and then it breaks, it only takes a minute to buy it back and you'll only miss out on a small profit in the grand scheme of things.

Ok that's all for the metals and the mining index.  Hopefully soon I will have something more detailed on some really awesome miners that  have tons of potential that will make Goldcorp look as exciting as a root canal.

Good luck and be careful out there everyone.

-Jonathan M Mergott

Tuesday, February 7, 2012