(June, 2004)
GOLDCORP LEVERAGED?
Chris—I did as you suggested recently and bought back into Goldcorp in a modest way. I understand your reasoning, that it might be able to make some accretive acquisitions down the road, and tend to agree.
My question though is what you think of Goldcorp as a continuing “play” on the gold price as it sits right now. With such low cash production costs, there doesn’t seem to be near as much leverage to any further rises in gold’s price as there would be with some higher-cost producers. For them, their margins would increase more drastically if, say, gold were to go up another $100 per ounce. Any thoughts on this, as well as what companies might be interesting as a more leveraged bet from current prices?
You make an excellent point; Goldcorp has indeed been panned by some as not possessing as much upside from here due to its low cash costs at the Red Lake Mine. That point is well-taken’ however, I think after the drubbing the stock took since December plus its prominent stature, it will regain the good valuation it had before, even if no major acquisitions are made soon. But, again, good point, as there are indeed some companies out there that have more leverage.
One I keep an eye on is Queenstake Resources (TSE-QRL; OTC-QNKRF.) That company took over Nevada’s Jerritt Canyon Mine north of Elko about a year ago, from Meridian Gold and Anglo Gold. Since then, the company has had some great drilling success, identifying large amounts of higher-grade ore for future production.
That gives it upside leverage to gold. In addition, as efficiencies improve together with the mining of higher-grade ores, cash costs should come down considerably. At the end of last year, they were around $300 per ounce of gold. The company projects that during 2004, the average should work down toward $250 per ounce, and further to the $235 per ounce by next year.
So, unlike Goldcorp, this is a company (selling some 40% below its 52-week high, by the way) that has more dramatic leverage to gold’s price from their respective current levels, when we use that measure.
INFLATION VS. DEFLATION CONT’D
I would love to hear your take on the Deflation vs. Inflation debate which has dominated a lot of the financial analysis these days. For what it is worth I think deflation is ultimately inevitable given the excessive debt levels that can not continue to grow indefinitely without a period of consolidation where money supply should contract, having a deflationary effect and bringing about a heavy recession internationally. The million dollar question is when? Many analysts feel this time is upon us but my gut feeling is there may be room for one more bubble.
In the mean time (short to medium term) I feel inflation could be inevitable given the Fed’s hell bent attempts on keeping the party alive for as long as possible as the alternative is too scary to consider. If this is the case and given commodity stocks in a lot of the major commodities are dwindling, is there a chance we may see a bubble in commodity equities before we see a crash in the overall stock market as the weight of debt finally takes its toll? My feeling is we have seen bubbles in just about every other investment medium and whilst the resource sector has seen some resurgence, we are yet to see excessive levels of public interest which constitutes a true bubble. I feel the greedy investment public are just itching for another sector to chase exuberant profits and given the limited prospects for the already overpriced industrial equities and bond market, this may be the next logical destination for funds, be it only for a brief period.
As to your thesis, I generally believe you are correct. The Fed, once it does start to raise rates, is not likely to move in too aggressive a fashion. Greenspan and Co. have little choice but to keep the party going for as long as possible; as I mentioned in my May issue, Greenspan WANTS inflationary growth. The trick will be to keep the bond market vigilantes from rebelling too much more than they have already, which would force the Fed to do more than it wants and bring about the deflationary unwinding you suggest sooner rather than a bit later.
Eventually, whatever last gasps the Fed is able to engineer in the many bubbles they continue to foster (primarily in housing, but also in consumer credit in a broader sense) will come back to haunt them. There have been a couple excellent takes on this recently. One was by Jim Grant of Grant's Interest Rate Observer. He wrote an op-ed piece in the New York Times recently entitled "Low Rates, High Expectations" where he discussed his view that the Fed's valiant attempts to stoke inflation have actually increased the chances of a subsequent nasty deflation. You can read what he had to say on the “Other Experts” page of my web site, where I have that commentary posted.
Several days ago, PIMCO’s well-known bond manager Bill Gross, in a CNBC interview, sounded much the same theme. While he thinks the Fed's substantial monetary inflation can keep things at least muddling through for the rest of 2004 and, perhaps, into 2005, he feels that afterward we'll be faced with a dramatically slowing economy and declining stocks and commodities. In that environment, he would again become bullish on longer-dated Treasuries, as their yields would likely fall as a consequence after first hitting a peak later this year. I tend to believe that Gross' suggested time table for all of this will prove accurate.
As for the commodities area, the best scenario would be that the Fed is indeed slow in raising rates and that--all else being equal--the U.S. dollar more energetically resumes its longer-term down trend. That would allow us more opportunity to make some more money in metals-related stocks, as well as in commodity funds like the Rogers International Raw Materials Fund I've been touting lately. We need to keep in mind here, though, that any higher energy prices, especially if accompanied by more wide-ranging terrorist attacks, would most likely serve to both strengthen the dollar and cause most other non-energy commodities (and shares) to retreat. Ironically, a softening of energy prices could reinvigorate hopes for more sustainable global growth for a spell and, thus, bolster the prices of other commodities.
MUTUAL FUND AND ETF ADVICE
Dear Chris—I am a fairly new subscriber, and prefer to invest mainly through mutual funds and ETFs. Do you give recommendations there? Would you do so?
From time to time I have indeed recommended mutual funds, but more so for those who (perhaps due to constraints of a 401(k) or similar plan) are unable to buy individual stocks. Also, I recognize that many simply prefer funds and ETF's.
Even though I have predominantly stayed with stocks, I nevertheless regularly remind folks that, if they invest in funds or ETF's, they can still benefit from my recommendations by sticking with the asset allocation models, etc. I give. Further, a “read” of those kinds of stocks I do recommend gives you an indication of the kind of funds/ETF's to be in from time to time (heavily skewed toward commodities in the recent past, for instance.)
While I'll continue to lean toward “stock picking” I feel that the likelihood that the markets will for some time to come be in a sideways pattern argues in favor of trading via things such as ETFs. So, expect to see some presence of these on my recommended list before much longer.
Last but not least, always remember that--whatever my own “pet” recommended holdings--you can always bounce selections of funds or ETF's off me for my own two cents' worth.
BUSH VS. KERRY
Chris—You haven’t had all that much to say recently about the prospects for the markets with the presidential election coming up in November. Can you give us all a quick “thumbnail” of what to be looking for?
Well, for starters, it strikes me as interesting that there has not been the degree of chatter about this that one would expect at this point. I think it is because of a few other matters that the markets have been preoccupied with, including Iraq, terrorism possibilities and—last but not least—the outsized focus on what the Federal Reserve is up to. In addition, it seems as though Sen. John Kerry is presently more interested in waiting for President Bush to lose his re-election bid than he is in trying to win. Not seeming to run a forceful campaign to this point has, coupled with these various other preoccupations, served to keep the presidential contest at a lower profile so far than it might otherwise be. Eventually, this will change; perhaps after June 30th’s events are out of the way and we’re getting closer to the two major parties’ conventions.
If I were a Democrat and a backer of Kerry (and I’m neither) I’d be wanting him to do more than wait for Bush to lose. Having said that, though, I nevertheless still tend to think it’s accurate to say that the election is, and always has been, the president’s to lose.
In my opinion, the biggest danger for Bush in a political sense is that he has so alienated many traditional conservatives due to his behaving like a “Rockefeller Republican” on fiscal matters and in turning America into more of a police state via his Patriot Act. Further—though most have stayed loyal—there has been uneasiness over Bush’s Iraq excursion. Here again, though, Kerry seems to be behaving as though he wants Bush to lose on this issue, and he has additionally not provided any sufficiently compelling ideas as to what he would have done differently. About the only “strategy” he has offered is to make the U.S. even more dependent on the United Nations and our “allies” before we do much else down the road. Whatever other mistakes one can point to by Bush vis-ŕ-vis Iraq, this issue is a loser for Kerry, as the majority of Americans correctly believes that we cannot be shackled by the U.N. or anyone else.
Bush will win if his court jester Karl Rove is able to sufficiently mobilize conservative voters to turn out in force. Already, he’s putting together a strategy where the G.O.P. will be using churches as bases for voter registration drives; something that brings back memories for Yours Truly, as I was involved in such an effort spearheaded by the Moral Majority back during the re-election effort of the late President Reagan in 1983-1984. Sufficient success in this area would mitigate the losses that will come from conservative voters who either 1) stay home, or 2) cast a vote for Ralph Nader or another third party candidate, and will give Bush another four years unless the economy has noticeably slowed by November, or the Iraq situation dramatically worsens.
As for the markets specifically, I generally expect that perceptions of a looming Bush victory would be bullish for stocks and negative for the U.S. dollar. Were Kerry to gain the upper hand, reverse these. Bush is a known quantity to investors domestic and foreign alike. They will expect that, in a second term, he would seek to institute additional/extended tax cuts, and would pursue other “pro-growth” policies. This would all be bullish for stocks; however, his inability to say no to continued runaway big government spending habits would run the federal deficit even higher, and would be negative for the greenback.
The prospect of a Kerry win, on the other hand, would delight foreign investors in the dollar and Treasury securities. At the least, he would resist further tax cuts; and if the Democrats manage some inroads in Congress, he would attempt to raise taxes in some areas, all in order to reduce the deficit. The dollar would rally on these expectations, even if they eventually went unfulfilled, as foreigners would see the possibility that America’s budget and current account deficits would become less of a drag on the dollar. The flip side of this, though, is that such possibilities would clearly (and correctly) be seen as negative for the stock market.
No matter which man wins, 2005 will in all likelihood be a year in which some of the chickens of the last couple years come home to roost more forcefully. Trading for the balance of the year, though, will undoubtedly be influenced by the above.
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