Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Wednesday, March 14, 2007

Keeping Your Head Above the Waves

The selling in Asian markets was brutal overnight, so we'll probably see a continuation of yesterday's selling in North American markets. Is it time to freak out and sell? No.

At least not with uranium stocks. The price of uranium keeps going UP, while uranium mining stocks go down. This disconnect will be corrected by the market. And unless a magical uranium leprechaun comes by to hand us a pot of 4 million pounds of uranium to make up for lost production from the flooded Ranger mine in Australia, uranium prices are going much higher in a hurry. That means that great miners are ON SALE, and you can pick them up on the cheap.

And I don’t think doom is nigh for gold and silver stocks, either. Look at this chart of silver ...

The uptrend is still intact. In fact, it looks like a great buying opportunity is coming up.

And then there's energy . Why is the price of oil going down? Just look at some recent stats
  • The International Energy Agency has warned that global oil and fuel stockpiles are falling unusually fast this year, creating concern about supply over the next few months.
  • The IEA's report indicated that stockpiles for the OECD nations are falling by 1.26 million barrels a day this year, which could ultimately amount to the largest Q1 stock reduction in over 10 years. Oil supplies generally fall by about 100,000-400,000 barrels a day during this season.
  • OPEC's daily output last month averaged 30.2 million barrels, 400,000 barrels less than the level the IEA claims is needed from the cartel.
  • In February, daily oil supply from OPEC members (not including new member Angola) was down a million barrels a day since September.
So we're seeing supply/demand squeezes in uranium and oil, and gold and silver haven't even tested support yet. Nonetheless, natural resource stocks are being sold off. There are probably multiple reasons ...

  1. A liquidity crunch. Fund managers have losses in other areas (mortgage companies, for one), and so they have to sell other stocks to cover, even if they would rather not sell those stocks.
  2. A repricing of risk. With mortgages melting down, traders and funds are starting to account for more risk in speculative investments. Small-cap mining stocks are speculative. Therefore, these funds are allocating them a smaller portion in their portfolios.
  3. The thundering herd. A stock sell-off can gather momentum like an avalanche. Nimble, short-term traders decide to sell now with an eye on buying later at cheaper prices. Traders and investors who shouldn't be in this market anyway just sell because they get scared.

Add it all up and we have great stocks on sale for 5% cheaper than they were yesterday. They'll probably get cheaper yet. But I believe this will be a short-term blip.

Why? Look at this next chart ...

Natural resource stocks are cyclical, and one of the cycles is yearly sell-off starting in late March, early April. It started early this year. Will it go as deep as the sell-off we had last year? I don't know. It might be shorter and shallower, it might be longer and deeper. I have to say the strength we're seeing in the underlying commodities (uranium, silver, oil) argues for a shorter sell-off.

Last year, I tried to get my Red-Hot subs out quickly then back in at the bottom. That didn't work so well. Looking back, we would have been better off just holding on to the best stocks.

So, don't panic. Keep your head. Let this selling wave pass. We'll see how things look on the other side.

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