Red-Hot Resources

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

Thursday, January 31, 2008

Oil Takes It On the Chin

The surge in first-time unemployment claims and slowing personal spending are fueling recession fears. Add that to the rise in crude oil and gasoline inventories yesterday, and you can see why oil prices are skidding below $90. End result: Oil stocks are getting hammered.

On the other hand, have we really gotten to the point where we consider $80 to $90 oil "cheap"? Holy smokes!

I say that because many oil industry stocks are still priced as if oil is going back below $50.

I know it hurts, but let's hope they get cheaper in the short term. Long-term trends are still intact for most of them, and as I showed you yesterday, the slowing US economy doesn't have a lasting effect on oil prices.

By the way, here's a blast from the past: Fears of recession in August 2006. One of the things that worried economists then was that oil prices had surged ... above $70 per barrel! We know how that worked out.

Oh, and Shell's production is falling. Somebody has to pump more oil. Is that "somebody" OPEC? In a word, "NO!"

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Financials Face More Pain

Amback Financial and MBIA face combined losses of $23 billion
Hedge fund manager Bill Ackman told regulators on Wednesday that the two biggest U.S. bond insurers face combined losses of over $23 billion and should be forced to stop paying dividends.

S&P Mulls $500 billion in Mortgage Downgrades
Standard & Poor's Ratings Services is considering slashing its rating on more than $500 billion of investments tied to bad mortgage loans, the ratings agency said Wednesday. The massive downgrade would threaten a broad swath of the world's finance industry, S&P said, ranging from Wall Street's trading desks to regional banks to local credit unions.

Subprime Mortgage, CDO Bank Losses May Exceed $265 Billion, S&P Forecasts Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's.

This is bad news for the iShares Financial Sector exchange-traded fund, the IYF.
The smart way to short the IYF, I believe, is to buy the SKF, the Ultra-short financial ETF.
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Wednesday, January 30, 2008

Hi-Ho, Silver!

Silver hits a 27-year high as the Fed's rate cut sends the US dollar lower.


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Canadian Metal Mania in Money and Markets

My latest MoneyandMarkets column is up, with more details on my trip to Canada ...

Metal Mania in Canada! by Sean Brodrick Wednesday, January 30, 2008 7:30 AM
The Vancouver Resource Investment Conference I attended last week was a treasure-trove of undiscovered stocks. What's more, the pullback in the broad markets is turning these ... [More...]

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The Dog That Didn't Bark

One of the great Sherlock Holmes concepts is about "the dog that didn't bark." In other words, being aware of things that don't happen as much as things that do happen, and what they tell you.

I find it interesting that GDP growth in the fourth quarter was 0.6% -- only half as much as expected. What's more, that's way, way down from the 4.9% pace the previous three months. And yet, oil prices DIDN'T tumble. Indeed, we saw oil prices surge in the fourth quarter.

If a faltering US economy was going to have a real effect on commodity prices, shouldn’t we have seen oil prices go lower? Especially oil prices – we use one-fourth of the world’s oil!

I point you to some factoids I noted in yesterday's blog entry on an oil crisis ...

  1. China’s economy is nearly doubling every five years, and that country’s auto sales are growing at a 20% clip.

  2. Meanwhile, India just introduce a car that costs less than $2,500 – which means millions more people in India will be hitting the road in gasoline-guzzling vehicles.

  3. Here in the US, we continue to see unusually low crude oil inventories, with stockpiles dropping to 293 million barrels from 321 million barrels a year ago, according to the Energy Department.

It will be interesting to see today's oil inventory data.

UPDATE: Today’s inventory data was bearish for crude oil – with crude supplies building by 3.6 million barrels – but the oil market seems to be shrugging it off. I guess if prices don't go down, that's really not bearish. I'm not sure why oil is holding up so well.

Maybe it's because crude oil stockpiles are still at 293 million barrels, way down from 321 million barrels a year ago, according to the Energy Department.

The Fed’s announcement on interest rate cuts at 2:15 today could have more impact. The even BIGGER news for oil is on Friday, when OPEC meets.

UPDATE II: The Fed cuts 50 basis points. This lit a fire under oil prices, and many oil industry stocks are catapulting higher. Let's see where we end the day -- you never want to buy on euphoria.

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New Clean Coal Technology Hits a Rough Patch

One of the arguments of nuclear power proponents (like me) is that other technologies are unproved. A case in point is "clean coal," in which C02 will be stored underground "permanently." Well, that sets my radar off -- nothing in the world is permanent.

And sure enough, we read this in the Washington Post this morning ...

Energy Dept. Might Drop Support for FutureGen Power Plant

Energy Secretary Samuel P. Bodman told lawmakers yesterday that the Bush administration might drop its support for a $1.5 billion coal-fired power plant designed to store greenhouse gases underground, citing mounting cost estimates and other possible technologies.

I think nuclear power is looking better and better. Whatever the solution, we better get working on it soon.

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Tuesday, January 29, 2008

The Coming Oil Shock

A couple weeks ago, I put out an oil report ... and last week, oil stocks crashed along with the rest of the market. Well, ain't that just my luck!

But it actually is lucky for the people who bought the report – because they can add to positions. While most of those stocks are bouncing back in a hurry, they’re still cheap.

And if the global economy isn’t slowing down as many fear, the oil crisis is about to take a turn for the worse.

OPEC crude oil production spare capacity is barely existent, oil prices are hovering around $90 per barrel, and the International Energy Agency (IEA) says global energy demand grew 4.6% in 2007 and should grow another 2.3% in 2008 to 87.7 million barrels per day. That means the world will start using oil at a rate over 1,000 barrels per second!

Looking at this chart, you can see little sign of a drop in demand.

What’s more, China’s economy is nearly doubling every five years, and that country’s auto sales are growing at a 20% clip.

Meanwhile, India just introduce a car that costs less than $2,500 – which means millions more people in India will be hitting the road in gasoline-guzzling vehicles.

Here in the US, we continue to see unusually low crude oil inventories, with stockpiles dropping to 293 million barrels from 321 million barrels a year ago, according to the Energy Department.

Now look at this chart of the front month of crude. You can see that oil made a double bottom in December and January, and just pushed higher through its recent downtrend.

I believe crude could head back to its old highs and then go much higher!

Meanwhile, all this talk of an economic downturn has given OPEC all the cover it needs NOT to raise production quotas when it next meets on February 1. OPEC likes prices where they are – nice and high. And they’d like them higher.

If you haven’t already, check out my recent oil report. The sudden sell-off last week made some of these stocks incredible bargains … I don’t think they’ll remain that way for long.

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News You Can Use for Tuesday

There is some troubling news for the Red-Hot Global Small-Caps portfolio in today’s news roundup – Sino-Gold is seeing its production impacted by severe weather and power outages in China, and Paladin has pushed back the opening of its Malawi mine by two quarters. These are both short-term problems, and buying opportunities may rear their heads.

Anyway, on with the news …

U.S. Durable Goods Orders Rise More Than Forecast, Biggest Gain Since July Orders for U.S. durable goods rose more than forecast in December, suggesting business investment is holding up even as other parts of the economy weaken.

Australian Business Confidence Drops to Two-Year Low on Costs, U.S. Growth Australian business confidence fell to a two-year low in December, signaling companies may pare investment and hiring as global economic growth cools.

South Africa's Zuma Says Power Crisis Due to Accelerating Economic Growth Jacob Zuma, the newly elected leader of South Africa's ruling African National Congress, said a power crisis that has halted production from the country's gold and platinum mines for five days is due to economic growth.

Snowstorms in China Kill 24 People, Cause $3 Billion of Economic Losses China's worst snowstorms in five decades have affected 77.8 million people since Jan. 10 and caused about 22.1 billion yuan ($3.07 billion) in direct economic losses, the Ministry of Civil Affairs said.

Sino Gold says bad weather to cut mine output Sino Gold Mining said on Tuesday gold production in February from its Jinfeng mine in China would fall below its target due to reduced power availability. The company said it had been advised by authorities on Monday that full power may not be available to the mine in until after the lunar new year holiday, around Feb. 21.

Uranium Falls to $78 a Pound, Lowest Since October, on Increased Supply Uranium fell to the lowest since October as Australia and Kazakhstan, two of the world's top three producers, reported increased 2007 output, and supply rose to four times demand.

Paladin Energy Puts Back Date for Production Start at Malawi Uranium Mine Paladin Energy Ltd., the Australian company building a uranium mine in Malawi, put back the date for the start of production from the project.

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Monday, January 28, 2008

China! China! China!

China's growth could spark political tensions
China’s booming economy is expected to consume more than half of the world’s key resources within a decade, according to Rio Tinto.

The rapid industrialization of China’s economy means that it is likely to consume a majority of the world’s supply of all the major metals and minerals, potentially leading to clashes with other countries over access to resources. Rio Tinto, the world’s second-largest miner, said last week that China already accounted for 47 per cent of all iron ore consumption, 32 per cent of aluminum and 25 per cent of copper.

Tom Albanese, Rio’s chief executive, has predicted that within the next couple of years this will move to 58 per cent of all iron ore, 45 per cent of aluminum and a third of all copper. He said: “Even with the assumption that the current growth intensity will slow, we are looking at China consuming a higher percentage of global supply.”

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How High Could the Dow Bounce?

I've been doing some Fibonacci retracements on the Dow Jones Industrial Average. This system gives you mathematical support and resistance levels.

I'm hearing a lot of bearishness from people I respect. But it wouldn't surprise me to see the Dow rally this week and maybe next week. The question is, how high.

The answer -- from a Fibonacci point of view anyway, depends on where you start.

The really short-term view ...You can see that the Dow has retraced all of its move from April. In this, a very bearish scenario, I'd look for a bounce to 12,810 and then 13,075 at the most. MACD has turned short-term bullish, supporting a rally.

The short-term view ...

Measuring from the start of the Dow's big move in 2006, we are still potentially in a bull market. 12,439 is what to look at next. You'll note that in this time-frame, MACD (momentum) is still bearish.

The long-term view ...The long, LONG term view ...This is just stuff to think about this week.
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Charts for Monday

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News You Can Use for Monday

The Bullish ...

Gold Fields, Anglo Platinum Mines Stay Shut on South African Power Crisis AngloGold Ashanti Ltd., Gold Fields Ltd. and Anglo Platinum Ltd. kept their South African mines shut as power supply was cut for a fourth day, threatening investment and jobs in the continent's biggest economy.

Coal Jumps to Record as Production Drops in South Africa, Australia, China Coal rose to a record in Asia and also advanced in Europe as floods in Australia and snow storms in China restricted output, spurring generators to secure supply.

Chicago Wheat Gains by Limit on Speculation Demand for Grains to Increase Wheat futures in Chicago rose the daily maximum as the weak dollar encouraged buyers to increase purchases of U.S. supplies. Corn declined for the first time in three days.

The Bearish ...

Sales of New Houses in U.S. Last Year Probably Dropped the Most Since 1963 Purchases of new homes in the U.S. probably fell in December, capping the biggest annual decline in at least four decades, economists said before a government report today.

Nickel Slides in London to 2008 Low on Higher Inventories, Demand Outlook Nickel fell for a second day in London as increased inventories signaled demand from stainless- steel makers, the biggest user, has yet to pick up. Copper, aluminum and zinc also declined.

Global Recession Risk Grows as U.S. `Collateral Damage' Hits U.K., Japan The U.S. economy may already be in recession; other countries might not be far behind.

PetroChina 44% Decline Proves BRIC Premium Evaporates When S&P 500 Tumbles The biggest slide in emerging-market stock valuations in a year and a half is proving that a slowdown in the U.S. economy still matters to Brazil, Russia, India and China.

Other Opportunities ...

Statism Beats Capitalism as Gazprom, Petrobras Squeeze Exxon, BP Earnings State-controlled energy companies OAO Gazprom and Petroleo Brasileiro SA are winning the battle for investors as their governments squeeze Exxon Mobil Corp., BP Plc, and Royal Dutch Shell Plc for access to oil and gas.

Death of VaR Evoked on Wall Street as Risk-Taking Meets Taleb's Black Swan The risk-taking model that emboldened Wall Street to trade with impunity is broken and everyone from Merrill Lynch & Co. Chief Executive Officer John Thain to Morgan Stanley Chief Financial Officer Colm Kelleher is coming to the realization that no algorithm or triple-A rating can substitute for old-fashioned due diligence.
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Sigh ...

I know my day is getting off to a bad start when Pat Buchanan starts channeling everything in my brain.

And Dennis Kneale is a world-class weasel. He says things that just aren't true and doesn't expect anyone to fact-check him. I guess he didn't expect to be on the air with Buchanan. You go, Pat! Set that liar straight on historical trade deficits!

Those of you who are watching CNBC right now know what I'm talking about.
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Happy Australia Day!

Australian markets are closed because Australia Day was this weekend (if the January 26th holiday occurs on the weekend, everyone gets the following Monday off).

A few points ...

Australia was only settled because of the loss of colonies in North America.

  • It's the day that Governor Bligh (of "Mutiny on the Bounty" fame) was arrested by British officers in what became known as the "Rum Rebellion."
  • Today, it's a day of festivals, fireworks and boat races.
Happy Australia day! Kiss a sheila for me, mate!


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Sunday, January 27, 2008

Sunday News Roundup

Story #1: Coal Shortages?

More than a quarter of Europe's energy coal is shipped from Richards Bay, South Africa. Anglo American, the second-biggest coal producer in the country, stopped five of its nine mines after state utility Eskom Holdings Ltd. said it couldn't guarantee electricity supply ... Eskom told miners that production may have to be curbed for two to six weeks, on the day that China, the world's biggest coal producer, ordered domestic shippers to halt exports next month and in March to ease shortages. In Australia, the world's biggest energy coal exporter, rains disrupted mining in Queensland and Macarthur Coal Ltd. said it may miss contracted deliveries.

XX My take -- sure, supply is part of the problem. But if the global economy is slowing down, why are countries like China running out of coal?

Story #2: China Infrastructure build-out

China Will Spend $62 Billion Building 97 Airports by 2020 to Meet Demand China, the world's second-largest air-travel market, plans to spend 450 billion yuan ($62 billion) building 97 more airports by 2020 to meet demand.

XX I have to think this is good for global infrastructure stocks, as well as commodity stocks.

Story #3: Why We Don't Invest in Zambia

Zambia Sets Windfall Tax on Mining Companies, Cuts Depreciation Allowance Zambia, Africa's biggest copper producer, will introduce a windfall tax on mining companies to enable the nation to derive more benefit from its resources, Finance Minister Ngandu Magande said.

XX We had an Australian stock that mines in Zambia in Red-Hot Global Small-Caps last year and sold it when the Zambians started making noises like this. I met representatives of the company in Vancouver last weekend and they told me, "oh, it's overblown." Su-u-u-u-u-u-re it is.
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Friday, January 25, 2008

Stories and Charts for Friday

And thank ever-lovin' God it's Friday! Man, what a week!


IEA Calls on OPEC to Pump More Crude; Says Stockpiles Still Remain `Tight' OPEC should pump more oil to replenish inventories and ease high prices, while state-owned oil companies must keep up the pace of investment in new capacity, the head of the International Energy Agency said.


Strong Global Market for Iron Ore is Here to Stay, Rio's CEO Albanese Says Rio Tinto Group, fending off a $114 billion hostile offer from rival mining company BHP Billiton Ltd., said an ``extremely strong'' iron ore market will last, and there's no slowdown in Chinese demand for commodities.


Argentina's Soybean, Corn Crops May Be Hurt by Dry, Hot Weather in Pampas Argentine soybean and corn crops may further deteriorate as dry, hot weather reduces soil humidity, affecting yields, a weather researcher said.

Corn, Soybeans Gain for Second Day on Speculation Demand Will Increase Corn and soybeans in Chicago rose for a second day on speculation recent price declines, the dollar's weakness and a reduction in freight costs may boost demand from overseas importers. Wheat futures also gained.

China's Buyers Boost Soybean Imports on Drop in Shipping, Commodity Costs China, the world's biggest importer of soybeans, boosted purchases this week after shipping costs and the global benchmark price of the commodity declined, market researcher Shanghai JC Intelligence Co. said.


S&P/ASX 200 Index Jumps Most in a Decade in Biggest Ever Three-Day Rally Australia's S&P/ASX 200 Index rose the most in a decade, completing a three-day rebound sparked by the Federal Reserve's cut to U.S. interest rates and President George W. Bush's plan to revive growth in the world's largest economy.

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Thursday, January 24, 2008

3 Important Stories for a Potentially Wild Day

Yesterday's whip-saw action in the markets was just what I was talking about in a Red-Hot Resources issue that went out before the market rallied. Here are some points I made in that issue ...

Why aren’t I talking about fundamentals? Well, I think natural resource stocks are fundamentally very cheap. But there are bigger “fundamentals” at play here: The fact that the Federal Reserve, Treasury, White House or Congress could jump in at any moment with some new market-saving plan fundamentally alters the game.

It reminds me of when I used to play the game “Risk” as a kid with my friends. Sometimes, one of the guys would get so angry at his losing position that he’d wipe the board clean and stomp off.

That’s what the government is trying to do. The fundamentals are lousy. The banks have jumped into the credit abyss and they’re dragging the rest of the market with them. That’s a losing proposition for politicians in an election year – and politicians hate to lose. So, they’ll keep trying to change the fundamentals with helicopter-drops of cash, tax rebates, heck, maybe even a resolution trust corporation to take of the mortgage crisis.

Will any of these potential game-changers work? I don’t know. But with the fundamentals shifting under our feet, the smart thing is to wait for a breakout one way or another and play that breakout.

With that in mind, here are three stories you might want to read.

Important Story #1 …

New York's Dinallo Wants Banking Industry to Fund Rescue of Bond Insurers New York regulators are pushing the biggest U.S. financial institutions to rescue bond insurers, led by MBIA Inc. and Ambac Financial Group Inc., and avert credit- rating downgrades that may further disrupt financial markets.

My take – the banks are more likely to do this if the government guarantees they won’t lose money on the deal – a “free money” situation. Since this is an election year, that’s entirely possible. But without government guarantees, this deal could still fall apart.

Important story #2 …

China's Economy Expands 11.2%, Supporting Global Growth as U.S. Slows China's economy expanded more than 11 percent for the fourth straight quarter, supporting global growth as a recession looms in the U.S.

My take – yesterday, CNBC was populated by a flock of bobble heads saying it was “obvious” that the global economy is not decoupling from the US. While I still think the US is important, it is not the be-all and end-all for the global economy that it used to be. And if India and China see their exports falling off, they will likely ratchet up domestic spending in the form of an infrastructure buildout, if only to keep a lid on social unrest.

Important Story #3 …

Potash Profit Doubles on Nutrient Prices, Higher Shipments of Fertilizer Potash Corp. of Saskatchewan Inc., the world's largest maker of crop nutrients, said profit more than doubled to a record as rising commodity prices spurred fertilizer demand.

My take – if you’re looking for one sector in North America that should continue to shine if the economy weakens, the farm sector is it. Exports are driving growth across the board.

My other two picks are precious metals and energy.

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Wednesday, January 23, 2008

In Case You Missed It ...

Here is my MoneyandMarkets column from today

Notes from the Vancouver Resource Investment Conference
by Sean Brodrick
Wednesday, January 23, 2008 7:30 AM
Yesterday, Ben Bernanke announced an emergency 75-basis-point cut to the fed funds rate in a bid to stop the tidal wave of selling that was racing around the globe. I was in British ... [More...]

And here is my latest interview with, which was done right at the conference.

I actually met a couple of fans at the conference. One is a regular reader of this page -- we didn't have long to talk, which is a shame, and I didn't even get his name. Maybe next time.

The other was a gentleman who listens to me on HoweStreet. He was very nice (flattery will get you everywhere) and his story was interesting. He's 60, and he lost a lot of money playing Nasdaq stocks. Then, three years ago, he switched to natural resources, started listening to HoweStreet, and attending the Vancouver Resource Investment Conference. Now, he's made so much money on natural resources, he can retire. I got his name -- a big shout-out to Greg!


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Maybe We Are Seeing a Bottom

... in commodities and commodity stocks that is. I was feeling pretty bearish today until I wiped the jet-lagged sleep from my eyes to look at the charts of stocks in Red-Hot Canadian Small-Caps and Red-Hot Resources.

Damn, but it looks like we're seeing some bottoming action right now. Take a look at this chart of Fronteer Development Group, a core portfolio holding in Red-Hot Resources ...
To be sure, the coast isn't clear. I expect FRG to go back and test those lows over the next couple weeks. But this is typical of a bottom.

Fronteer is a gold/uranium stock. Many speakers at the Vancouver Resource Investment Conference were very bearish on the broad market -- especially banks -- but still see tremendous upside for resources including gold, silver and oil later in the year. That's kind of a disconnect for me. As my old trader friend Charlie Belida used to say, "When the paddy wagon comes along, it takes the good girls downtown along with the bad."

But if US Global Funds chief Frank Holmes is right, an infrastructure building boom in China, India and other developing countries will take up all the slack in commodities from a US recession and more.

It's very interesting. And it certainly gives me some names to play if we get a decent rally.
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Mixed Signals on Gold

Yesterday, in one of my publications, I put out a support level on the front-month gold future at $848. Gold came down to $849.50. Is that "close enough for government work"?What I said was I'd consider buying at 848. And if gold breaks that, the next support levels/buying opportunities are 813 and 781.

However, MACD, a good momentum indicator for gold, just gave a pretty strong sell signal. So, we have mixed signals on gold.

Let's see how things go today. We may look back and say yesterday was a bottom in gold. Or, we may have a lot further to go in the selling. And as one of the experts at the Vancouver Resource Investment Conference said this weekend, "even good companies can be bad investments" when the major indexes are going down.

I'm glad I recommended some bearish hedges in Red-Hot Canadian Small-Caps and Red-Hot Global Small-Caps yesterday. As for Red-Hot Resources -- with all this "divine" intervention by the Fed and other government agencies in the wings, it's actually harder to make very short-term moves. The President could come out and say something* that might send the market up 200 or 300 points.

This is a "watch and wait" day.

* "I resign" would be a good start.
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Tuesday, January 22, 2008

Jack Crooks Is Scaring Me

My friend Jack Crooks, a veteran currency trader, sent me this chart this morning ...
As Jack says: "Nominal Dow vs. the Dow in Gold Terms…a big divergence. If the Nominal Dow plays catch up, this could get ugly."

I do think gold could go a bit lower -- the front-month contract has support around $848, and I may add new positions at that level. But the broad indices could tumble a lot harder and faster than that.

I'm adding hedges in Red-Hot Canadian Small-Caps and Red-Hot Global Small-Caps today. The plan is to send the issues out AFTER the open (look for them around 10:30) to avoid the immediate volatility. The Fed is stirring the pot with its 75-basis point cut, and that only makes it more dangerous for both bulls and bears.

Now, I have to go catch a plane. It's unnerving to be on a plane when the market is experiencing this volatility, but I have to travel sometime, and the days ahead could be even more volatile.

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Monday, January 21, 2008

Awful Day in Canadian Markets

There's no way to sugar-coat it – Canadian stocks are getting hammered along with the rest of the world. US stocks are spared only because of Martin Luther King Day. We can expect more bloodletting tomorrow.

The gurus I've been listening to at the conference were very bearish for the next few months, and the market echoed their opinions by crapping out today.

One speaker said the market faces five problems through the Spring …

Five major problems

  1. The Spring builder starts will be awful – not just in the US but in the UK and Spain.
  2. "Sell in May" is a seasonal event, and this will accelerate the downside slide.
  3. In the first two weeks of April, big banks start reporting their earnings, and they'll be awful. Credit card failures will really hit the banks hard. Banks have no other way to make income. Mortgages, commercial loans, bridge loans have all gone away.
  4. Used home sales in the Spring will be bad. 80% of the yearly home sales occur between January 15th and June 1st.
  5. One million mortgage resets will hit.

The recommendations from the opening panel could be summed up as:

1 & 2) Buy silver juniors in Mexico, which he thinks are undervalued and will ride the rally in silver he sees coming later in the year. Two panelists recommended this course of action, and one of them added that the junior gold mining sector has a minimum 2 to 4 years to run.

3) Accumulate gold shares that have big reserves in the ground – the value of those reserves will soar along with the price of gold later in the year.

4) Just get out! A bear market will hurt all stocks, and even good companies can be bad investments in a bear market. Later, in the fall, you can look at extremely beaten down sectors.

We can't add new positions today as US brokers are closed. Obviously, I called a bottom too early last week, though with 4% and 5% declines around the world today, I think the Fed will be moved to action sooner rather than later. The question is, can the Fed or the White House stop the market from going lower. We may want to use the next bounce to add more short positions.

I have to rush back to the conference. Stay tuned for more updates.

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Saturday, January 19, 2008

Vancouver, Ho!

So I’m in Vancouver now. The good news is the airline didn't lose my luggage. The better news is I’ll be dining tonight with Tom and Phil from They’ve been scoping out the latest developments on the Vancouver small-cap scene and they’ll give me the scoop.

And then tomorrow, 7:30 local time, Tom Jeffries and I are walking a few blocks to the Gold Show. How exciting. Watch it rain, lol.

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Friday, January 18, 2008

Stimulus Package Gives Market "Oomph!"

Stocks are set to open much higher this morning on the news that Washington may have gotten its act together to put together an economic stimulus package. The number being bandied about is $100 million to $150 million. Importantly, as the Wall Street Journal tells us …

The administration also signaled it would accept a stimulus bill that didn't include an extension of Mr. Bush's tax cuts -- a centerpiece of his economic agenda -- removing a potential hurdle to bipartisan support for the legislation.

Why is this important? As economist Paul Krugman detailed on his blog on Tuesday …

If this Times report is at all right, Republicans will hold any attempt to help the economy now hostage to yet another try at making the Bush tax cuts permanent.

But apparently the last few days of red-ink market action have overwhelmed Republican intransigence.

The Democrats also gave something, as the Wall Street Journal tells us …

Congressional Democrats, meanwhile, are suggesting they would be willing to suspend their budget rules and agree to tax breaks without first finding ways to pay for them. They also indicated willingness to add some incentives for business, usually a key Republican demand in economic-stimulus efforts

So what will the stimulus package look like? Again, from the Wall Street Journal …

The stimulus package could end up resembling the 2001 stimulus plan, which was widely regarded as well-timed and effective in keeping that year's recession mild. In that package, which Mr. Bush supported, married couples got as much as $600 in tax rebates and single tax filers as much as $300. The rebates were based on the new 10% bottom tax bracket that the 2001 legislation created. The lowest bracket previously had been 15%.

This time around, the rebate could eventually be as much as $800 for individuals, $1,600 for married couples, according to some officials. The rebates would be created, in effect, by temporarily eliminating the 10% tax bracket. Because the government is in the midst of the tax-filing season for 2007, it could take several months -- perhaps until June -- for rebate checks to make it into the hands of taxpayers.

Now the question is, will a stimulus package actually do any good? The general consensus on CNBC is that if you give people an extra $800, and they’re worried about the economy, they’ll tend to stick that money in the bank. So, the stimulus plan has to be more than tax rebates.

What would MY stimulus plan be? I’m so glad you asked.

I wouldn’t give tax rebates. I’d spend the $150 million on jobs, technology and material to make us more energy independent. “Green-energy” jobs to “solar-wire” our cities, rehabilitate light rail, and put a wind-generator on every frakking farm in the country. And when possible, Buy American to get the parts and material.

That’s what I would do. But no one asks me. On the other hand, my stimulus plan would probably take longer to get rolling than a "hand out money" plan, and both Wall Street and Washington have decided they want this stimulus NOW. So perhaps my solution is not the solution for the problem at hand.

I can tell you this -- if the government starts throwing money at problems, that is inflationary. That is a boost for gold and oil prices, and one that is separate from the boost we should see as the Fed continues to cut interest rates.

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Thursday, January 17, 2008

Where is Gold Going Next?

Stocks, including gold stocks and agriculture stocks, sure looked oversold yesterday. That's why I recommended RGS and RCS subs close out bearish hedges (at tidy profits) and add new positions. So what did we get today? Another cliff dive! Ouch.

Today's action tells me that the pullback in gold could continue for a bit. Here's what I'm looking at ...There are many fundamental forces pushing gold higher longer-term – tight supply, soaring demand fueled by investment funds and consumer demand in China and the Middle East, and the declining US dollar just to name some. But in the short-term, the yellow metal is technically weak, and the door is open to a further pullback.

Here’s what the market’s technicals are telling me about the streetTRACKS Gold shares (GLD), an exchange-traded fund that follows the price of gold closely .

On the bottom of the chart is a momentum indicator called MACD. This looks like it is about to give a “sell” signal when the blue line crosses below the red line. This tells us that GLD could have some more downside.

The horizontal lines on this chart are Fibonacci retracements – key support levels that are common in stocks.

  • A 25% retracement of GLD’s big move since August would bring it to 83.69. That also lines up with its high from November.
  • A 50% retracement would bring the GLD to 76.95 – and that lines up with another area of price support.

For the GLD to get to 76.95, gold would have to fall to 769.50, which is about when you’d see gold permabulls curl up in fetal positions and/or crap themselves on CNBC. We probably won’t be lucky enough to see a pullback that far. I’d mark 83.69 as more likely, and a good place to start buying gold or the GLD.

So if we think gold is going lower in the short-term, should you short it? That’s probably not wise. There are too many surprises that could send gold soaring. For example, Ben Bernanke could announce a surprise 50- or 75-basis point rate cut to prop up the economy. It might help the economy, but a rate cut is also A) inflationary and B) bearish for the dollar.

Since the US dollar and gold sit on opposite ends of what I call the “see-saw of pain,” such a move could send gold surging higher.

It’s better to wait for gold to get to those support levels and then go long. Remember to use protective stops – doing otherwise is foolish in such a volatile market


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Wednesday, January 16, 2008

The Road to Higher Oil Prices

There's a bit of editorial license here. I originally wrote $150 oil, but my editor thought $200 oil sounded better. Watch us both be wrong, lol!

by Sean Brodrick Wednesday, January 16, 2008 7:30 AM

They say the highway to hell is paved with good intentions. I think the same can be said for the road to $200-a-barrel oil. And the car on that road will be the Nano, the new ultra-cheap ...

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Brace for Impact!

The futures look terrible this morning, careening lower after bad news from Intel overnight, and the crew on CNBC is furrowing their beetley brows with concern. Gold is down $18, too, and oil is around $90. Sentiment has swung decidely bearish.

This is the kind of territory where bottoms are found ... perhaps because this is also the kind of territory where the Fed makes an emergency rate cut.

But until then, let's admit the news is decidely negative. Technically speaking, the volume is lighter on each rally than on the declines -- that's a negative and indicates more selling ahead (unless the Fed comes in and waves its magic wand).

Also, there was some surprising news yesterday on the Producer Price Index. It declined 0.1% in December, when economists were expecting an increase of 0.2%. This immediately had doom-ologists clutching their pearls and shouting: "Deflation! It's deflation, I tell you!"

Now here's the skinny ...

Last month's decline in the headline number followed a 3.2% increase in November; the largest increase in 34 years.

Core prices, which exclude food and energy, rose 0.2%, in-line with forecasts.

year-over-year the PPI was up 6.3%, the largest yearly jump since 1981's 7.1% increase

The decline in the headline figure was largely due to 1.9% decline in energy.

Now how is that possible? Well, while energy prices soared in December, that occurred at the end of the month, after the Labor Department gathered its data. It's not so much a conspiracy as bad timing.

But it also means that the "deflationist" crowd can stick a sock in it.

Here's some news you can use ...

China Tells Banks to Set Aside Larger Reserves, Curbs Food-Price Increases China ordered banks to set aside larger reserves and imposed price curbs on grain, meat and eggs to try to prevent inflation at an 11-year high from triggering civil unrest.

XX That still sounds inflationary (and bullish for agricultural commodities) to me.

Dollar Falls to 2 1/2-Year Low Versus Yen on Widening Credit Market Losses The dollar fell to a 2 1/2-year low against the yen as losses in credit markets widened and the U.S. economy showed more signs of sinking into recession.

Oil Falls on Signs of U.S. Economic Slowdown; Saudi Comments on Production Oil fell to its lowest in more than three weeks in New York after an unexpected drop in U.S. retail sales added to concern the U.S. is headed for a recession.

Gold Declines in London as Lower Oil Costs Curb Demand; Silver Advances Gold fell for a second day in London on speculation lower oil prices will slow investor demand for the metal as a hedge against inflation. Silver gained while platinum and palladium declined.

Gold Will Average $915 This Year, Goldman Sachs Says, Raising Forecasts Goldman Sachs Group Inc., the world's largest securities firm, increased its gold forecast for 2008 through 2010 because of expectations for a U.S. recession in the second and third quarters and a weaker dollar.

And so what if the bears are right, and we're careening deeper into recession? Here's an interesting column on what that might mean ...

Different Recession, Different Cure

In a normal recession, the to-do list is clear. Copies of Keynes are dusted off, the Fed lowers interest rates, the president and Congress cut taxes and hike spending. In time, purchasing, production and loans perk up, and Keynes is placed back on the shelf. No larger alterations to the economy are made, because our economy, but for the occasional bump in the road, is fundamentally sound.

This has been the drill in every recession since World War II.

Republicans and Democrats argue over whose taxes should be cut the most and which projects should be funded, but, under public pressure to do something, they usually find some mutually acceptable midpoint and enact a stimulus package. Even in today's hyperpartisan Washington, the odds still favor such a deal.

This time, though, don't expect that to be the end of the story -- because the coming recession will not be normal, and our economy is not fundamentally sound. This time around, the nation will have to craft new versions of some of the reforms that Franklin Roosevelt created to steer the nation out of the Great Depression -- not because anything like a major depression looms but because we face an economy that's been warped by two developments we've not seen since FDR's time.

Go read the whole thing. Is that how things are going to play out? No one really knows. I do know that prices are rising so fast that China feels forced to impose price controls. Holy smokes!

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Tuesday, January 15, 2008

Lotsa News for Tuesday

Here is some news you can use. First, the outlook for oil and iron remains bullish

Bush Urges OPEC to Increase Oil Output to Lower Near-Record Crude Prices U.S. President George W. Bush, on his first visit to Saudi Arabia, urged the Organization of Petroleum Exporting Countries ahead of its Feb. 1 meeting to pump more oil in an effort to lower near record crude prices.

Rio Expects China Demand to Sustain `Strong' Market Outlook for Iron Ore Rio Tinto Group, battling a hostile takeover proposal from BHP Billiton Ltd., expects the ``strong market outlook'' for iron ore to continue on demand from China.

It will be interesting to see how uranium stocks react to this next one. Paladin in Australia jumped over 7% on the good news from ERA …

Energy Resources Jumps After Higher-Than-Expected Uranium Price Increases Energy Resources of Australia Ltd., producer of more than a 10th of the world's mined uranium, rose the most in almost five months in Sydney trading after it won greater-than-estimated prices for the fuel.

Even this news didn’t hold it back …

Australia Won't Sell India Uranium, Reversing Previous Government's Stance Australia, holder of the largest known uranium reserves, won't sell the fuel to India because the country isn't a signatory of the Nuclear Non-Proliferation Treaty, reversing a decision by the previous government.

China and Energy – full steam ahead …

China's 2007 Coal Imports Jump 34% as Economic Expansion Increases Demand China, the world's biggest user and producer of coal, increased purchases of the fuel from overseas by 34 percent last year as its economy expanded.

December Diesel Imports Rise More Than Fourfold on China Demand for Fuel Diesel imports by China, the world's second-largest energy consumer, jumped more than fourfold in December from a year earlier after the government ordered refiners to ensure supplies and ease shortages.

India – bearish force (short-term, anyway) for wheat and gold?

Wheat Production in India May Rise to Seven-Year High, Reducing Imports India, the world's largest wheat consumer after China, may reap its biggest harvest in seven years after favorable weather and increased planting, easing pressure on the government to import the grain for strategic reserves.

Indian Housewives Boost Old Jewelry Sales as Gold Prices Soar to Record Sales of gold scrap in India, the world's biggest buyer of the precious metal, have increased as record prices prompt housewives and other consumers to recycle more old jewelry, curbing demand for new supplies of bullion.

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Monday, January 14, 2008

My Latest Interview

Phil and I talk about all sorts of things on this very bullish Monday. Click here:

The sound is very uneven. I can hardly hear myself talk. Better luck next time.


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2 More Charts

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Chart of the Day -- Gold and the Dollar

Gold, Platinum Rise to Records in London on Declining Dollar; Silver Gains Gold and platinum rose to records and silver extended its rally to the highest in 27 years as a declining dollar increased demand for precious metals as alternatives to stocks and bonds.

Dollar Declines to 7-Week Low on Bets Fed to Cut Interest Rate Below ECB's The dollar fell to a seven-week low against the euro on speculation U.S. interest rates will fall below those of the 15 nations that share the euro for the first time in three years.

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News You Can Use for Monday

Big miner mergers continue …

Vale do Rio Doce May Buy Xstrata to Diversify Its Portfolio, Liberum Says Cia. Vale do Rio Doce, the world's largest iron-ore exporter, may buy Xstrata Plc to diversify its production and gain access to U.K. investors, Liberum Capital Ltd. said.

While commodity prices -- and demand -- heat up ...

Copper Rises in Asia as China Imports Reach 8-Month High, Commodities Gain Copper prices rose in Asia after imports of the metal by China, the world's largest user, reached an eight-month high and as investors bought raw materials as an alternative to a declining dollar.

Crude Oil Advances as Qatari Minister Says OPEC Unable to Control Prices Crude oil rose for the first time in four days after Qatar's Energy Minister Abdullah al-Attiyah said OPEC is unable to temper near-record prices.

Chicago Soybeans Advance to Record on Output Drop; Corn at 11-Year High Soybeans in Chicago extended gains to a record after a government report showed global production will fall as demand increases for animal feed, vegetable oil and fuel made from crops. Corn futures rose to an 11-year high.

But if commodity demand is heating up, why is everyone worried about Asia's growth? ...

Goldman Sachs Cuts Asian Growth Forecast as U.S. Economy Nears Recession Goldman Sachs Group Inc. reduced its growth forecasts for Asia on concern an expected recession in the U.S. will erode demand for the region's exports.

China's Growth-Slowing Efforts May Kick In at Worst Time for World Economy China is starting to gain control of its turbocharged economy, just as a U.S. slowdown raises the risks of doing so.

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Saturday, January 12, 2008

Keep Your Eye on the XLE

No sooner do I start tooting my horn about how well your stocks are holding up yesterday than the broad indices fall off a cliff and EVERYBODY goes down. However, your portfolios didn't suffer nearly as bad as some, (like those poor bastards in tech, for example. Ouch!). So if we have a pullback for a bit as things shake out, so what? That just means better buying opportunities, which is what I've been looking for since Christmas.

Let's take the energy complex as an example. The XLE, a broad index of oil industry stocks, is trying to find support. If it breaks support, it could tumble lower. However, it also looks like a set-up for a move much higher. I think a bottom could be closer than a lot of people want to believe right now. That's when bottoms come – when everyone is looking for the exits.

I'll keep my eye on the XLE, and I'll keep you posted.


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Friday, January 11, 2008

Canada could ride out global gloom

From the National Post

The same investment bank that said on Monday the United States was already in recession, predicted on Wednesday Canada would pull through with "the best relative performance ... in modern times."

David Wolf, Merrill Lynch's Canadian analyst forecast Canadian real GDP would trough at 1.3% year-over-year in the third quarter, down from 2.9% in the fourth quarter of 2007 and a nearby peak of 3.6% in the first quarter of 2006.

Canada's housing market looks nothing like the United States with activity and prices still rising and crucially owner's equity - which could be tapped for spending - running over 70% compared about 50% for the United States where it has shrivelled from 55% in mid-2005.

No doubt employment and wage growth will slow, but Canadian consumers are in much better shape, and Mr. Wolf forecasts another "boring" year of 3.9% consumer spending growth in 2008 after ranging between 3.5% and 4.5% in every quarter since mid-2004.

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Ben Bernanke Wants to Make You Rich

Yesterday, Ben Bernanke said he was ready to make deeper cuts in interest rates. This is good for Red-Hot Canadian Small-Caps and Red-Hot Global Small-Caps in three ways.

  1. This is naturally inflationary, so that should boost prices of precious metals.
  2. It's also bad for the US dollar, so it will boost the value of US shares of foreign stocks.
  3. Finally, this should juice up the US economy, which is still the most powerful engine in the global economy. And that should increase global demand for natural resources.

Why is Mr. Bernanke doing this? Well, he can't ignore the signs of a slowing economy anymore.

First, the numbers are in, and holiday sales were terrible: An already weak holiday shopping season turned out to be even worse than expected for many of the nation's retailers, who reported Thursday they had disappointing sales results for December. The poor performance raised more concerns about consumer spending, and in turn, the health of the economy.

Adjusted for inflation, December retail sales dropped about 2% compared to last year.

Next up, credit card borrowing surged: The Federal Reserve reported Tuesday that consumer borrowing climbed at an annual rate of 7.4% in November, far higher than the 1% rise in October.

The category that includes credit card debt surged at an annual rate of 11.3%, a six-month high, an indication that shoppers were relying heavily on credit cards to finance purchases since home equity lines of credit became harder to get....The 11.3% rise in credit card debt was the seventh straight month of strong gains in this area and was the biggest jump since a 12.8% rise in May.

So consumers had to max out their credit cards even though they bought less than last year.

In a consumer-driven economy – which is what the US is – this is bad news.

More bad news: U.S. manufacturing contracted in December and sits near five-year lows, while hiring in December rose by 18,000, the least since August 2003. Also, profit growth for S&P 500 companies turned negative in the third quarter for the first time since 2002 and is projected to be negative again in the final three months of 2007.

And this bad news isn't confined to the US. European retail sales in November fell the most in at least a decade, and U.K. house prices declined 0.8 percent in the fourth quarter, the first drop since 2000.

Taking these things into consideration, you can see why Bernanke is eager to cut interest rates. The markets are starting to price in not just a 50-basis point cut in interest rates but ANOTHER 50-basis point interest rate cut after that.

The fact is, the Fed and the Treasury are just not going to sit on their hands and let the economy go into the tank in an election year. They are going to STIMULATE the heck out of the economy.

However, it's not like inflation is cooling down. Did you see the US trade deficit figures today? Not only were the headline numbers bad, but US import prices posted their largest calendar-year increase on record in 2007 as oil prices climbed over 50%!

What's more, China used to be a deflationary offset to higher domestic prices. But that's not happening anymore.

The real bad news: In 2007, import prices soared 10.9%, way, way up from the 2.5% gain registered in 2006. What's more, that's the highest calendar-year increase since the government began compiling the data in 1987!

Obviously, inflation is red-hot. And lower interest rates will only make it hotter. Obviously, this makes the value of the US dollar go down. And what goes up when the dollar goes down … what's on the end of the fabled "See-saw of pain" ….

That's right, amigos! Gold!

Naturally, silver will go up, too.

But wait – there's more!

Along with lower interest rates, Central Banks around the world have been throwing billions and billions of dollars (and euros) at the banking crisis. That crisis could cost banks $400 billion, and the government will likely pick up the tab. That means you and I pick up the tab, but on the upside, a government bailout will likely jumpstart bank lending again. On top of that, now the Bush administration is considering a "stimulus package" of undetermined size. $100 billion is a number being tossed around.

You think things will change if the Democrats win the election? Well, Hillary Clinton is already pushing a $70 billion stimulus package.

All this liquidity has to flow somewhere. I bet a big chunk of it flows into gold, and other parts of it keep flowing to emerging markets which produce the oil that America is addicted to like high-speed chicken feed and places like China and India which make the goods we buy on credit.

Let's not focus on who foots the bill right now. Let's just admit this is like crank for the global economy.

So, to sum up: Gold and silver going up. US dollar going down. US shares of foreign stocks going up. Demand for natural resources going up.

Now, the big stocks are down this morning. But most of the stocks in the Red-Hot Canadian Small-Caps portfolio are rising. The Red-Hot Global Small-Caps portfolio got clocked overnight, but don't worry, that was an over-reaction -- it should play catch-up tomorrow.

Why is your Canadian portfolio rising? Because those stocks are focused in the right sectors (natural resources) and the easy money policy being pushed by the government will make buyouts and takeovers top of the menu in 2008. The big fish will start circling these stocks soon -- you wait and see.

I'm getting more bullish on the right sectors.

2008 could be one heck of a year.

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Thursday, January 10, 2008

So Who’s Right?

Clif Droke says election year cycles and other trends will keep the markets afloat …

Mish says money supply trends are deflationary and we're all doomed.

So who's right? What if they're both right? What if the trend in real estate is deflationary on the one hand, but on the other hand, the Fed and Treasury pull every rabbit out of their hats in a bid to keep the markets afloat through the election.

Meanwhile, the decoupling of emerging markets from the US continues. Commodities (gold, oil, more) still look good to me, longer term.

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