Seeking silver linings in a cloudy stock market
There are many reasons to be gloomy, says this specialist in junior resource stocks, but there are silver linings, like rare earth metals.
So how bad is it?
For over a month, the bad news has had the upper hand on the good news. And the world’s stock markets have acted accordingly.
But there’s no point in wallowing in gloom and doom. It is far more useful to try and determine what we can expect in the months ahead.
One always-interesting viewpoint comes to us from a Canadian transplanted to California. Mr. John Kaiser’s Bottom-Fish Action Report follows the junior resource stocks on the Toronto Venture exchange.
He sees “a preponderance of reasons to be negative,” but he still doesn’t think things are as bad as they were two years ago.
It is all too easy to hit the sell button, he says. “Although I acknowledge all the negative possibilities hanging over the market, I am inclined to stay the course and ride out the summer doldrums.”
And he invests in a risky set of stocks. His favourites these days are in rare metals, and he will hear about one for which he has high hopes.
The end is nigh
Last month was the worst May on the Dow Jones Industrial Average in 40 years. “Sell in May and go away” was one well-worn saying that lived up to its reputation this year.
Things were certainly no better on the Venture exchange. Resource juniors have entered a bear market, Mr. Kaiser admits, and the summer months do not offer much hope for encouragement.
In the meantime, the Shanghai stock exchange has been moving sideways for almost a year, even when the Dow Jones was moving up.
This is music to the ears of several fund managers who are preparing their portfolios for a “China Crash,” says Mr. Kaiser. They are “now working the media to push their narrative on to a market increasingly receptive to the notion that the end is nigh,” he adds darkly.
Yet this does not feel the same as it did in June 2008, when American home insurance giants Fannie Mae and Freddy Mac were about to fall apart “and one just knew the end was indeed nigh,” says the analyst.
Washed up Elvis Presley
There is something out of kilter, however. Junior non-precious metal stocks have been down more than they should be, says Mr. Kaiser, since metal spot prices have retreated only modestly of late.
While this analyst could see no good reason for the rebound in U.S. financial stocks last year, he can easily explain the rebound in raw materials. It was China.
While western nations “gazed at their hollowed out navels, the Chinese economy ramped up thanks in part to the enormous foreign currency reserve it had built up during the real estate bubble fueled credit crisis.”
At the same time, the so-called “carry trade” spent 2009 borrowing U.S. dollars at low rates in order to invest in commodities that would be driven higher by two forces.
One was the supply and demand imbalance created by Chinese expansion and American retraction. The other was the inevitable collapse of the U.S. dollar.
Only the dollar has not collapsed. America is “not a washed up Elvis Presley performing in Las Vegas for irrelevant audiences while consuming way too many stop-gap medicines,” explains Mr. Kaiser. Instead of giving way under the weight of its enormous deficit, the dollar has held up.
It was the euro that hit the skids. At the same time, it is possible that China “is losing control of its own economy through an inflationary real estate bubble” that has undermined its own banking system and dangerously widened the divide between the haves and the have-nots.
But even with these perilous prospects before us, are we in for a “double dip” recession, asks this analyst? “Again, although I am biased to hope for the optimistic outcome, it is hard not to worry.”
A recent study has shown deep pessimism among Americans. The gap between those who expect their incomes to decline during the next six months and those who expect it to rise has plunged “into deep negative territory for the first time ever in my life,” states Mr. Kaiser ruefully.
A serious contender
If there’s one thing that keeps this analyst optimistic, it’s rare earth metals. These minerals have found a home in today’s technology, in superconductors and hybrid cars, among other applications.
Up to now, however, China has had a stranglehold on the market. With a few minor exceptions, it produces all the rare earth metals in the world.
But North American companies are forging ahead (with some encouragement from the U.S. Department of Defense, which would like a secure source of these metals).
One firm that appears to be working toward a breakthrough is Rare Element Resources Ltd. (TSX/V-RES), 100 per cent owner of the Bear Lodge property in Wyoming. Despite the softness in the market, the company has solid financing.
What’s more, says Mr. Kaiser, its latest estimates “confirm my belief that Rare Element is a serious contender in the race to bring a non-Chinese rare-earth mine on stream.”
To those he calls “Speculative Value Hunters,” he suggests taking a position with a short-term target of $6 — “and much higher medium to long term prices, particularly if a macro scenario unfolds which supports higher gold prices and underlines the importance of rare earth deposits outside of China being developed.”
Today the stock trades at $2.41. There is no dividend.
A junior striving toward production may seem like a distant silver lining among the dark clouds. But it’s enough to keep this analyst from selling out. Beyond the summer doldrums, he believes, there is hope.
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