The naked bet vs. shady trading profits
This U.S. advisory looks at the gap between the suspicious profits of insiders and real risk-taking profits, like those in junior mining stocks.
If you succeed in a very risky speculation, more power to you.
But if you’re playing with a marked deck, shame on you.
The fallout from derivatives trading, with its disastrous consequences for many and its rich rewards for a few, is still being felt.
Here’s how one thoughtful observer puts it. “The notion that certain individuals can consistently achieve outsized ‘trading’ profits that are legitimate is about to come under attack.”
The words are those of Mr. John Kaiser, editor of the Bottom-Fish Action Report. Born and raised in Canada, he lives and works in Moraga, California.
His specialty is junior mining stocks and speculative investing. And he makes a pointed comparison between the kind of speculative trading he and his subscribers do and the kind the Wall Street “bonus barons” have been doing.
The Wall Streeters do not get the better part of the argument.
We’ll also look at one of those speculative investments Mr. Kaiser deals with, a junior with a find in rare earth metals.
Naked bets
In his latest report on the markets, Mr. Kaiser comments on the perilous state of Greece’s debt and the role played by Goldman Sachs, “everybody’s favorite scapegoat.”
Overall, he says, it “was a reminder that the world was changing in complex ways and it behooved wise investors to park some of their wealth in gold and ignore the pressure to be a clever trader.”
But this also leads him to examine the very nature of trading today.
“The extraordinary bonuses collected by the investment banking elite at the end of 2009 despite a taxpayer bailout that averted an all-out meltdown has shifted the spotlight to the concept of trading, an activity that has been glorified by the hedge fund culture that blossomed during the first decade of the 21st century.”
There is a difference between the gains made through a “naked bet” and those made by trading activity monopolized by a small inside group.
It is one thing, Mr. Kaiser insists, to make “speculative” profits when you bet capital on an uncertain outcome such as the fate of an exploration drill hole. “Such bets are naked in the sense that one is either right or wrong, with the outcome shaded somewhere in between if one has merely been clever.”
If there are outlandish gains, they “deserve to be applauded because the bet was exposed to large loss potential,” he adds. But outlandish gains reserved to individual traders or clusters of them have a “suspicious smell that needs to be investigated.”
A bitter feeling
Many of these traders operate in a world of high-speed “algorithmic” trading based on complex models and executed on digital systems. It all functions “at speeds far beyond human capacity,” says Mr. Kaiser.
There is no intuitive human element that links its programmed matrix to the real world of events. In short, markets “are in danger of becoming digital battlefields that turn into out of control whirlpools.”
Time to rethink it all, says the editor. “What will soon come to the forefront is the common sense idea that in a truly free market outlandish profits not secured by naked risk-taking simply cannot be achieved on a consistent basis.
“This notion in turn will undermine the idea that some people deserve extraordinary compensation of which the ‘bonus’ is the best known example.”
There is a bitter feeling, he says, “that capital markets have been rigged so as to facilitate a systematic siphoning of wealth from the masses by an elite which does not shamefully hide its success in the darker corners of the landscape, but instead struts its success in a full-blown demonstration of superiority.”
Old-fashioned success “defined as being in the right place at the right time” needs to make a comeback, Mr. Kaiser concludes.
And being in the right place at the right time is the essence of investing in juniors.
World-class numbers
Quest Uranium Corp. (TSX/V-QUC) is working on a big find in rare earth metals. Essentially seventeen chemical elements, rare earth metals are increasingly prized for their application in cathode ray tube technology, fibre-optical communications and hybrid cars, to name a few.
At Strange Lake in Quebec, Quest has “potentially world-class numbers” on its hands, says Mr. Kaiser. It hopes to deliver an all-important resource estimate by the end of this month, followed by a metallurgical study by the end of April.
That in turn should “light a fire under the Quebec government which by now has no doubt grasped the economic implications of developing rare earth related downstream business.”
The editor is confident that he resource estimate will meet his expectations, but eagerly awaits the important metallurgical report.
In the meantime, he confirms the “Good Relative Speculative Value” buy put on the stock in September at $3.14 and confirmed in December at $2.50. Good news in the next two months could push the price above $5. It is currently at $2.82.
With stocks like these, you are taking a calculated risk for your profits. It may be a “naked bet,” but it’s still an honest day’s work.
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