CS. We will conduct the brave scientific experiment today with our own money, as usual, and will try to decipher the the recent FED actions, Quants and derivatives with our common sense. Along the way we will study the connection between the Federal Reserve and Federal Express and why we have missed our bail out cheque in the mail. FedEx must be given the wrong address. Our special English will keep our personal charm and hint to our outsider status and mountainous location, who knows - maybe we can see the parts of a bigger picture and have missed some simple explanations from FOX and CNBC.
With traders coming back from holidays, it is time to look at the potential catalyst to reward us for our patiently acquired collection in Gold, Silver, Copper, Zinc and Lithium.
One of the major catalyst which can trigger redistribution of liquidity is on the chart above. We have a Sell signal in long term Treasuries. Maybe, our Treasuries Bubble is really ready to pop this time. Bear market, upcoming crash and Deflation are so much advertised now that it is time to take a contrarian approach again and take the side of the FED.
As you remember, you can never find any investment advise on this blog - you are always welcome to read our travel notes - but today we have to warn you particularly. Our investment thesis has a one, but mortal flaw - if we are wrong and Deflation will beat the FED with Mr. Bernanke and his shareholders - we do not know what to do. And the most dangerous part of it is that it will not be important any more even for us. US Corp does not have a luxury of "lost decades" like Japan - it will be teared apart by internal and external forces, when the coming war will be seen as a relief even by the population sacrificed in it. It is history; but we will not go there.
We will share one free, but very expensive advise here - before the end of the world, time will come to pay your bills and not once. Let's concentrate on our circle of competence: what we can change and try to position ourselves in case if somebody will manage to get all of us from headlines about Deflation and into the Inflation stage.
We will be looking at the signs - footprints - left in the charts, volume and direction will be the confirmation of our ideas and you can always make your own opinion.
FED is as Federal as Federal Express - it is a business, we are out of politics and will consider only the business opportunity. We think that the credit cycle is done and it is time to start the new one:
1. Credit expansion was finished during Lehman weekend. Liquidity has dried out and we had our hell in the basket. We were bailed out - if you did not received your cheque in the mail - you are reading this blog now.
2. Debt was cured by debt and US Corp has added 1 trillion of additional debt in a record time: just within few months. Total Public Debt outstanding now is over 13 trillion and we will not even go into the total outstanding obligations, which are over 100 trillion now.
3. In order to make all this exercise profitable you need that the system survived: after redistribution of property you need your debtors to be able to service their debts.
4. There is no point to run all this loan book at zero rate even at these magnitude: rates will go higher, in balance - not to kill those, who will be paying the interest.
5. Deflation will be defeated in this scenario by printing press or QE in the Twitter age.
6. US Dollar will be the victim.
7. In the end we all will pay for it - it is not the charity - even after some, hopefully, this time targeted liquidity distributions to the population, price to be paid will be in inflation: diminishing purchasing power of US Dollar and cuts in Services (police, schools etc.) and Social Spending (pensions, medicare etc. (those another 100 trillion of US Corp. unfunded outstanding obligations above 13 Trillion national debt)).
8. During this exercise Treasuries Bubble will be popped and the shift in liquidity will drive other asset classes: FED will begin its "fight" against inflation.
9. Not everything will be going to the moon - the developed world could be in stagflation for a number of years: it is a period of anemic growth with rising inflation.
10. We need to position ourselves in places where liquidity will go in order to acquire the real wealth for its owners. Here, as Warren Buffett teaches us, we need to have a margin of safety - we need to go where all of the above will trigger bottlenecks on the Supply/Demand side and, ideally, could provide not only wealth preservation like Gold, but new technological solutions which will affect our economy as a whole and almost every individual - here our choices are Electric Cars and Lithium with Rare Earth Elements as the material base for this new technology.
But back to our charts and do not forget: maybe you will see different picture there.
On the chart above we have another powerful formation in case of confirmation of our Sell Signal in long term treasuries. TLT could be signaling the formation of a double top with a very strong reverse pattern, which means higher yields and lower treasury prices. It means that FED is ready to QE 2.0 Among the anecdotes from the market place, explaining this technical footprint in the market, we will mention:
1. China is selling Treasuries and buying into the Japan and Korean bonds.
2. Serious talk on CNBC about 100 year bonds.
3. Record low yields in treasuries with record high corporate cash balances.
4. Corporations like IBM and Johnson&Johnson among others issuing record low yield bonds and slashing their interest payments.
5. M&A activity in growth sectors: BHP and Potash, Dell and HP bidding war for 3Par, deals in the Gold sector and Lithium.
6. Record outflows from equity funds into bond funds. Investors are primed for another blood bath - this time in "safe" bonds.
7. China holding record amount of treasuries and US Dollar denominated assets is the interesting combination with idea of national security, but we do not bank on Crash - gradual collapse in US Dollar will do the trick: 7% inflation in the real terms will slash the debt by almost 50% within next eleven years.
The US dollar is teetering on the edge of a really ugly technical formation.
This time the round number of .8000 is not critical, but instead meaningless.
An approach to .8000 only means that .7200 and the old lows are coming into play"
US Dollar above confirms this thesis with the same powerful double top formation. Here the most important fact is that QE 2.0 and stimulus 2.0 will be started from this point on US Dollar history line and with Gold at the record high on the chart below. FED has a number of ways to create necessary liquidity now and address Deflation scare:
1. Inflation by definition is the expanding monetary base: rising prices and declining purchasing power of the FIAT currency is the consequence. We have more money chasing the same amount of goods and services produced by the economy.
2. This time even official unemployment is too close to tipping point: stimulus 2.0 will be announced within next weeks and will address jobs creation.
3. There are numerous ways to give liquidity to particular households, even if banking system "hoarding the cash." Ideally liquidity should go into the productive hands of the middle class: they are buying goods and services and will be able to continue to service their debts further.
4. Payroll tax holiday - elegant solution, widely discussed now.
5. Bomb for elections and for the market: extension of Tax Cuts.
6. News today about R&D taxes - interesting in a sense that at least part of the money will be spend on the productive technological advance in ailing economy.
7. We are advocating here for Electric Cars as the basis for the new industrial revolution and creation of high tech manufacturing jobs in U.S. Program includes: federal and state tax rebates for EV buyers (existing), battery and EV developments DOE grants (existing), EV charging infrastructure development DOE grants (existing on a very low scale), comprehensive program to introduce electric cars on a mass market scale (bill is in the Senate), US Resource Development Corp. like Japanese JOGMEC to develop supply of strategic resources like Lithium and Rare Earth Elements (still not addressed apart from some slow motion movement in understanding this problem).
8. 50 billion Infrastructure Development Plan announced today, hopefully it will incorporate some of the above.
"The car is the second largest purchase after the house for the middle-class. It is never really an investment in contrast to the house (according to the logic before the Crash - a house was an investment). Electric cars allow to sell the second biggest item in the household "second time". Family gets an instant cash flow adjustment with electric cars economics: 2.5 cent cost per mile against 12 cents in conventional vehicle (CV). The government gets the opportunity to send money to consumers to fight the Deflation Death Spiral and take it away into the value food chain, hopefully belonging to the domestic production cycle.
The way of doing it - stimulus for production in order to bring prices down, like today, and direct Tax Rebates on purchases of EVs - which are already in place. With the GM Volt battery strategy, the price for EVs will quickly reach the same level as for a CV, and in this situation the Electric Car could become an investment in the household balance sheet as it will be producing "an alternative income" relative to cost of ownership of CV. Here is our "adjusted" cash flow. Third, why do we think it could happen at all? About it Obama, here."
When Glenn Beck talks about Gold on Fox - we are getting cautious, when Jim Cramer screams Buy - we would run away just a few years ago. We are not in the first year of this bull, but fundamentals are still on its side.
"S&P Says US Should Act to Protect AAA-Rating: Report. This chart of long term treasuries looks very nasty - Gold smells this trouble - what will happen with the price of goods with unlimited supply? Economy gives no other choice than to Inflate pumping the liquidity by QE, and the US Dollar will be among the casualties."
There is still a lot of power in this bull. Reversed head and shoulders formation has been resolved in the upside break out and now we have another potential break out with Cup and Handle formation.
"1. We are in a new Bull market territory, with Gold moving up against all FIAT currencies.
2. Corporate default was exchanged on sovereign one - all bailouts were not more than transferring obligations from failed banks and other Corporations to the public finance. Bonuses were left with bankers, losses were privatised with public. Now we have on outskirts of Europe with less than 4% of EU GDP fireworks, which are supposed to end Euro legacy in wain. But don't rush to trash the Euro yet. The sovereign default is very different from corporate one. If the debt is issued in local currency it could be always printed more in order to repay it. U.S. Corp. is living in this space for years, the UK is there and Europe will have to decide and move in support of Greece to prevent the run on the bank and collapse of the following PIIGS members.
3. Expect shakeouts, but the direction in Gold market is clear: further Up - driven by run from all FIAT currencies, rising interest rates, generational Bear market in Treasuries, negative real rates and expansion in monetary base (QE) with inevitable by definition Inflation. And we have to pray for it - we do not know how to survive in the dreaded Deflation Spiral should anybody made a mistake at a crucial turn.
4. First Gold will make new all-time high, second will be M&A play: Majors will shop for Juniors with resources in the ground. Here is the double-game - Gold is moving up and Majors' production and Reserve Base is going down. If you like more leverage you are welcome to Silver market. Place to be is in stories will strong management, growing resources and stable political situations. Markets will be volatile by all means and political tensions will be driving this Gold Bull as well."
Next couple of weeks will be very important for Silver and Gold market: all announcements by Obama about new economic initiatives should confirm Bernanke's "We will use everything what is necessary". It should translate into sell off in treasuries, lower Yen against the US Dollar and lower US Dollar against the other currencies. Silver should break out to the upside above USD 20/Oz confirming Gold upside move. There is always a risk of open market operations in Gold and Silver markets to show that the FED is in control of inflation situation. It will provide another buying opportunity. Triggered selling addressing "lower risk of economic recovery" will be met by buyers diversifying out of FIAT currencies in the new credit expansion cycle. Word inflation first will come to you with your grocery bills and insurance premiums and later in the headlines. If you can understand Australian language you can check their press and BOA Cash Rate of 4.5% and Inflation which is already there with official 3.1%.
"Gold bears always mention Silver non-confirmation of the recent Gold Bull Run - and they are right up to the certain point. Gold performs its function as a real wealth preservation in both Inflationary and Deflationary environments. Silver, with its industrial usage in electronics, needs more conviction that the FED will win its battle against Deflation Death Spiral and Inflation will be in the headlines for years to come. It is time for us to write up on our Silver squad from our Summer 2010 Top Picks."
Time is to come to the most important sector for us now - Lithium and Rare Earth Elements. We are using above SQM as a semi proxy for the sector. Stock shows very strong move to the upside this summer even considering deflation scare and dreadful August for the most markets. For us it is an indication that institutional money are positioning themselves in this sector.
"We have been proudly running Gold Bull for nearly ten years now: Gold first, than Majors and follow up on Junior side. We were always wondering about Future of Energy and have collected some great memories on Uranium Run, Solar and Water plays. Gold Bull has years to run, but we are searching constantly for new Macro trends - it is very interesting to find out what will be the next Bull which will come out of these rubbles in case we are right and Inflation will be the answer to the Deflation war scenario. It is time for Lithium to come into picture.
Lithium is the leveraged play on Peak Oil and rising Oil price with coming Inflation. Sector is very small and market is even more smaller - everything is ready for the parabolic move in case of supporting fundamentals.
Recent Oil Spill shows the real price for Oil and leaves no doubt for us that there will be no more cheap oil: offshore drilling is costly now, it will be even more costly later. Relatively cheap Oil is in the hands of state owned companies in not so friendly to U.S. places. Oil squeeze will come from diminishing production rates and rising Inflation. The move will be even more explosive than in the Gold market - in the end only minority of people is effected by the gold price even now, Oil is the underlining of all Western Energy Diet. It is not sustainable. Emerging markets are taking more and more share of world wide production, oil producing countries are spending more at home. If you account all cost to produce, deliver and protect Oil supply to U.S. corp the price is already above 150 USD/barrel."
Peak Oil theory moves from status of almost conspiracy theory and into the official government reports:
More on Peak Oil:
This year we have quite a few warnings already about Peak Oil from main stream economists, universities, US military and government agencies all around the world. The question now is not if, but when is it going to happen.
We have time still, but it is running out very fast. After a certain point in the oil price increase the only concern we are going to have about Electric Cars will be their availability on a mass scale to preserve our way of life and freedom."
In the last weeks we had a very important confirmation of returning risk appetite and liquidity coming into the junior mining sector. Most of our Summer 2010 Picks have been breaking to the upside already, finally reflecting the fundamentals and catching up with Gold, Silver, Copper and Zinc prices and Majors' valuations. M&A deals like in Potash, Gold, Zinc and Lithium to name a few, will drive this process further. Junior mining companies are holding resources, which majors are ready to buy to keep up their production rate - trading premium for time and risk developing them.
"As you know, we are going with our money where the supply chain begins in Lithium with Junior mining companies.
It's much more risky, but the reward is based on a very high leverage of exploration and development plays in these micro cap companies. If our investment thesis is wrong or we chose the wrong company, the end game will be brutal to our investment outcome - therefore you have to know what you are doing. Today we will discuss our lithium hit list below: all these companies are in the Byron Capital Lithium Index and we own these stocks or have owned them before. The game here is based on the combination of the rising price of underlining commodity (Lithium Bull this time), multiplied by the developments in this particular junior: exploration discoveries and resource definition with strategic partners involved and up to the M&A as it happened with Salares Lithium recently.
As usual, please do not forget that we do not provide any investment advise on this blog."
As you already know, our top pick in Lithium space is TNR Gold with its coming spin out of International Lithium. You have Copper, Gold and Lithium in one portfolio of properties holding by this one company. Do your own DD particularly here - we have a position in the company - nothing should be taken as an investment advise here, we are biased, but you can still find a lot of information about the company on this blog.
The company is followed now by Jay Taylor and Richard Mills. The stock is building its upward momentum from the recent double bottom this summer, and after announced developments on its major lithium brine project in Argentina. Insiders are buying more shares and the company is raising capital for its pre IPO financing. Investors coming on board will give us another hint on the future development of this company. The most important value play will be in TNR Gold's ability to position the International Lithium portfolio of properties among strategic partners in order to rapidly advance Mariana into development stage and make a consolidation of projects in Nevada for US based Lithium development play.
Now Mariana becomes a very sizable project among other lithium brines in Argentina. Company talks about "New claim secures prospective land area for potential future processing plant facility" - management seems to be carefully considering its options before International Lithium spin out with major focus on Mariana lithium brine in Argentina. It will be very important to see investors coming on board in pre IPO financing. With recent M&A activity in the lithium space company has a very strong position to attract strategic partners from the A-list of lithium end users.
TNR Gold Corp.: 33% Increase in Project Area to 160 Square Kilometres, Mariana Lithium Brine Project, Argentina
"We have another hint into the recent M&A activity in Lithium space. Talison deal with Salares Lithium confirms real Chinese appetite for Lithium. Now it is time for Lithium Supply - China already controls 97% of Rare Earths market. Lithium output will be increased fivefold in Chinese Lithium province, but the real news is below from Reuters - it is only half of previously expected output and now Chinese companies are on the shopping spree among lithium developers. Who will be at the boardroom table next - only a few lithium brines plays are left without J/V partners and we are following here two of them: International Lithium and Rodinia Lithium. We expect M&A activity in lithium space to be continued during this summer months."
Rodinia Lithium is an another junior mining lithium developer on our M&A screen. The stock was recently under pressure and is still in its consolidating pattern. Recently, the company's president has left the company and a few phone calls are warranted to understand the situation and who is backing the company now. The company is raising 5 mil announced financing and its portfolio includes lithium brines in Argentina and Nevada. It was recently on a media roll out promoting its story:
"One of the lithium exploration and development companies that is moving as fast as possible to capitalize on the burgeoning demand for lithium, particularly in the United States, is Rodinia Lithium Inc. (TSX: V.RM, Stock Forum).
The company’s President William Randall believes that a supply squeeze is on the horizon, and this 21st century metal will becomes an increasingly “strategic commodity” for the U.S. industrial sector. This is why Rodinia wants to help ramp-up future lithium supplies in the U.S. by developing America’s next prospective lithium mine."
We will remind you a few rules of a safe travelling. Always check the map and be sure where you would like to go. Never be in a rush, do your own DD, there are plenty of companies to chose from according to your appetite for risk and potential reward. Watch electric cars videos and spread the word, maybe a sticker on your car "I am waiting for my Electric Car" will be your best investment in our green future. You will not miss anything - we will report to you our travelling experience, chasing the bubbles along the way.