This Week’s Commentary – March 3, 2007 – Yikes

by JDH on March 3, 2007

As regular readers know, I started this site for two reasons (as described in The Point of This Site):

First, I want to keep track of why I do what I do. Why did I buy that stock when I did? Why did I sell it? By recording everything, I can see my thought process, and hopefully learn from my mistakes.

Second, with the Buy High Sell Higher Forum, I can learn from all of you. As I write this there are 124 registered members, and 256 posts, which means I (and everyone else) has had 256 opportunities to learn from each other. I think that’s great.

There are days when I start to feel pretty smug about how things are going. For example, in the last week, this site and the Forum have had over 10,000 pageviews, and 80% of the visitors to this site are returning visitors, meaning many of you check back regularly. When you consider that I started this site just over three months ago, that’s pretty good. And it felt really good writing my commentaries at the end of the year bragging about how I was up 94% last year. Smug indeed.

But to repeat, the purpose of this site is to learn, so let’s look at some numbers:

Here’s my gain for the year, as of the close of business on the following selected dates:

  • January 10 – down 10.5%
  • January 13 – down 6%
  • February 13 – up 5.9%
  • February 19 – up 12.1%
  • February 26 – up 19.5%
  • February 27 – up 8%
  • February 28 – up 10.3%
  • March 1 – up 6.9%
  • March 2 – up 0.9%

In other words, I lost 10.5% in the first 10 days of the year, then gained almost 30% so I was up almost 20% on February 26, only to lose it all this week.

Yikes. I guess I’m not as brilliant as I think. Two months work for nothing.

So, since I want to learn from my mistakes, what have I learned?

First, stock markets are volatile, and uranium stocks are even more volatile. You can lose 20% in one week. Believe me, you can.

Second, to paraphrase Robert Burns, “the best-laid plans of mice and men often go awry”. I assumed my portfolio would get to a gain of around 50%, just like last year, before the consolidation would start; by then I would be 50% or so in cash, so the consolidation would not wipe out all of my gains. How wrong I was.

(In his poem To A Mouse he actually said “The best laid schemes o’ mice an’ men / Gang aft a-gley.”; since I don’t understand what “Gang aft a-gley” means, I thought paraphrasing was necessary. Follow this link for the full text of To A Mouse, On Turning Her Up In Her Nest With The Plough).

Huh?

Why am I quoting a guy who died 210 years ago?

Because this is a family blog, and it’s a classier way of saying **** happens.

As I was running on my treadmill on Tuesday morning, watching CNBC at 6:00 am, I watched the discussion of the collapse of the Chinese stock market. I didn’t even know China had a stock market, but it collapsed, and next thing you know, my 20% gain on the year is back to break even.

In hindsight, should I have been prepared for the collapse of a stock market half a world away? Perhaps, but I don’t think so. Sometimes stuff happens.

I then asked myself, what has changed? Did the world find a new source of energy, making uranium obsolete? I just did a Google search, and the answer is no. A slowdown in the Chinese economy may slow the growth in demand for energy, but it certainly doesn’t justify a 20% drop in my portfolio this week.

Upon further reflection, I realized nothing has changed since last week, except perhaps the speculative frenzy has been reduced. To prove my point, I added a new page to the site this week, called The Case for Uranium. The article contains nothing original, but the process of writing it convinced me that, in fact, nothing has changed. Uranium shares are still great investments.

In addition, given the volatility in this market, I should not get excited about a 30% gain in a few weeks, and I shouldn’t be overly concerned about a subsequent 20% drop. In fact, as Sector_Y pointed out in their first ever post on the Forum about the State of the U308 market, significant corrections occur every few months in the uranium market, and more should be expected in the future. (That post was very insightful; it’s worth another read, or a first look if you missed it the first time).

So what’s the conclusion?

I think this week will tell the tale. If we start off with a few down days, it will be time to significantly lighten the portfolio and move into cash to see where this shakes out. My guess, however, is that like all past consolidations, this is the pause that will lead to higher highs.

Here, then, is my strategy:

I will become somewhat more conservative, and increase my cash component to whatever level of gains I have had so far this year. In other words, once my portfolio increases 10%, I will move 10% of the portfolio into cash. If I get back to a 20% gain like I had at the start of the week, I’ll be a little smarter and move to a 20% cash component.

Does this make sense? Or would another strategy be more sensible? For example, based on market value, my portfolio is now 74% in uranium, 15% in precious metals (mostly silver), 6% in base metals, and 4% in cash. Would it make more sense to reduce the uranium exposure in favor of silver? Gold? Industrials? The dilemma of course is that uranium has the potential to outperform everything else, so why should I settle for second best? Take a look at the uranium price chart on the right hand side of the screen (updated weekly) – does it look like it’s in a down-trend? Nope.

I want to hear your thoughts, so please post your comments at the bottom of this post, or start a new category on the Buy High Sell Higher Forum. To quote Robert Burns again, “Dare to be honest and fear no labor”, meaning I have some work to do to get back into the plus column. All suggestions will be appreciated.

{ 3 comments… read them below or add one }

davidslane March 4, 2007 at 11:00 am

I read three really thought provoking items the past two days.

The first is an excerpt from John Mauldin’s weekly newsletter (the #1 free economic newsletter out there). In fact, his book, “Bull’s Eye Investing” is the best stock market book I have ever read on orders of magnitude.

http://www.investorsinsight.com/
(I like signing up through the Casey Publishing site as they have lots of good daily readings including Mauldin’s.)

Here’s the comment:

“Take 2000:

‘In December 1999 and January 2000, several 3% down days were registered. The market peaked on March 10, and two days later suffered a 6% drop (peak-to-trough intraday). The next day was just under a 4% whack. “These moves set up what would turn out to be one of the wildest years in market history: From that March peak to the beginning of April, the NASDAQ dropped 29%. A 22% bounce by April 10 was followed by a 27% drop, a 23% gain, and a 23% sell off – all before May was over! “From the lows in May, the NASDAQ subsequently rallied 41% by mid-July. Between then and September 1, the Nazz dropped 17.9% and rallied 21.0%. From September to December, the NASDAQ markets then dropped over 40%, to just about 2,300.'”

The second comment was a throw away piece in this month’s International Speculator by
Doug Casey:

“But the real reason I own it [Gold Coins], and continue to buy more, is for reasons of prudence and safety. A speculator may not be a financial planner, but neither is he a gambler. My main areas of speculation, at least right now, are property and securities. I want to be sure that even if the government shuts down the stock market, or closes down gold mines (as happened during WW2), that I’ve got plenty of real and liquid cash to tough it out. I don’t want to be severely inconvenienced if the property market goes “no bid,” as happened during the 1930s. Or if that happened to mining exploration stocks, which is possible if we have a credit collapse.”

The third is a segment from the weekend addition from Robert McHugh Jr.’s weekend newsletter.

“For those of you looking for a bounce, whether the Bulls to feel relieved the carnage is over, or Bears looking for a position to enter a short position, consider this: It is very possible that we are already inside the bounce, and that Friday’s 120 point crushing in the DJIA is actually part of the bounce higher. There is another rally leg left, which should work off a portion of the oversold condition, however, the bounce may ultimately disappoint. We expect that once this bounce is over, a huge decline will follow.

We could see a lot of different things in 2007. We could get 20% moves up and down. We could get a credit collapse as the market tanks which is the worst possible thing in the world for commodities and mining stocks. And we might get a crash on Monday never seeing that bounce we all expected.

davidslane March 4, 2007 at 11:00 am

PART II

Don’t get me wrong, I love uranium, gold and silver. I think the mining stocks we follow will all go to the moon and some will have rises we can only imagine in our wildest dreams. But, that doesn’t have to happen tomorrow. That could happen in 2008 or 2009 or 2010.

Right now, the US economy is on the verge on unraveling.
The sub-prime mortgage disaster is going to take down some major banks.
And the Yen carry trade is so precarious, its unraveling could spark a 1987 style crash.

I was surprise as everyone else to see our gold and silver stocks tank this week while the market tanked. But now I realized that it was the liquidity from Japan that helped raise not just the stock market but commodity prices. No liquidity, no gains in commodity stocks. That’s what Casey calls a credit collapse.

So, that’s a lot to swallow.

Here’s what I think will happen:

I think the Yen is about to go from 121 Yen to a dollar to 110 Yen to a dollar very fast (like this upcoming Monday before the market opens). The yen has already gone from 121 to 117 this last week. It may even test the 2005 high of 104 (or about there). The yen swung far too much to one end and now it is swinging the other direction very fast and will probably overshoot equilibrium. Why, because there’s the biggest short squeeze in the history of modern markets taking place. If the yen moves 10%, it will wipe out all the carry trade profits. If it moves below 110, we’re looking at Hedge Funds who are heavily on margin, taking on carry trade losses.

The buying of yen to cover the yen shorts is going to be staggering. A 3% move in the yen brought about the carnage last week. What if it moves another 3% or 7%? I’ve read in the past that when the yen moves from a bottom, it typically moves 15% in two weeks.

Maybe I’m over reacting, but I think a lot of Hedge Funds do not want to be the next Ameranth and will start liquidating their carry trades very fast if the Yen keeps rising. I expect that rise to continue Sunday night and then we could see a 1987 type crash on Monday. (Remember, the 1987 crash happened on a Monday after an awful week before).

The unwinding of the carry trade is what Casey would call a credit collapse. Liquidity will dry up as people cover leveraged positions, sell everything to cover those yen positions. It was the leverage on the carry trade that helped to propel up gold, silver and uranium these past three years.

I went to 35% cash on Friday, selling into selling and banking what little profits I had left for 2007. I kept my strongest positions and sold the tiny stocks. I also bought tons of puts (both short and long term) on the major market. I couldn’t get myself to liquidate more because I’m hoping for rallies to sell the rest.

If we don’t crash this week, I cover my short term puts but hold my long term ones.

I also look for rallies to sell my remaining positions to get closer to 100% cash.

I’m happy missing the rest of the 2007 March/April run to have guarenteed cash to buy back in later this year at hopefully lower prices (or similar ones). Dines’ issue on Friday said that you should have all your “attack capital” in play now, nothing left on the bench. That’s a low state of greed and a sign to get out!

If we crash, the Fed will lower rates, this will start the liquidity to flow again — eventually. This will eventually help our gold, silver and uranium miners to skyrocket, but they may not start up again until late 2007 or early 2008 again.

Remember, the market recovered quikcly after the 1987 crash. Even did after 1929 for a while until protectionist tarriffs really created the great depression (and they can again).

Just thought I throw out these thoughts.

Curious what others think.

I all know we all think/know/hope our uranium stocks will go through the roof, but I think it might be good to take a step back and see if there might be an unforeseen hickup first on that road to riches.

BTW: everyone should be reading Mike Shedlock’s (Mish) Global Economic Trend Analysis blog — http://globaleconomicanalysis.blogspot.com

Thanks for letting me rant and get down my thoughts.

JDH March 4, 2007 at 12:56 pm

I love a good rant! Here’s my only problem with your analysis:

Take a look at the charts for:
Mega (http://www.buy-high-sell-higher.com/MGA.TO)
Fronteer (http://www.buy-high-sell-higher.com/FRG.TO)
Pan American (http://www.buy-high-sell-higher.com/PAA.TO) and
Denison (http://www.buy-high-sell-higher.com/DML.TO)

If you draw a trendline from the October lows, the trendlines have not yet been violated. Close, but not yet. That’s why I think the coming week will tell the tale. If we bounce off these support levels, we should rally again.

If not, it could very well get much worse before it gets better. I could be wrong, but I don’t like moving 100% into cash until the uptrend lines have been broken.

(As an aside, the chart of Pinetree doesn’t look as good; it may be time to lighten up on Pinetree).