This Week’s Commentary – December 22, 2007 – A Matter of Perspective

People are funny.

All summer long, as we sweltered in the heat, the media was full of stories about “global warming”.

Last Saturday, just as I finished writing my weekly commentary, the snow began to fall in my corner of Southern Ontario, and throughout most of eastern Canada and the North Eastern United States. It was cold, snowy and windy.

I heard and read many news stories this week that talked about “climate change”. I didn’t hear any stories about “global warming.”

Why is that? Simple. If you are trying to convince people that the planet is heating up, it’s hard to use the word “warming” in the middle of a freezing cold blizzard. Hence, during the winter months, we use the term “climate change”.

I predict, however, that as soon as the first warm day arrives, the phrase “climate change” will be scrapped, and it will go back to being called “global warming”.

Is this habit of changing the words to fit the situation good or bad?

Well, it you are a staunch Al Gore believer, than changing the words is a brilliant marketing move. If you are a global warming doubter, you see this as more evidence of a “liberal media bias.”

The point here, dear reader, is that our own preconceived notions strongly influence our perceptions, even more than the “truth” influences our perceptions.

(For the record, it makes sense to me that if we humans continue to pump out an ever increasing amount of crap into the atmosphere, the earth will heat up, but I’m not a scientist, so don’t take my word for it. Greenland was once a thriving forest, wasn’t it? I hedge my bets by being a strong supporter of nuclear energy, the only viable solution to “global warming” and “climate change”).

So, how do you perceive the market action of 2007?

2006 was a great year for investors in uranium stocks. In 2007, the uranium shortage has continued. More nuclear power plants are being built. And yet, my portfolio is down for the year. (Last week I was down 36.7% for the year; after Friday’s strong rally I am now down 35.2% for the year, still flirting with my worst ever performance of a 37.9% loss in 2001 after the internet stock melt down).

Do I perceive this as a change in the fundamentals, or a blip along the road? All will be clear in a year or two, but unfortunately decisions must be made now. Do I buy, sell, or hold?

Stepping back from the trees, here’s the forest that I see:

Ux U308 Price
 

The spot price of uranium, as you can see, spiked strongly into the summer months, corrected, and then has resumed it’s upward movement. If you bought uranium in July at the spot price, and sold it in October, you lost half your money. Your perspective would be that you just encountered one of the worst bear markets of all time.

However, take a look at this chart of the long term uranium price, courtesy of TradeTech’s Uranium.Info web site:  

The long term uranium price has climbed steadily since 2004, and is currently trading at it’s peak of just over $90 per pound. Doesn’t look like a bear market, does it?

It’s all a matter of perspective.

The speculators and hedge fund managers ran the spot price up, which brought all of the uranium stocks with it. When the hedge fund managers had to jump off the wagon to raise liquidity to cover the losses in their other stupid investments (ie. residential sub-prime mortgages), they sold their winners, and depressed the price.

Here’s the kicker: The spot price of uranium is complete nonsense! Virtually no-one actually buys uranium at the spot price! Think about it: does anyone honestly believe that operators of nuclear power plants call up their “uranium broker” on Monday morning to buy the uranium they need to run their plant on Tuesday? I think not. We’re not talking about gas for your car here. You don’t just put uranium in the tank and drive it over to the plant.

Virtually all uranium purchases are negotiated and planned months and years in advance. The spot price doesn’t matter. It’s the long term contract price that matters.

Yes, yes, I know, if you are a day trader than the spot price matters, because it influences the day to day swings in prices. But since most sales will occur at the long term price, that’s the only price that matters.

And, as the chart above shows, we are obviously in a long, sustained, uptrend.

A bull market.

And bull markets are good, when you are long on stocks.

The story on gold is the same.

Speculators may drive prices up or down daily or monthly, but the long term trend is easy to spot. Just look. It’s up.

Sure, if you bought gold in May, 2006 at $700 and sold it in June, 2006 at around $550 you lost 20% of your investment. But even if you bought at the peak in May 2006 at $700 you could sell that same investment today for over $800, for a 14% profit.

It’s all a matter of perspective.

And that brings me to my final point today: It’s easy to get caught up in the emotion of the ups and downs of daily trading. One day the sky is falling; the next day it’s the dawn of a New Age of Glorious Profits. But unless you are a day trader, (which I’m not; I have a real job, and I can’t afford the time to day trade) the daily swings don’t matter. It’s the profit when you finally sell that matters.

So, here’s my plan: I’m going to take the next two weeks, over the Christmas break, and review my actions over the past year. What did I do right? What did I do wrong? (That is, after all, the point of this site). I’ll post my thoughts next week.

(For those of you who are prolific posters on the Buy High Sell Higher Forum, you can click on the Member’s List button at the bottom of the main page, and sort the list by username or number of posts, or whatever. You can then read through your own posts of the past few months, and do what I plan to do: learn from my mistakes).

Once that analysis is completed, I’ll post my thoughts for 2008.

So, next week, on Saturday December 29, I’ll post my recap of “JDH’s stupid mistakes in 2007”.

Then, on Wednesday January 2, I’ll post my “here’s my best guess for 2008” thoughts, complete with updated performance charts and my updated portfolio.

In the meantime, help me write these posts by posting your own predictions in the 2008 Predictions section of the Buy High Sell Higher Forum.

Until next week, thanks for reading, Merry Christmas and Happy Holidays!