This Week’s Commentary – February 16, 2008 – Predispositions

Well, another basically boring week.

My portfolio was up, but that’s not saying much. Last week I was down 8.2% on the year, now I’m down 7.1% on the year, but I am still sitting on 64% cash, until I see a definite move one way or the other, although as I discuss below my plan is to start deploying some of that cash. Let’s look at some specifics:

G.TO – Goldcorp Inc., one of the large, blue chip gold stocks, is obviously in a consolidation phase.

From a peak at $39.03 on January 14, 2008, Goldcorp fell to $33.02 on January 21, 2008, and has traded in that range ever since. In previously announced news this week, Goldcorp has completed the sale of it’s 48% interest in SLW.TO – Silver Wheaton Corp., also one of the stocks on my buy list. The shares were sold at $14.50, with over $1.5 billion going into Goldcorp’s bank account, presumably to fund future increases in gold production.

That would appear to be good news, and given that Goldcorp’s share price has favourable RSI and MACD levels, accumulating at this point is probably not a bad idea. Obviously we will have some down days, so stink bids in the $34 to $36 range may get filled, but that’s not far off the current price, so I see no reason not to be a buyer at these levels.

Speaking of Silver Wheaton:

Since peaking on January 2, 2008 at $18.85, Silver Wheaton has been in an obvious down trend. However, there will be obvious support at the $14.50 level, since a billion and a half dollars was just spent at that level, so I don’t see much downside from Friday’s close at $15.32, so I would rate this one as a buy as well.

Going back to gold, last week I said this: “The chart of K.TO – Kinross Gold Corp. shows a pullback to the line joining the September and January lows, which appear to be holding. (Of course you could draw the line off the December lows as well, which shows that we are well above the uptrend line). The RSI and MACD levels are also favourable.”

Here’s the chart now:

Now I ain’t much for book learnin’, but I do know that when you have a blue uptrend line on the same chart as a red down trend line, something’s gotta give, because you can’t be going up and down at the same time. Given my predisposition to a continued bull market in gold, I would guess that the next leg will be up, and again, I see no reason not be accumulating Kinross at these levels.

(As an aside, our predispositions can be very dangerous, and we probably shouldn’t let them overly influence our thinking. As an example, the Senate hearings this week featuring Roger Clemens were obviously biased. The Republicans all loved The Rocket, and the Democrats on the Committee all thought he was lying. Neither side appeared interested in the truth. They only appeared interested in advancing their own opinions. That’s sad in politics, but very dangerous in investing, where we should try to draw conclusions from as many facts, and as few opinions, as possible).

So what about uraniums?

The spot price has fallen to around $75, which looks bad compared to the $135 level last summer, but $75 is about where the spot price was a year ago, and we were all happy then, so our predispositions may be influencing our opinions. Also, no-one actually buys uranium at the spot price; the long term price continues to hold around $95, which makes most of the junior and senior uranium plays very viable.

Obviously the uraniums have been beaten down along with the rest of the market during the liquidity crunch. If you are a hedge fund and you get a margin call, you sell whatever you’ve got, good or bad, and that drives everything down.

We’ve talked about The Dines Letter and Mr. Dines’ disastrous recommendations during 2007, but he is not alone. Doug Casey admits in his most recent Casey Energy Speculator that the Casey recommended Athabasca uraniums are down 60% since their highs in 2007, even worse than the 55% drop for the index of those stocks as a whole.

Yikes. Obviously the “experts” have been very wrong over the last year.

Or have they? There are two sides to this story.

On the one hand, if your stocks are off 60% from the peak, that’s obviously a bear market, and you should have sold long ago.

On the other hand, if the sub prime mess causes a liquidity crisis and everyone sells everything, and stocks go down, is that Casey and Dines’ fault? If a company is now trading, for example, for less than the cash they have in the bank, is that the fault of the “gurus”, or just a temporary market blip?

The answer is both. Obviously if a stock starts tanking you should sell, but once the selling becomes over done, the time to move in arrives. If I was a senior uranium company, or a junior with cash, and I saw that I could buy a company for basically their cash in the bank and get their deposits for free, I’d be buying.

So, here’s the game plan: Start accumulating the quality juniors (cash in the bank, uranium in the ground, good management), most of which are listed in the right hand navigation menu of this page. I don’t expect to see a big uptick immediately, so pick a nice entry level, and place “stink bids” at that level, so that accumulating can be done on days when the market tanks.

Keep a close eye on the stops to protect capital, build quality positions over time, and wait for the inevitably take over mania to happen as companies looking to expand start buying the under valued juniors.

What specific stocks would I be buying now? I’m not sure; other than the stocks I’ve mentioned, that will be the subject of further research, but my suggested portfolio, which I haven’t updated since the start of the year, probably contains most of what I want to buy.

Enough rambling for this week; Happy Family Day for those of you who live in Ontario; Monday’s a holiday so I assume the Toronto markets will be closed. Thanks for reading, and please continue to post your thoughts on the Buy High Sell Higher Forum.