Casey Takes a Shot at Dines Over Rare Earth Elements

by JDH on August 7, 2010

Since nothing much happened this week on the markets, I thought instead I would comment on the war of words occurring between two of the investment gurus that many of the readers of this blog follow: James Dines and Doug Casey.

(For those of you who have never heard of Dines or Casey, you can read my post on Doug Casey, and Casey Research: A Comparison to The Dines Letter, and my detailed comments on The Dines Letter 2010 Annual Forecast Issue for more background).

Mr. Dines is a master of self-promotion. He has labeled himself “The Original Gold Bug”, and the “Original Internet Bug” (well, not anymore), and his latest, “The Original Rare Earth Bug”. In his most recent issue of The Dines Letter, published on July 23, 2010, under the headline TDL’S LATEST FROM “THE
ORIGINAL RARE EARTH BUG”, Mr. Dines comments that:

The big news reported in our latest flurry of Interim Warning
Bulletins (IWBs) is that China has slashed its export quotas by
around 70%, so deeply that even America and Europe are
beginning to notice that they are at the mercy of China’s
supply of nearly 96% of the world’s estimated Rare Earth
production – with 60% of that total reserved for China’s own
This is not some Old World commodity, such as OPEC’s
petroleum cartel, but the future of many vital new technologies
including windmills, electric cars, cell phones, high-tech magnets,
lasers, superconductors and military weaponry. We predict that
China’s Rare Earths will emerge as a new monopoly the likes of
which the world has never seen before, believe the unbelievable or
.  (Bolding and italics reproduced from the original – JDH).

Cool. Perhaps I should use bold type and italics more when I write as well.

Mr. Dines has a portfolio of eight rare earth element stocks, and he recommends placing an equal amount of capital into each. I’m not going to tell you the names of the stocks; you can buy a subscription if you want to their names. Not surprisingly, the results have been mixed. Here are the returns:

24-Sep-07 $      1,000 -50% $         500
10-Mar-08 $      1,000 -50% $         500
10-Jun-09 $      1,000 102% $      2,020
10-Jun-09 $      1,000 174% $      2,740
7-Jul-09 $      1,000 904% $    10,040
16-Jul-09 $      1,000 74% $      1,740
4-Mar-10 $      1,000 30% $      1,300
18-Mar-10 $      1,000 -22% $         780
$      8,000 $    19,620

As you can see, one stock made a 904% return; obviously without that stock in the portfolio, the portfolio would have been slightly above break even. However, you can’t argue with the fact that, if you had put an equal amount into each stock, you would have more than doubled your money in Mr. Dines’ rare earth element stock picks.

For those of you who would like me to play Devil’s Advocate, Stock #5 in the list above was first recommended on July 7, 2009 at around 30 cents. It exploded to over $3.70 in the next two and a half months, and then peaked again in April of this year at over $4. By the end of last month it had dropped back to $2, before recovering to around $3 today. In other words, this is a very volatile stock, and your returns will change dramatically depending on the day you check your portfolio.

Equally interesting is that this stock has an average volume of approximately $250,000 worth of trades. That’s a very thinly traded stock. An order for $10,000 in shares can have a material impact on the price.

Dines’ disciples will tell you that he is very good at uncovering a new bull market before the rest of the investment world catches on. There is an element of truth to that statement. He was an early proponent of gold, and internet stocks, and uranium stocks. He was not the first; but he was early in the process.

His detractors will tell you that if you have a newsletter read by 25,000 people (and I just made that number up; I have no idea what The Dines Letter‘s circulation is), and each of those readers invests $1,000 in a stock, you instantly have orders for 100 times the normal daily volume of the stock. It’s therefore not that hard to create a self-fulfilling prophecy: he tells his followers to buy, and up goes the stock, which makes him look very smart indeed.

Frankly, it’s a great business model. He picks a thinly traded stock, and tells everyone to buy, and his personal holdings go way up. Obviously that strategy is not as successful with large cap blue chip stocks, since it takes a few million in orders to budge the price in any direction.

Dines and Casey

So, what does all of this have to do with Dines and Casey? Every day the Casey Research organization publishes Casey’s Daily Dispatch, a free publication. On August 5, 2010 the headline was Talk vs. Action on Rare Earths, and the they commented on, you guessed it, Rare Earth Elements. Here’s a snippet, with emphasis added by me:

A number of subscribers have written to ask why we haven’t taken the plunge on the rare earth element (REE) plays that have been making so much news lately.

Actually, we did, in our Casey’s Investment Alert service, well before the REE bubble inflated last year, and having made a bunch of money and taken profits, we still have some risk-free chips placed on our favorite REE play. This was a very high-risk move, made because the company in question also had a strong gold story. If the market hadn’t gone gaga over REEs when it did – for no reasons anyone could have predicted with any high degree of confidence – we’d have likely taken a loss on that bet.

The critical point here is that the market for REE juniors took off because a writer made a big splash publicizing the REE market, not because of some sudden and real change in the underlying supply and demand in that market. Many companies in the sector shot up two, three, even five times, without anything changing in their fundamentals.

That worked out great for those of us already invested, but once a “flavor of the day” inflates a bubble, it’s time to take profits, not buy.

That said, there has now been a seismic shift in the REE market, in the form of the Chinese, source of over 90% of the world’s REEs, cutting their exports by 72% recently. Here’s a link to a story on this.

So, with the REE plays having sold off since the bubble peaked last year, is now finally time to buy?

Maybe. Or maybe not.

First, note that in spite of the major shift in the market the Chinese have created, popular REE stocks, like RES, AVL, and CCE, have not gone through the roof.

Second, the highest-profile REE play out there at the moment is the new IPO of Molycorp (NYSE.MCP), which has the past-producing Mountain Pass project in California. And yet, the company had to reprice the IPO at a lower level, and the shares have not taken off, as of this writing.

These are clear signs that REE plays really were in a flavor-of-the-day bubble, but more importantly regarding the junior explorers, as far as I can tell, none of them can say yet how much it will actually cost them to produce a pound or kilo of the metals they propose to produce. If this were off-the-shelf technology we were talking about, we might go with reasonable estimates from similar projects, but it’s not. Ranging from technical factors such as crystal size to the specific mix of metals in each deposit, these minerals are each unique, meaning there is no simple, economic production process. Until these guys can say what it will cost them to produce what they have, we cannot say that what they have has any value at all.

That doesn’t mean that they will all fail to figure out their processes, just that until they do, we’re likely to remain on the sidelines.

To repeat: Rare Earth Element stocks went up because “a writer made a big splash publicizing the REE market.” I did a Google search for Rare Earth Elements, and I couldn’t find any particular writer attempting to make their name publicizing this type of investment. So what do I conclude?

I conclude that Casey Research is referring to “the Original Rare Earth Bug” himself, Mr. Dines. No reading between the lines is required to conclude that the Casey Organization are not big fans of Mr. Dines. Why? Two reasons, I assume:

First, they are competitors. They both write newsletters, and they want investors to subscribe to their newsletter, so it behooves them to cast their own product in the best light possible. (Note to self: I’ve never heard either Casey or Dines use the word “behooves” before). They both recommend precious metals stocks. In fact, they both recommend many of the same precious metals stocks. They also follow uranium stocks, so it’s not surprising that there is some overlap in their subscriber base, and it’s logical to assume that they know they are being compared to each other, and they want to win that competition.

Second, Casey presents their analysis in a more analytical fashion than Dines. It is very common for a Dines Letter to include a note “Stock ABC added to Supervised List #3, no stop yet”, and that’s it. No explanation, just “buy”. Conversely, all Casey recommendations contain the Eight P’s (people, price, push, etc.) to explain why the stock is being recommended. Generally a recommended price is also given; in many cases Casey’s advice is “don’t buy yet; wait until the price drops to $X”.

Does that mean Casey is good, and Dines is bad? No. It simply means they have different approaches. Dines devotes a great deal of time to the big picture; he explains why he believes, for example, that gold, or uraniums, or Rare Earths are in a bull market. He then picks the best stocks in that market and recommends them. Casey also discusses the big picture, and then provides detailed analysis on each stock he recommends.

Of course it is entirely possible that both Casey and Dines “front run” the stocks they recommend, taking positions in advance of their formal recommendations. Dines admits as much in his disclosure policy, and Casey publishes paid advertising from companies he recommends, so neither of them are “pure as the driven snow.”

(For the record, no-one pays me to say anything, but if any readers want to pay me, feel free to send money………).

So what’s my conclusion?

Caveat Emptor. Buy beware.

Over the years I have both made and lost money following the recommendations of Dines, Casey, and many other market commentators. Ultimately you have to make your own decisions. I advise everyone to think for themselves.

Read what each commentator has to say, and decide for yourself if you agree with their reasoning and thought process. If you do, follow their advice, or tailor it for your own purposes. If you don’t agree with their reasoning, don’t follow their advice. Simple.

All gurus have their pet projects. Both Dines and Casey are fans of precious metals. When gold and silver are up, their stocks do well, and vice versa. In many instances their skill is being in the right place at the right time, which is why if you review their returns over the last few years you will see they have good years, and bad years, just like the rest of us.

Gurus are a resource, but not a substitute for your own thinking.

So think.

That’s it for today. The economy is in terrible shape with rising unemployment and declining consumer spending (which is 70% of GDP), but the market is oblivious; all is good, so the market continues to rise. That can’t continue forever, but as we all know the market can be illogical for a lot longer than we can remain solvent, betting against it, so for now we bide our time, remain with lots of cash, buy the odd put for downside protection, and sit and wait.

Thanks for reading’ see you next week.