(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
use! 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
not.  (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:

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.

Before we leave Dines, based on the comments I’ve received, both on-line and offline, it appears that most of you agree with my general impression that Dines may be good at spotting tends, but his lack of substantive fundamental analysis leaves him as nothing more than a “pump and dump” artist.

On the Buy High Sell Higher Forum, sidewinder had this to say in response to last week’s commentary about The Dines Letter:

JDH there is no way you were too harsh to this peddler of “Newsletters” in fact, you were quite fair in my estimation. I make no bones about my attitude towards him as you may well know.

As to the “original Rare Earth” bug business, someone brought this up a couple years ago I think on this forum. Michael Berry has been touting Rare Earth companies for some time and the same companies which Dines “suddenly” discovered, Berry has actually visited and posted photos in his morning reports long before. So the old Blowhard now is staking claim to being the “original Rare Earths bug”. Disgusting self promotion.

Unsophisticated, Inexperienced investors with money seek the knowledge and advice of experienced, sophisticated advisors. When it’s all said and done the one with the experience has the money and the one with money has experience.

Wow. I wouldn’t want to get on sidewinder’s bad side……

Now, on to the pressing matters at hand. Has the long awaited correction started?

Well, duh:

A 4% drop in a week, and over 2% on Friday alone, certainly looks like the start of a correction. The Dow is now down almost 2.5% on the year. Most troubling is the decisive drop below the 50 day moving average.

As the chart shows (click to enlarge), the 50 day moving average has provided support, particularly in October and November of 2009. As the circled section shows, we did break below the 50 day moving average for a period of time back in July, but the market recovered, so this may not be fatal. But who knows. A break of the 50 day moving average is never a good sign if you are a bull.

What about gold? Same story:

Gold is now more than $100 below the 50 day moving average, and depending on how you draw the uptrend line it can be argued that gold is now down to the uptrend line support established back in November and December of 2008.

What are my thoughts on gold?

Looks like a great buying opportunity. Gold has gone from just over $1,200, to just under $1,100. That’s a big discount, and since nothing fundamentally has changed, something that was a good buy at $1,200 is now an even better buy at $1,092. The RSI, which was up well over 80, is now down to a much safer level of 40, which is traditionally an excellent buy point. As well, while the general market got hammered again on Friday, the big cap gold stocks held up quite well.

We know from the past that when the market gets creamed, everything gets creamed. Investors sell their good stocks to cover their margin calls on their losers. If there is further weakness, I have no desire to jump in to quickly. (I was the guy who predicted the DOW would fall to 9,000 by March 31, 2010).

So, my plan this week is to place some stink bids to pick up some bargains, but I will remain largely in cash in anticipation of further weakness.

Thanks for reading; see you next week.

DISCLAIMER: I am not an employee of Dines, or Casey. I have never met either or them. Or talked to them. Or e-mailed with them. Or seen them in person. I have no financial relationship with either of them. I don’t get paid for writing this stuff. However, if Casey wants to advertise on this site, or pay me a lot of money, that would be great. Send me a message and we can talk. Until that happens, these are my thoughts, rambling and disjointed, but unbiased.

Doug Casey and Casey Research

Doug Casey is an interesting guy. Like Jim Dines, he appears to be single, and has a very big ego. (Having a big ego is not a criticism. Obviously I have a huge ego, or else I wouldn’t take the time to write my thoughts on this blog every week, in the expectation that someone actually cares to read them. But I digress).

He is the founder of Casey Research, which publishes half a dozen different investment newsletters, including:

• The Casey Report, the “big picture” on the markets, and life;
• Casey’s International Speculator, for speculative stock picks, mostly resource based;
• Casey’s Gold & Resource Report, formerly called Big Gold, focusing on large cap gold and resource stocks;
• Casey’s Energy Report, covering smaller cap, speculative oil, gas, uranium and energy related stocks;
• Casey’s Energy Opportunities, covering conservative energy investments (larger cap stocks, ETFs, etc);
• Casey’s Extraordinary Technology, covering, you guessed it, technology stocks, and the industry in general.

In addition to these traditional, once monthly newsletters, Casey Research also publishes two “alert” services, that are published sporadically, for traders wanting to make quick, speculative investments:

• Casey Investment Alert, highly speculative, small cap stocks, primarily resource based; and
• Casey’s Trend Trader, suggesting trades in the futures and options markets.

Casey Research also publishes two free daily publications:

• Casey’s Daily Dispatch, commenting on markets, and life, (you can subscribe here) and
• Ed Steer’s Gold & Silver Daily, covering, obviously, precious metals (you can read it here).

Finally, on a weekly basis they publish Conversations With Casey, also free (you can read it here).

So, compared to The Dines Letter that publishes 17 pages every three weeks (of which less than half the pages are original content), Casey Research publishes well over 200 pages of unique content every month (sometimes a lot more). Of course, to subscribe to all of these publications costs many hundreds of dollars a month, which is more than the $295 per year you pay for The Dines Letter. Dines also has an Interim Warning Bulletin service for $249 per year.

So, what’s the difference between Dines and Casey, if they both have huge egos?

The biggest difference is that Casey’s stock recommendations are always accompanied by actual analysis. They use what they call the “Eight P’s” to evaluate a stock:

• People (ie. management)
• Property (the property they are mining)
• Push (good things that will happen in the near future to push the stock higher)
• Promotion (good investor relations promoting the stock)
• Politics (is the company in a mine-friendly country, or a country run by a dictator)
• Paper & Phinancing (shares outstanding, debt on the balance sheet)
• Price (under valued or over valued)

It is not uncommon for a new stock recommendation to be accompanied by five or six pages of detailed analysis of the Eight P’s, including comments on management, the mine, the country, and other relevant factors. All recommendations carry specific buy prices. In fact, over the last few months, many of the buy prices have been stink bids, on the expectation that market weakness would provide good buying opportunities.

So there’s the difference between Dines and Casey: Dines says “buy this stock, just do it because I said so”; Casey gives you pages of analysis, written by an analyst (he has 40 people working for his company) who has actually visited the mine in Peru, or wherever, with detailed reasons for the buy recommendation.

Does this mean that Dines is simply a “pump and dump” sham artist, and Casey is some godlike creature, interested only in my well-being?

No.

Casey, for all I know, could be a pump and dumper too. It’s not inconceivable that he could be in cahoots with management, buy shares of a company cheap, and then write a glowing research report, with the Eight P’s, and lots of facts, and then start selling stock once the newsletter is published. Pump and dumpers can wear suits and talk pretty too.

(Casey would respond by telling you that all employees are required to give advance notice before they sell a recommended stock, so they only sell after they have given subscribers the chance to do so. Dines has no such policy).

Ultimately whether Dines or Casey are getting kick backs from management is not really the issue. The issue is: do their picks go up?

Here’s the chart of the yearly performance of Casey’s International Speculator:

• 2004: 26.2%
• 2005: 14.5%
• 2006: 34.1%
• 2007: 5.7%
• 2008: -45.2%
• 2009: 67.9%

From 2004 through 2009 that’s a 103% gain, or 188.5% compounded. Obviously that performance would have been much better were it not for the 45% loss in 2008. Oh well, that was a bad year for everyone, as I recall.

The Casey Report published it’s 2010 forecast in it’s January issue (a full 66 pages, so longer than the Dines effort). After a two page introduction, there was a 15 page article by Chief Economist Bud Conrad on the Direction for the Economy in 2010. Mr. Conrad’s predictions for 2009 were very accurate, and he foresees a not-great economy in 2010. The next 11 pages were a “How To Invest” feature, with stock recommendations, followed by 2 pages of charts.

Then it gets interesting. There was a three page “Obama Watch” article, followed by a 32 page “Special Report” on Expatriation. Yup, expatriation, ie. how to get yourself out of the U.S. and into a more safe environment.

Doug Casey wrote a book, The International Man, back in 1976, and his official bio states that he “has lived in 10 countries and visited over 175″. He is a big fan of having roots in many different places, so that if there’s trouble in one country, you have another place to go. The question, of course, is as a reader do you want to read 32 pages on how to leave the U.S.

His basic premise is that if the government does what it did in the 1930′s (making holding gold bullion illegal) and starts confiscating it, you are safer if you have some gold coins you can carry with you, and you have some bullion stashed in some safe foreign country. You should have investments, and a residence, in more than one country, so if things get bad here, you have a place to go.

Here’s the thing: this type of thinking impacts on your investment decisions. If you believe that Obama will curtail freedom, then you will be reluctant to invest in the U.S. That negative approach cost Mr. Casey’s subscribers the chance at big gains in 2009 as the market recovered. In 2009 Casey was largely on the side lines, with a model portfolio of 1/3 gold bullion/coins, 1/3 equities, and 1/3 cash. In hindsight the correct strategy for 2009 was 100% equities. (Of course his strategy may be entirely correct for 2010).

So what’s my take on this? I believe it’s important for investors to consider alternate viewpoints. I believe you should watch the government cheerleaders on MSNBC, and I believe you should also read the “sky is falling” commentators like Doug Casey. Ultimately one group will be proven correct, and the other incorrect. Only time will tell who is right.

I personally believe that government deficits will balloon out of control, and inevitably we will have higher interest rates and higher taxes. Higher taxes, almost by definition, leads to less personal freedom. It is quite possible that as the entrepreneurial spirit in the U.S. wanes, foreign countries may be more attractive.

But, does that mean I want to stash gold under my mattress, and build a house in Argentina? Unfortunately neither of those options are particularly practical.

(As a side note, Doug Casey is a big fan of Argentina. He has a real estate development there. I have a friend who is from Argentina, and still owns a farm there, and returns there each summer. He now lives in Canada, primarily because Argentina is not paradise. He tells me there are many places in Argentina where you don’t go without a gun, which doesn’t sound like paradise to me, but I’m Canadian, and I don’t know anyone who owns a hand gun, so perhaps I’m out of touch).

So should you subscribe to Casey publications? That’s up to you.

If you want lots of detail on the stocks you are going to buy, Casey is a good choice. If you want general economic commentary on interest rates, the economy, and precious metals, Casey is also good.

If you are offended by strong political views, even presented in the guise of helping to explain the world so you can make better investments, Casey is not for you.

Back in November, Doug Casey in Conversations with Casey expressed the radical view that charities are “not worth the cost of the gunpowder it would take to blow them to hell.” He believes the most productive use of wealth is to create more wealth; build companies, which creates jobs, which is the best way to help people. He believes that charities exist to make the giver feel good. “I gave to a charity, so I don’t need to do anything else” (my quote, not his). He believes that the overhead consumed by charities is a waste, and we would be better off without them.

I don’t disagree that there are charities that should not exist, but given the recent disaster in Haiti does Doug Casey believe we should simply let them all die? We should not help them? That seems like a very harsh view of the world. I hope Mr. Casey never finds himself, his friends, or his family ever in need of a helping hand.

On January 20, 2010 Doug Casey, in his Conversations with Casey weekly feature, announced his “gut feel” that the markets will crash in 2010. After this week he’s looking pretty good, but gut feels are probably not the most scientific method for making investment decisions.

Over the past two years I have invested in a number of private placements recommended by Casey, and while many of them have been busts, overall I have made a significant profit (as a general rule I don’t cover private placements in this blog, since they are generally open only to qualified investors). Many of his stock recommendations have also turned out well. So, overall, I am not dissatisfied with his recommendations.

There is overlap between Casey’s and Dines’ recommendations, particularly on the large cap gold stocks. (It doesn’t take a genius to determine that there are only a handful of large cap gold stocks, so it only takes about ten minutes of analysis to create that list, and then pick the strongest performers).

Again, I’m not getting paid to write this, but if you are looking for a different perspective, start with the Casey free publications to get a sense of their approach, and then decide for yourself if it’s worth the cash to start paying for his advice. At least, compared to Dines, you get to read some actual analysis, and that alone is probably worth the price of admission.