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April 2009

Why We Like The Canadian Market

The number one reason why Canada takes favor with us is its banking system. Currently one of the world's strongest. Not a single penny of government bail out money has taken place in the financial sector. Canadian banks are typically leveraged about 18 to 1 as opposed to the U.S. at 26 to 1 and European banks, at a horrendous 61 to 1. Besides its reduced leverage which is government regulated, there is a mortgage insurance agency called CMHC (Canada Mortgage Housing Corporation). This organization insures mortgages for a fee which is added on to the cost of the loan. 0 down payments are possible but not that prevalent due to costs and strict borrowing standards. Many first time home buyers are usually in the 5% down payment category. They then would have to pay CMHC another 5% as insurance in case of foreclosure. This is a sliding scale and goes down to about 1% on a 25% down payment loan. All CMHC money is put into a trust account to guarantee the bank gets paid. The system seems to be working as the organization hasn't ever required any additional government money.

From a tax standpoint a principle resident is not allowed to have any tax deductions on the interests on any mortgages. This has a majority of people paying down home loans as opposed to using their homes as ATMS. The government not having to pour out billions of banking welfare dollars can then do what it's supposed to do, pay for services in the public interest. Had the U.S. government adopted this rather simple insurance system they may have avoided many of their current financial problems.

Canada has only about 33 million people, yet it also is home to about 10% of the world's fresh water. Water is definitely going to be a strategic asset going forward. One of the world's largest oil reserves, the Tar sands of Alberta which makes it the number one American energy supplier. Base and precious metals, agriculture and forrestry and the second largest land mass provide tremendous growth potential. Also an open and aggressive immigration policy will permit population growth well in the future. For the reasons mentioned here, we believe the Canadian dollar is undervalued at around 82 cents and should increase against its American counterpart. In other words, interlisted U.S./Canadian stocks should be bought in Canadian dollars. As far as resource stocks go Canada has the largest number of junior exploration companies in the world. We are based out of Vancouver where many of these firms are located. This can allow for many more opportunities to get first hand information. 

SPDR gold shares have now the sixth largest gold reserve in the world. These shares allow mutual funds or small investors a quick and easy way to invest in precious metals. This reserve is currently almost equal to half of annual worldwide production. Never before in our history has purchasing gold become so easy. Almost anyone, anywhere on the planet can actually purchase gold with a click or phone call.. This in itself should dramatically put pressure on gold supply. Great time to buy gold shares. China just keeps on buying, why wouldn't they? With one of the world's largest reserves of U.S. dollars.  19.5 billion dollar for 18% of Rio Tinto, a 25 billion dollar loan to oil company, Rosneft out of Russia, and PETROLAS of Brazil was leant 10 billion dollars also. This is more evidence of paper money being turned into hard assets. China still had a six percent growth rate in the 3rd quarter as compared to a six percent decline in the U.S. This was one of the largest declines on record. Who would have thought 20 years ago that Red China would help save the U.S. economy from imploding.

Tata Motors of India launched their $2000.00 Nano Car in Mumbai recently. This should be history in the making as now affordability will come to so many more people. As revolutionary as Henry Ford's Model-T, yes we think so. The demand for raw materials and energy to power these vehicles will continue for years to come. The latest rally has left precious metals on the sidelines so we see gold and silver stocks now as our best buying opportunities.

March 2009

Have We Hit Bottom?

A very important question for those of us risking our hard earned dollars in the capital markets. We here at LimitTheRisk seem to think so. Remember all that bail out money does take time to filter through the system whether you agree with the politics or not. It does seem though that for the markets anyway the worst is over. Barrish sentiment was at an all time high and now is slowly starting to improve. When things seem the worst it presents the best buying opportunities.

There's suddenly increasing optimism within the media and business community. The financials have come roaring back from the slaughter and it is this sector that is the heart of the whole economic system. Looking at the advance decline line of the NYSE (rising stocks minus falling stocks). Even though the market was making new lows the number of companies declining was subsiding. This is an important sign that shows the health of the general market. The financials started this mess and once they are cured the market is cured thanks to the American tax payer. One of histories worst bear markets have been followed by one of the best 30-day rallies ever. With trillions of dollars on the sideline and interest rates at historic lows this rally should continue for a few months anyway. Doesn't mean an all-out bull market but fund managers do not want to get caught under performing the market. This by no means implies that the economy is going to improve suddenly just that the markets especially certain segments were tremendously oversold.

Copper inventories came down almost 10% this month, the first time since summer which is another indicator of an improving economy. Yes mine closures have definitely helped but it seems as China, the world's number one user is building strategic reserves at these prices.  The price of copper is also on the rise which tends to be another leading sign of increasing economic activity. 

Last week the federal reserve announced it will purchase hundreds of billions in U.S. treasuries. Gold, which started the day around $30.00 lower turned around in an hour to be $30.00 higher. Some people with an awful lot of money is losing faith in the U.S. dollar and U.S. debt. Afterall where does the Fed get the money? Nobody knows because they don't tell us.
 

Petro Canada is up 20% in one day on a merger offer from Suncor one of the largest oil sand players. This will now be the single largest Tar Sand  development with about 26 billion barrels of reserves. Another case of undervalued assest being purchased at a respectable premium. Finally the energy stocks have started to move as we suggested they would back in January. With an improved general stock market outlook, gold and silver could be in consolidation. The shares have held up rather well relative to the metal price. In the meantime, position yourself for a continous rally in the short term. 

February 2009

Yes, the economy is bad. Joblosses, plant closures, bankruptcies close to all time highs. How long can this continue? Things aren't going to turn around overnight, years of excessive spending to buy things we don't need with borrowed money takes time to readjust.  Again the problem is borrowed money, your best friend when prices are rising and a living nightmare as prices fall. Sure, worldwide stimulus packages will help deflect the storm and provide some badly needed infrastructure improvements, but we are now in the NEW ECONOMY!

Remember during the Internet boom, this was the popular term used at the time that was completely wrong. I think the phrase was used to sell a whole lot of overpriced techno stocks so that Wallstreet could make massive amounts of money. Well now the new economy is real but is much different. The most important thing to remember though is when everything is the worst it brings about the best buying opportunities. General Motors are at a 50 year low, valuation of about 1 billion dollars. The world's largest car icon is becoming a penny stock. I'm sure that if you tried to build the empire that they created over the years it would cost tens of billions. Think about it, massive landholdings, assembly lines, office towers, dealerships, design studios, etc. The only problem is debt.

Putting aside trips to Vegas and yes, even Disneyland is the new norm. You can go to Vegas for next to nothing because very few people are there. The Disney Corporation announced major layoffs at their famous amusement parks. This is the first and a clear barometer of the current situation. Afterall, if Mickey Mouse is sick, America is sick.

Poor management, lack of planning and insight have driven many companies into oblivion. The problem being most people really don't need a car every four years. My vehicle is great shape and is 10 years old. Well then let's look at how a reduction in spending can actually form a positive scenario. Less pollution, more family time, perhaps a reduction in salary for high priced CEO's and sports heroes who will have to make only millions as opposed to tens of millions. Maybe better health plus excessive eating and drinking which can be very expensive and problematic. Smoking costs money and kills, going for a walk in the neighborhood is free. So is running or riding a bike. More activities like this doesn't create any pollution and is a great way to enjoy life.

What about renewable energy and recycling. These are all parts of a new economy that doesn't necessarily have to continually consume in order to be prosperous. There is a business out there that actually is making money. In fact they are making more of it this year than they were last year. The price of its product is increasing, people demand it, the companies don't have to advertise to sell it and the main cost of producing their product is decreasing. Sounds too good to be true? Well it is precious metal mining companies. Retail demand for coins in small amounts are at all time highs and the cost of energy has fallen by more than half which is the major cost of mining companies.

Even though our precious metal stocks are achieving spectacular returns there are solid fundamental reasons for it. Can they continue? Yes, the can. In fact, we bought more Dynasty and Fortuna Silver recently. Look at the money supply growth! Where is it coming from? The Federal Reserve won't really tells us, after all can you really trust them? This is why we got into such a mess in the first place. 

During the 30's, the only place to really make money was gold. If you don't have precious metals now you should start accumulating because prices are going to be higher next year and the year after. Take care and we still believe the best value are in gold and silver companies as they still seem fairly valued compared to the metals themselves.

There's not a huge amount of public or corporate hype on the companies themselves which means when there is, much larger premiums should likely occur. Take care and good trading!

January 2009 (scroll below for comments)

Happy New Year! Hopefully markets will perform better in '09 than they did in '08. Since our inception in October 2008 the precious metals have been the clear leader. In most cases the stocks have outperformed the physical metal. We believe this will continue. Usually the first horse out of the gate wins the race. In fact from the bottom in October the Gold Index has almost doubled. This is roughly where it was before the crash. Yet the DOW has remained flat. During the "Great Depression" gold stocks outperformed all other categories. Also during the inflation era of 70's gold went from $35 - $850. For the year, gold and silver should shine. Look at what is happening to some of our juniors; incredible price movements. This has occured because they were tremendously oversold in the first place.

We believe sometime in the future the panic selling that occured could change to panic buying because of the monetary crisis and the limited amount of gold shares. Currently all publicy listed precious metal shares have about $150 billion market capitalization. The market value of Google alone is approximately $75 billion. When people want to own gold shares there will be very few to go around. This works tremendously in the favor of individuals who currently own shares.

The amount of money being printed is unprecedented. Yet the amount of gold being produced is decreasing. More dollars chasing fewer ounces of gold. These debts that are in the trillions will be almost impossible to repay unless there is currency devaluation. Can you really afford to pay more taxes?

This bodes well for gold and as gold goes so does it's shadow, silver.

(more comments below)

The price of oil hit a low of approximately $34/barrel in December. Yet our two energy picks managed to increase slightly in value. Well managed and diversified business that can make money in this market should be bought. We think that the December low should hold in oil so energy is a definite buy. Mexico lost 10% of it's oil production in '08 and is down about one million barrels per day from its production peak in '04. With other countries facing similar situations, the long term price should rise. The world's population has doubled to 6.7 billion people from 1970.

The developing world currently uses two barrels of oil per year compared to the North American average of 25. Even with reduced use here in North America, the developing world will take up any slack. UTS energy that owns property in Canada's oil sands doubled in one day from .80 cents to $1.60. Total Petroleum of France is making an offer to purchase UTS. The oil sands are not profitable at $40/barrel of oil. Do they know something we don't?

We feel these type of acquisitions will continue in resource companies that have assets that are grossing undervalued. If you do not like our energy picks buy an energy index as you can see that the consolidation in the sector looks like it wants to breakout.