A Melman Minute — October 7, 2011
| By | Leonard Melman |
|---|---|
| Date | October 7, 2011 |
Despite the fact that all Canadian markets are closed for the Canadian Thanksgiving Day and America’s bond markets are also taking the Columbus Day off, many markets remain open and some of them have been particularly active so far this morning. Financial markets have opened strongly higher as have precious metals markets as well with gold reaching into the $1,670’s before some light selling set in.
However, our focus this morning is on a much longer time perspective, one to which this writer attaches a great deal of significance. The specific subject is the changing perspective of trading strategy evaluation and it applies to mining shares as well as to the general markets at large, although with a decidedly different emphasis. It also helps to be something of a ‘gray-beard’ and to have been around for several decades in order to note these significant changes.
In the case of general securities, for decade after decade since the mid-19th century, the greatest influence on the price of securities’ shares as well as the movement of market indexes was the performance of individual companies with the major driving force in those share prices coming from changes in terms of earnings, sales, product development, profit margins, book values, Price-Earnings ratios (PER) and other fundamental information of that nature. Market averages then responded to the collective change in direction of action in the majority of individual stocks – but it was trading in the shares themselves which was the driving force of market action.
However, in today’s markets, a much larger force is now dominant, particularly in terms of short-term market activities and today is a good example. Based on a political statement from France and Germany that they would cooperate in finding a resolution to the problem of Europe’s insolvent banks, markets have surged in Europe and North America. We can find little news relating to any individual companies; rather this appears to us to be nothing but a psychological improvement in market sentiment background based almost entirely on government statements.
The same is frequently true following speeches by the American President, the IMF General Manager, the Fed Chairman and so forth. Based on their words alone, markets might soar or fall precipitously.
At The Melman Report, we regard this trend as somewhat unwelcome since it is always our preference to base decisions on hard facts rather than political influence pandering or statements which promise dramatic improvements but seldom provide little more than generalized statements of assurance of future positive developments. (More on this below)
In a slightly different vein (ore body pun fully intended), we find a similar situation affecting segments of the mining investment world. When I first started studying mining operations some 35 years ago, my own attention and that of most other analysts and investment advisors was focused almost exclusively on developments within a particular company. What was the quality of their ore body? How successful were they at raising capital? How were their exploration programs progressing? What was the likelihood of ultimately achieving profitable production?
It was also true that junior mining companies received a much more powerful ‘bang for their buck’ than they do today in the sense that virtually every dollar raised was directed toward fundamental mine development, rather than filing endless reports, obeying huge volumes of complex government regulations, spending vast sums to placate aboriginal demands, hiring experts in botany and stream biology rather than mining engineers, professional geologists, etc.
As a result, junior mining companies were geared to rapidly advance the discovery processes for their properties and investors could count on a relatively quick evaluation of those projects.
We know that today is a truly different era as the investigative process can drag on for year after year, waiting for government responses to Environmental Assessments, Environmental Impact Reports, water purity studies, fish evaluations, Aboriginal considerations or any of the other regulatory requirements which are now part and parcel of attempting to create a productive mine out of an original prospector’s discovery.
The situation relating to foreign nations can be even more perilous and it was the appearance of headlines relating to Ivanhoe Mines and their dealings with the Mongolian government that brought about this train of thought.
For many years, Ivanhoe has been working diligently to develop their giant Oyu Tolgai project in that nation and one might have expected the price of the shares to rise and fall based on fundamental mining developments related to that project. However, that has not been the case as for several years, it has been actions – threatened or actually enacted - by the Mongolian government which have been most influential in the price of the shares.
The latest sudden jump from $12 to $18 was due almost exclusively to the latest action by Mongolia’s government. As can be observed, IVN had fallen quickly from $22 to $12 based to a large extent on threats by Mongolia to demand a re-writing of Ivanhoe’s Mining Agreement with terms to be set in a more advantageous manner for that government. Of course, the belief was that such a revision of the agreement would increase costs and diminish profits and, therefore, the stock fell sharply.
However, last week, Mongolia declared its intent (at least temporarily?) to abide by the original agreement and the shares moved up swiftly. And so, we have a situation where the shares lost almost half their value and then rose by a full 50% with both major moves taking place despite the fact that not one significant alteration in the actual mine had taken place.
We believe that government domination of the marketplace is growing; that such growth is making government actions the dominant force in many markets and that this reflects an almost irresistible trend away from free markets which to us spells heightened economic dangers down the road.
There is yet another pattern to political statements which we have noticed over the past decades. They are growing less specific in nature.
An excellent example was noted over the weekend when the leading Spanish political candidate, Mariano Rajoy, made a rousing speech in favour of his candidacy for the Presidency of Spain. According to a Reuters story, he pledged to, “...reform the financial sector; create jobs, cut waste in regional government and improve education.” Sounds familiar, doesn’t it? What he never mentioned was how he was going to accomplish all those worthy goals.
Presumably, his strategy is working because the latest polls show him with a 15% margin over his next competitor.
Our concern is that the trend toward non-specific speeches is powerful and can be found in country after country and the failure to enunciate specific and believable solutions to problems will only spread uncertainty and fear in the long run. Therefore, we continue to believe that holding precious metals for monetary insurance remains a sound strategy.
As of 8:30 AM PDT, financial markets in the USA (Canada’s are closed) remain solidly in the ‘plus’ column with the Dow Industrials ahead by some 265 points while gold and silver are also rising as well with gold trading just above the $1,660 level and silver near $32 per ounce. Base metals are up sharply as well on improved optimism and mining share indexes have improved by 2-3%.
In other markets, Crude Oil continues its recent rally, moving above the $86 level; long-term interest rates have moved higher and the Greenback is trading more than a full point lower in the DX Index.