A candid meeting of minds about subjects varying from making money in the markets to the vagaries of the human psyche to the philosophical aspects of man and much more...
We had
an engaging and even contentious meeting
today at La Madeleine’s! We had a total of 4
attendees: (from left to right) Kevin Day, VJ Arjan, Jeff Harrington, and Tommy
Schultze.
Gratitude
Kevin kicked off the meeting by relating
to us his experience growing up in a small town in Australia when running water
and electricity were a luxury. He told
us how he had to ride a horse to school every day, which was a few miles ride.
Tommy then added that there is, in
fact, an affirmative action law in Texas that preserves one’s right to ride on
horseback to any given destination.
Viviendo en una Burbujaa (Living in a bubble), 2006
Relaying his experience implanted the
seed of gratitude in our minds. It is
easy for the millenium generation to get caught up in the bubble of their world
and to forget how incredibly fortunate we all are and to appreciate the
technology that we have that makes our lives so much easier than they could be.
Perspective from Germany
Kevin just visited Germany and
relayed that experience to us.
Interestingly enough, they are actually keen on saving the Euro although
a much more despondent situation might change their viewpoints.
Surprisingly enough also, the Germans
believe that President Obama is the greatest thing to happen to America in a
long time and they firmly believe that he will win the next term. It is ironic how the world’s impression of
the President may differ so widely from the citizens themselves.
Jeff chimed in that the current
crisis was almost built into the creation of the Maastrict treaty which did not
have any provision for the current crisis as the creators felt it would force
the countries into a political union.
VJ asked whether the current crisis
in the Eurozone would create any investment opportunities in Europe for quality
large cap companies. Kevin mentioned
Siemens (SI) as a good choice. (I
suppose Unilever (UN) would fall into the same category as well.) Jeff however warned of risks with investing in companies that are either export-driven or are in banking as these firms will take a hit should Germany leave the Eurozone and move to a higher-value Deutchmark.
Lithium Miners
Jeff chimed in mentioning how the
huge demand for iPads and other tablets has caused a spike in lithium mining
companies. Lithium batteries are also
used in electric cars. One particular
miner he mentioned was Sociedad Quimica y Minera (SQM) which is up 225% in the
last 5 years.
The speed of the emerging markets
Kevin mentioned the incredible speed
with which the emerging markets are growing and building their cities. A skyscraper usually took a few months to built,
but recently and remarkably, a 30-story hotel was built in China in 15 days! Don’t believe me? Take a look at the video above.
Presenting Akiro Kurosawa’s SFEG
The debate that ensued reminded me of
Akiro Kurosawa’s Rashoman, in which the singular
circumstance of murder is described wildly differently by each witness.
In this case, the single event is
that Santa Fe Gold Corporation has recently taken a 50% hit to the stock price. Below I present each person’s arguments. I will leave it to the reader to make up
their mind.
Jeff did an analysis of the company’s
income statement and cash flows and determined that the company is not
profitable in the core business of its mining operations and may be keeping
afloat by its derivatives element. The
recent $15 million equity line just further proved to him that equity holders
are being diluted further so that the company can stay afloat. He made the dramatic conclusion that the
company is therefore burning through cash and will declare bankruptcy. I don’t believe he made any suggestions in
regards to time frame. As a result of
this analysis, the stock price has sold off sharply.
Kevin believes that the conclusion
that Jeff came to is absurd and he believes that this presents a great buying
opportunity for the long-term potential to come. The good earnings are yet to come. From his estimates, the company is slated to
earn a gross revenue of $40 million this year after the dish to Sandstorm. If even half of that comes as net earnings to
the shareholders at a price-earnings of 10, the stock should pop to at least the
$1.50-2 per share range. He believes
that the company is far from bankruptcy and the stock is taking the hit due to
some lone sellers. He further believes
that the company would not have received $15 million line had not the investors
felt that they had done their due diligence and expected a full return on their
investment.
VJ agreed with Kevin mentioning the
lack of volume to justify the enormous sell-off. As anyone who has owned or traded SFEG knows,
small purchases or sell-offs can generate huge swings in the price. Although Jeff may have a valid point
regarding the dilution of the equity holders, the main indicator VJ looked at
was volume, which told him a different story. In the last month, between 1.5 – 2 million
shares were traded, which is about 2% of the total shares outstanding. The insiders and major holders of the company
apparently are not selling off. So he
believes that if many of the long-term holder’s are still in the stock, they
must still believe in the potential therein.
There you go, readers. You are free to put on your Sherlock Holmes
thinking-caps and determine, rather deduce, how the case shapes up.
The rest of the year and more to come
VJ quoted Louis Navallier and Jim Rogers,
the famous money managers, on their insight for the near-future.
Mr. Navallier, who did some
historical analysis regarding market returns during the last six months of an
election year. He found that the average
return since 1928 was 9.2%. During an
incumbent election year, that number is 12.6%.
He believes that chances are that the
printing presses will continue for some time and the effect and risk of real interest
rates being so low is that companies may begin to become more lax in addressing
their balance sheet problems.
Mr. Rogers commented that there has
also been a slowdown or recession of some sort in the U.S. every four to six
years. The current bull market began in
March 2009, which means that if history is any guide, some time between 2013 to
2014, there will be a slowdown. It will
be interesting to see whether the economy will be able to stay afloat largely,
and hopefully, without the buttress of the Fed.
The coming slowdown, however, can
only reassure us of the case for commodities:
If the economy slowdown in quite
drastic, as it may be unlikely that the government will increase taxes in this
environment, the government will resort to the only thing it knows how to do –
start up the printing presses again.
This can only lead to hard assets or commodities going higher. The countries that will take the severest hit
will be countries that have little natural resources.
If on the flip side, if the economic
slowdown is not as bad as 2008 and the global economy begins to pick up steam
again, the global demand especially from the emerging markets can only lead
hard assets, particularly oil prices, much higher. In regards to oil prices,
only one country has more proven oil reserves today than 10 years ago, and that
is Brazil, so it is only natural that with supply at a standstill, oil prices
must go higher.
While the dollar continues to be
devalued, as it looks like will be for the near-term future, the stronger
currencies will be the Swiss Franc, the Chinese Renminbi, and the Japanese Yen.
The broken window
Frederic Bastiat
“Economics
is haunted by more fallacies than any other study known to man. The inherent difficulties of the subject of
economics compared to any other field of science, physics, mathematics,
medicine, etc. Is the special pleading of special interests. While certain public policies would in the
long-run benefit everybody, other policies would benefit one group only at the
expense of all other groups.” (Henry Hazlitt, Economics in One Lesson)
VJ
brought up the interesting economic argument, first posed by French economist
Frederic Bastiat, regarding a broken window.
A baker is going running his business one day, when all of a sudden a
street tramp throws a brick through the window, shattering it to pieces.
The
baker chase the vandal a block and returns gasping for breath. By the time he returns, there is now a group
of by standers gather next to the broken window. One of them, an economist, mentions that at
least the broken window will provide more business for the glazer. The glazer will have to get the window from
the glass manufacturer, and so on. So he
concludes to the group, that the broken window will create more economic value
than we had before. The crowd, seeing
the logic of the argument, seems to agree and cheerily moves about their day.
What
the economist did not know was that the baker was going to buy a suit, that he
can no longer do to fix the broken window.
This new suit would have provided new business, for the clothing
manufactuer, the retailer, and the tailor.
This, Bastiat, claims is real economic output.
For
if the latter were the case, then it would be advisable to destroy and level our
cities to the ground every few years so that there could be more economic
activity. Obviously, no one with common
sense would do such a thing.
But
such cases are made many times pulling a sheet over the minds of the
masses. For instance, the current
President has repeatedly made claims that the additional entitlement programs
he is putting into place will not increase taxes and will bring down the
deficit over time.
According
to Hazlitt, the author of Economics in
One Lesson, public spending can only be made with an equal and opposite
effect on taxes. If taxes do not go up,
the only other way to spend more while taxing less is to start the printing
presses, which actually creates an even larger deficit, which requires more money
printing, so on and so forth.
So
the next time, you hear the argument about increasing public spending, remember
the broken window argument.
The
next meeting will be on Sunday, August 5th, 2012.
For
those who have not attended a meeting, but would like to attend, please email
your wish to VJ Arjan at scarletkings@gmail.com
Also I find that there are many domestic and
international readers who are following our blog posts not only in the United
States but all over the world including Europe, Latin America, and Asia. If you
wish to be added to our email list, please email at scarletkings@gmail.com
