We had a wonderful meeting, where an array of topics were up for discussion! I want to heartily thank all those who came and made it an insightful and memorable forum. We had 5 attendees: (from left to right) Kevin Day, Tommy Schultz, VJ Arjan, Andrew Whatley, and Jeff Harrington.
Overvalued vs. Undervalued
We started the meeting with Jeff Harrington presenting to us his thesis that many capital goods producers are overvalued while some large financial institutions are undervalued compared to its earnings.
Companies like Deere (DE) and Caterpillar (CAT) have had a remarkable rise in stock price on what appears to be mostly empty air. Unlike some other companies that have reported increased earnings since Q2, both Deere and Caterpillar have increase while earnings have decreased, suggesting an amazing opportunity for a near-term correction.
On the other hand, companies like JP Morgan Chase (JPM), State Street (STT), and PNC Bank (PNC) have had the opposite scenario where earnings have risen faster than stock prices (by percentage).
Playing Gold and other precious metals
One may be surprised to hear that Peter Schiff, the CEO of Euro Pacific Capital and an avid gold bug, on an interview with CNBC stated that gold would travel to $5,000 an ounce. This may be indeed legitimate, only time will tell, but for the near-term it is somewhat certain that gold will continue to rise. Central banks buying into gold will mean that there are some long-term buyers in the market. Kevin Day was explaining that one way to play the rise of gold is to buy into the gold miners, particularly small to mid-cap ones, which appreciate better than buying into the commodity itself through Market Vectors Junior Gold Miners (GDXJ). Kevin has not been, to his own account, a gold bug but prefers silver instead, which he feels is still trading at a multiple to gold that is far less than its historical average.
Santa Fe Gold Corporation (SFEG)
We discussed what potentially may occur with the share price of this company as several readers of this blog own this stock. The timeframe for actual mining to commence should be sometime in 2010 by which time we will probably see the share price go to the range of $2.50-$3.00 a share. Kevin Day who personally owns a large number of shares himself said that he knows that there are several key individuals who own substantial blocks of this stock, several million shares, in fact, and that should the price start to move upwards, the exits would be blocked. The most probable outcome will be that this company will be bought out for a share equivalent of the buyer’s shares.
Dubai
At the end of November, Nakheel Group, the principal capital raisers for Dubai World alarmed investors by announcing that the approximate $4 billion that was to be paid on December 14th would have to be delayed some 6 months. This has caused an enormous sell-off in the Dubai and Abu Dhabi exchanges as investor confidence is rattled by the uncertainty of whether or not this debt will be repaid. Jeff Harrington suggested that this will affect not only European banks who are heavily invested in Dubai, but also places like South Korea which has put up the funds for the actual construction going on there. The emirate is also in the midst of a economic crunch, in which there are literally fields of cars being abandoned at airports by non-Arab residents leaving the country. The idea that Sheikh Al-Maktoum is trying to make a reality is to turn Dubai into the pleasure resort for the world, a sort of global Las Vegas. He has built enormous towers that are more than a kilometer long, the only 7-star hotel, as well as an indoor ski resort. Dubai, it can be said, however, resembles an empty shell, for there is yet no substantial cash flow to the area. Kevin Day claimed that he does not see a direct effect on U.S. interests but is concerned with what might happen should the UAE Central Bank not step in to bail it out. At the present moment, the UAE has decided to cherry-pick which businesses it will raise cash for and which it will not. This may indeed lead to Dubai losing its sovereignty to Abu Dhabi should the funds not be enough, but it may also lead, more importantly, to a possible domino effect in other emerging markets of the same shaking of investor confidence. Is this perhaps the first of many shoes to drop? Time will tell…
The Bubble Continues to Burst
Jeff Harrington relayed how the real estate troubles continue to dominate in hard-hit areas. On November 18th, 2009 the Pontiac Silverdome, the former home of the Detroit Lions, which was build for $55.7 million ($300 million inflation-adjusted) sold for an incredibly ridiculous sum of $583,000, less than 1 percent of what it was built for. No double Detroit is one of the hardest hit areas in the real estate market in the country. Homes which have sold for $125,000-200,000 are now selling for $15,000.
War with Australia
Australia is home to an incredibly abundant amount of natural resources. It is home to only 22 million inhabitants. This large natural-resource rich land was called Japan’s quarry in previous decades. It is now being eyed by China and/or Indonesia for its immense supply of natural gas. Kevin Day, who is a native Australian, remarked with some reservations that it would probably be too much for Australia’s small army to compete with a billion or so invaders.
Oil and alternative energy
“Oil is only going one way.” – Kevin Day
Peak oil, according to many scientific investigations, has been reached and there is only a decline in supply from here on. This will invariably result in rising prices as the world simultaneously industrializes. VJ Arjan argued that it would be too expensive for most of the world to lose its dependence upon oil, an industry that has taken five decades to build and has been transporting oil for a reasonable price.
However, it cannot be denied that there is an incredible amount of funding going into producing a shift to an alternative energy source, and it cannot be denied that it will have its due return. The question is which one will be ‘the one’?
Jeff Harrington thinks that there is a high likelihood that it will be natural gas. He believes that this is an incredible historic opportunity to buy natural gas at a very low price. He also suggests buying into companies like Chesapeake (CHK), Devon Energy (DVN), and EOG Resources (EOG). The only trouble may arise in the cost incurred by transporting natural gas. It must be transported in its liquid form, which can be an expensive process.
Another potential solution would be nuclear energy. Currently France derives 85% of its energy from nuclear sources. Many European nations rely heavily on nuclear energy as well. Large uranium deposits are placed in Canada, and there are companies like Cameco (CCJ) which are just a few years away from full-blown uranium mining. Why does the US not adopt this energy policy? It may date from President Jimmy Carter’s ban on reusing nuclear fields, 93% of which can be reused. Also, the radioactivity of nuclear wastes, which is minimal, may be exaggerated in order to prevent another 3-mile island incident.
Since when has Money been in bed with Politics?
The answer: since time immemorial. There currently is a conspiracy that the drug companies and law-makers dare not draw attention to called the ‘prescription conspiracy.’ This states simply that drug producers intentionally create drugs that solve one problem and create another one. Incidentally, they also offer a drug that resolves this problem, but leads to another one. It is no wonder, therefore, that companies like Pfizer (PFE) and Merck (MRK) have made so much money and will probably continue to do so.
Andrew Whatley explained another relevant example that delineates this policy in Travelers’ Insurance push in 2007to repeal Glass-Steagall for a merger. After a $200 million “donation” it was accomplished the week of the merger deadline.
Correction (12/14/09): Glass Steagall was repealed by the Gramm-Bliley-Leech act, which was passed in 1998.
Tiger’s lack of discretion
Yes, we talked about Tiger Wood’s alleged mistresses and scandalous affairs also. Kevin Day explained that Tiger went about this in a most blundering fashion. By keeping everything a secret and not making an absolute clean breast of his “transgressions” he is opening himself up to even more attacks. He would do well to mimic David Letterman’s response to blackmail attempts, by giving the public what they wanted to hear, the truth. No man or woman is perfect, and there is a likelihood that men and women do make mistakes in their life. But it cannot be stuffed under the carpet like the legendary golfer is doing. Tommy Schultz added that Tiger was taught to play golf and not to deal with fame.
A few ticker symbols for consideration
Here are a few equities that were bought up during our meeting and I’ve listed them below:
| Symbol | Company |
| EWC | iShares MSCI Canada Index (ETF) |
| EWA | iShares MSCI Australia Index Fund (ETF) |
| EWS | iShares MSCI Singapore Index Fund (ETF) |
| MXI | iShares S&P Global Mat. Sector Inde(ETF) |
| EWZ | iShares MSCI Brazil Index (ETF) |
| TUR | iShares MSCI Turkey Index Fund |
| ILF | iShares S&P Latin America 40 Index (ETF) |
| GUR | SPDR S&P Emerging Europe (ETF) |
| CRR | CARBO Ceramics Inc. |
| EP | El Paso Corporation |
I wish everyone a very happy holiday season and a happy new year!
May we be healthy, prosperous, and wise in the year to come!
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