Meeting Minutes

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 5^th, 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

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