List of Silver Mining Companies

Sunday, July 22, 2007

NOTE: I have updated and extended this list here in June 2009.

The surge of silver prices after the usual summer correction is a fitting impulse to publish this list of mostly Canadian-listed silver companies.
Companies are grouped into explorers/developers and producers. Compiling a list of silver companies is controversial as there are only very few pure silver plays. The white metal is mostly mined in combination with gold or base metals.
Seeing silver prices multiplying in this decade these companies give extra leverage - if their plans come true. As I am still scouting the sector for more purchases I do not disclose my current holdings.

GRAPH: Silver seems to have ended its correction. The metal is a lot more volatile than gold. Fundamentally a 16-year supply deficit speaks for itself. Silver currently trades at a ratio of 1:50 to gold. In the long term this ratio has been closer to 1:15, leaving enormous upside potential for silver that could easily lead to a price around $25 next year. Chart courtesy of stockcharts.com.
I consider investments in exploration companies as very risky and build up positions very slowly. But they come with a notable exception to the golden rule that for every percentage point of possible reward there is an equal risk. In the case of explorers/developers there is an exception to the rule: As long as one invests without leverage there is a risk of 100% but a multiple of that in possible gains when an explorer hits silver indeed.
When researching risky investments like this very small sector with only a few billions in market capitalization I look mainly for the following:
  • Quality of management. Check the track record of management in past ventures.
  • Management's stake in the company. If they don't sell or even buy more it is usually a good sign.
  • Delays. Are there any delays in realizing the company's ventures ?
  • Cost per ounce. What are the company's cash costs per ounce produced? How much do I pay per ounce when I buy their shares.
  • Institutional shareholders. Which funds own the company, which analysts cover the stock?
  • Proximity to production. Potential gains are higher with explorers in the early stages, but so are the risks. I like companies in the process of finalizing the feasibility study for financing or - at a later stage - companies that are close to production.
Here comes the list of 62 silver companies (click the name for the company's website and the ticker symbol for price information) (Updated 2009 list here):

Explorers/Developers
Abcourt Mines (ABI.V): Gold, silver and zinc in Quebec
Alexco Resource (AXR.TO): Silver in Canada
Apogee Minerals (APE.V): Silver, lead, zinc in Bolivia
Arian Silver (AGQ.V): Silver in Mexico
Aquiline Resources (AQI.TO): Silver and gold in Argentina, Canada and Mexico
Avino Silver & Gold Mines (ASM.V): Silver, gold, zinc, copper, lead in British Columbia
Aurcana (AUN.V): Silver, gold, lead, zinc in Mexico
Aura Silver (AUU.V): Silver in Canada, El Salvador, Mexico, USA
Baja Mining (BAJ.TO): Silver, copper, cobalt, manganese, zinc in Mexico
Bear Creek Mining (BCM.V): Silver, gold in Peru
Canasil Resources (CLZ.V): Silver, gold, copper, lead, zinc in British Columbia and Mexico
Continuum Resources (CNU.V): Silver, gold in Mexico
Eagle Plains Resources (EPL.V): 35 gold, silver, uranium, copper, molybdenum, zinc and rare earth mineral projects in Canada
Esperanza Silver (EPZ.V): Silver in Mexico, Peru
First Majestic (FR.V): Silver in Mexico
Fury Exploration (FUR.V): Silver in Canada
Genco Resources (GGC.V): Silver in Mexico
Huldra Silver (HDA.V): Silver in Canada
Klondike Silver (KS.V): Silver in Canada, Mexico
MAG Silver (MAG.V): Silver in Mexico
Mines Management (MGT.TO): Silver, copper in the USA
Mexican Silver Mines (MSM.V): Silver in Mexico
Minco Silver (MSV.TO): Silver in China
Orko Silver (OK.V): Silver in Mexico
Oremex Resources (ORM.V): Silver in Mexico
Oro Silver (OSR.V): Silver in Mexico
Palmarejo Silver and Gold (PJO.V): Silver, gold in Mexico
Pershimco Resources (PRO.V): Silver, gold in Mexico
South American Silver (SAC.TO): Silver in Bolivia, Chile
Sabina Silver (SBB.V): Silver in Canada
Silver Dragon Resources (SDRG.OB): Silver in China
St. Eugene Mining (SEM.V): Silver, lead, zinc in Canada
Silver Eagle Mines (SEG.TO): Silver in Mexico
Silver Fields Resources (SF.V): Silver in Canada, Mexico, USA
Stroud Resources (SDR.V): Silver, gold, natural gas in Mexico
Silvermex Resources (SMR.V): Silver in Mexico
SNS Silver (SNS.V): Silver in the USA
Scorpio Mining (SPM.TO): Silver in Mexico
Silver Quest Resources (SQI.V): Silver in North America
Southern Silver (SSV.V): Silver in Mexico, USA
Silver Grail Resources (SVG.V): Silver in Canada
SilverCrest Mines (SVL.V): Silver in Chile, El Salvador, Mexico
Silvermet (SYI.V): Silver in Canada, Turkey
Tumi Resources (TM.V): Silver in Mexico, Sweden
UC Resources (UC.V): Silver, gold in Mexico
US Silver (USA.V): Silver in the USA
Valencia Ventures (VVI.V): Silver in Australia, Canada, Chile, USA
Yale Resources (YLL.V): Silver in Mexico

Producers

ECU Silver Mining (ECU.V): Silver, lead, zinc in Mexico

Endeavour Silver (EDR.TO): Silver in Mexico
Excellon Resources (EXN.V): Silver in Mexico
Fortuna Silver Mines (FVI.V): Silver in Mexico
Great Panther Resources (GPR.TO): Silver in Mexico
Hochschild Mining (HOC.L): Silver in Argentina, Chile, Mexico, Peru
Impact Silver (IPT.V): Silver in Mexico, Dominican Republic
Minera Andes (MAI.TO): Silver in Argentina
Milner Consolidated Silver Mines (MCA.V): Silver in Canada
Pan American Silver (PAA.TO): Silver in Bolivia, Mexico, Peru
Silver Wheaton (SLW): Silver in Greece, Mexico, Peru, Sweden
Silver Standard (SSRI): Silver in Argentina, Mexico, Chile, Peru, Canada, the United States and Australia
Silverstone Resources (SST.V): Silver in Mexico
Silvercorp (SVM.TO): Silver in China

China Again Raises Interest Rates 27 Basis Points

Friday, July 20, 2007

In a move to rein the overheated economy the People's Bank of China (PBoC) has raised its one-year lending and depositing rates for the third time in 2007 . According to a report by chinadaily.com the one-year deposit rate will rise to 3.33% and the lending rate to 6.84% or 27 basis points more than until now. China raised the one-year deposit and loan interest rate by 27 basis points in March and by 27 and 18 basis points respectively in May.
The yuan fell 0.14 percent to 7.5740 against the dollar, extending its decline after the announcement, which came in the final minutes of the trading session. China is under pressure to allow faster currency appreciation to slow the flood of money into the economy from exports and ease trade tensions with the United States and Europe.
China also reported a record GDP growth rate of 11.5% for the first half of 2007, overtaking Germany as the third biggest economy in the world. The economic superpower has set itself a medium-target of 8% for annual GDP growth. Growth in Q2 2007 came in at 11.9%, a further acceleration from 11.1% in Q1. China has revised its GDP growth estimate for 2006 from 10.7% to 11.1% earlier this week.
Inflation is currently running at 4.4%, also well above the target rate of 3%. According to China food prices were the main driver.
Chinese officials are increasingly worried about the breakneck speed of the world's most populous nation. China's National Bureau of Statistics said the surge was based on new economic and fiscal legislation as well as a much better development of the global economy than the statisticians had expected.
-- UPDATE-- China's politicians were quite active on Friday. They also slashed the tax on interest income from 20% to a mere 5%. According to the report on China's official website the move is intended to adapt to changes in China's economic and social situation. The cut is equivalent to a 0.5 percentage point increase in deposit rates, said Frank Gong, chief China economist at JPMorgan Chase in Hong Kong in a report by the International Herald Tribune.

Too Much Inflation For You? Stop Eating and Driving!

Wednesday, July 18, 2007

A down-spike in oil prices in June helped to lower the headline inflation reading for June. According to the BLS consumer prices rose only 0.2% after a 0.7% step in May. The seasonally adjusted compounded 3-month annual rate of inflation receded to 5.2% (5.5%) in June.
If that is too much for you, just stop eating and driving. Food and energy prices are skyrocketing and the fundamental outlook in these sectors points to the possibly worst drought since the "Dust Bowl" of the 1930s and not much chances for oil supply to keep up with demand with a high risk of delivery disruptions. Shopping can still make you happy though. Apparel prices fell. Now if it were not for that credit card bill to come afterwards.
Federal Reserve chairman Ben Bernanke said in his testimonial to Congress that inflation is still a cause of worry for the Fed, a statement that drove the Dow Jones 1% down from its record reached yesterday. He nevertheless expected an improvement of both growth and inflation in 2008, stating that the Q4 2007 may see lower growth again. Yesterday's release of an uptick in industrial production, albeit at lower capacity utilization YOY and a slower advance of producer prices delivered a mixed short-term message though. He was further contradicted by the National Federation of Independent Businesses (NFIB) which saw 19% of their members raise prices, according to a report on Bloomberg TV.
Bonds nevertheless rose with the 10-year Treasury yield dipping 8 ticks to 5.08%. Gold jumped more than 1% above the $670 level and the Federal Reserve dollar marked a new low against the Euro at 1.3830.
After Bernanke's speech from May 10 where he introduced a new target for the Fed, inflation expectations, I am inclined to take the view that the Fed will try to ride out the mortgage storm it cooked up itself by not monitoring (and improving) standards in the subprime industry and leave rates unchanged in the coming meeting on August 7. Higher rates could mean a fatal end to record stuck purchases on margin and the weak housing market would decline further. But seeing that the Fed shifts its focus from portfolio-slimming inflation to the highly psychological and foggy area of inflation expectations I feel more uncomfortable than ever as this talk could easily get contradicted by the markets walk.
The white noise of monthly and quarterly data releases adds up to the uncomfortable perception on US economic growth that is strengthened by the fact that policymakers so far have not come up with much more than to blame the rest of the world.
Pushing for a higher Chinese Yuan while at the same time trying to coerce China into buying mortgage-backed securities may add to confusion over US policy in that corner of the world.
At the same time structural changes to turn the deficit-laden fiscal policy around remain yet to be seen. The US government now employs as many people as does US industry.

Bloggin' Lite in BC's Summer

Tuesday, July 10, 2007

--CORRECTED-- Coming home from a 3-day bicycle trip that started in Vancouver and included several islands it is time to limit blogging in the summer months of July and August to any of the following conditions met:
  • It is too hot or too cold to do anything else
  • It rains
  • Events require it
  • I am not out cycling
Living in Vancouver has its pros and cons, but latter fall mostly under inconveniences like very frequent rain. For a while I came home from every trip soaked, guided by optimism and not the weather report which is a must-see before every outside venture in British Columbia.


PHOTO: Vancouver Island has very charming doll-house architecture like this cafe in Chemainus.

I had luck on my trip that saw me cycling on a round-trip for 120 km from Vancouver to Horseshoe Bay where I caught a ferry to Nanaimo and more islands to come.
This first leg with its up and downhill path is a good introduction of what comes later. Signs for cyclicists are of not much help here (and the lack of them will later on become a fatal danger for those on 2 wheels on Vancouver Island.) The first time I ended up on the highway, sharing the road with those cars that were headed for the ferry reach too.

British Columbia Islands

PHOTO: I was told house prices have doubled and trebled in the last 5 years but the tranquility of this spectacular scenery is certainly a price supporting factor. Who does not want to live on a quiet island?

After a smooth ferry passage to Nanaimo I rode down the dock-walk and decided to push as far as possible towards Crofton where I would be taking another ferry to Salt Spring Island.
I soon found out that Vancouver Island is a rather hilly affair, but steeper ascents waited for me.
Guided by a rather large-scale map for the islands I soon discovered signs for bikers pointing south. But too my astonishment they directed me to go on the highway around Ladysmith. This is a bit puzzling as cyclicists are not allowed to ride on highways. But I found no other way than to go on the road shoulder of the very busy #1 highway for about 2 kilometres. Strictly spoken there is no safe way for walkers and cyclicists to enjoy the nature of this otherwise most charming island all the way from north to south.
Gliding downhill and frequently pushing upwards I reached Chemainus where I stayed at a lovely hotel similar to the cafe pictured above. In general I found out that the Loonie goes far compared to costs in Europe. Roughly said I get the same amount of products and services here for one Loonie as I would get for a Euro in the Eurozone. But I get 1.44 Can$ for 1 €, making Canada almost a third cheaper, with my rent in downtown Vancouver being the exception.
Day 2 was more of the same in Chemainus as aching muscles demanded a rest after the first 74 km.
On Monday I continued to Crofton for the ferry to Salt Spring Island, a most pleasant small island sprinkled with summer getaways. Enjoying a halibut fish & chips lunch in Ganges with a view to a busy marina I check out real estate ads. Offers range from Can$ 100,000 trailer homes to Can$2-400,000 for condos and end in the low Can$1MM+ which will buy you several acres with a well-kept 3,000 square feet house and outhouses for horses etc.

British Columbia Islands

PHOTO: BC islands still feature many unspoilt beaches like this one. There is still a lot of beachfront property to be had and it has to be hoped that condomania will not reach out to these last eco-refuges.

Property prices have been in an upward trend here recently, with house values doubling and trebling, I was told by locals. Given the beauty of these small islands - at least in summertime - I can understand that this housing boom is not to end because of the limited resources. Over development could lead to a decline of these eco-refuges of many species and make them less attractive in the long-term. A balance of commercial interests and the damage to its "natural" touch has to be found, it appears.
Coming from densely populated Europe to the second largest country one is overjoyed to see deer crossing the road just ahead and islands still untouched by humans. I hope this wilderness experience will be preserved.

WSJ Has Commentary on "Money Meltdown"

Friday, July 06, 2007

Fears of a financial crisis have spread to the Wall Street Journal. Thursday's edition carried a commentary by David Ranson and Penny Russell, principals of H.C.Wainwright Economics, on a possible "Money Meltdown" stemming from a broad-based loss of confidence in paper money that fails to be recognized by the bulk of economists and policy makers.
The authors reason that inflation always erupted in times of fiscal stress, particularly during and after wars. While they mention that Britain saw virtually zero inflation between 1800 and 1913 they fail to associate this period of absolute price stability with the deficit-limiting virtues of the gold standard in place. Read the full commentary after the jump:

"Money Meltdown"
By David Ranson and Penny Russell
The Wall Street Journal
Thursday, July 5, 2007
Interest rates are on the rise in the Eurozone, Great Britain, and Japan, as well as in India and China. But the Federal Reserve has again elected to keep its target rate on hold despite repeated assertions that inflation risk is still its predominant concern. Are central banks abroad recognizing a threat that their American counterpart has yet to acknowledge?

The Fed seems to believe that inflation has something to do with "excessive" demand. Although it admits that inflation is already running at an unacceptable pace, the majority of its policy officials cling to the belief (or hope) that the U.S. economy is slowing down, alleviating the inflation threat. Both of these assumptions are inconsistent with historical evidence.

What's more, the recent rise in the euro and sterling relative to the dollar has obscured the fact that the world economy has embarked on another classic "run" on paper currencies that is driving inflation up everywhere. For several years now, as was the case in the 1970s, all the world's currencies have been depreciating relative to stable benchmarks such as gold. Since the end of 2001, these declines have ranged from 38% (in the case of the euro) to nearly 60% (in the case of the dollar).

Why then has the pace of consumer-price inflation to date been so much less noteworthy than the pace of currency depreciation against gold? The answer lies in the timing: Gold is a fast-moving leading indicator, whereas consumer-price indices are slow-moving indicators that lag far behind. We all learned in the period between 1975 and 1985 that consumer prices do eventually catch up. It is the size of the move in the gold price, rather than in the consumer price index, that is a true and timely indicator of the magnitude of the inflation problem.

In 1975 Yale economist Richard Cooper described the process that now appears to be driving world inflation as "a general loss of confidence in money, a psychological mood that can be transmitted across national boundaries ... lead individuals to try to convert their assets into physical form: goods or housing or real estate."

But why does this phenomenon break out at some times and not at others? Why is it sometimes local and sometimes global? History provides the answer. Following World War II, rapidly rising prices began to be accepted as an inevitable -- even "normal" -- fact of life. But in reality, up to and including the 19th century, significant inflation had been the exception rather than the rule. And when it did occur it was usually local rather than global. In the United States, for example, cumulative consumer-price inflation was zero from 1820 to 1913, just prior to World War I. In the United Kingdom, consumer prices were lower at the beginning of World War II than they had been in 1800. In England the prices of consumables rose at an average annual rate of less than 0.4% over the centuries-long run between 1210 and 1940.

Against this relatively stable background, inflation erupted when nations faced acute fiscal stress, particularly in times of all-out war. A government that lost a war of survival typically saw the value of its paper currency evaporate to zero. In the final stages of this process, hyperinflation and astronomical interest rates accompanied economic chaos. The defeated government either did not survive (such as the Confederacy in 1865) or had to be rescued from its currency crisis by the victors (as in Germany and Austria in 1923 and Germany and Japan after 1945). Even the winners of all-out wars, especially those that emerged seriously impoverished (such as Britain in 1945), resorted to currency devaluations and suffered high inflation as a result.

In all cases, inflation was related to the inability or unwillingness of the governing authorities to maintain a stable currency in times of war-related government spending and debt. Although we are not entirely at peace today, U.S. military activity is at nothing like the all-out scale from 1917-1918 or 1941-1945. So why are we having an inflation problem, and why is it global in scope? There are two culprits.

First, since 1971 no government has made an attempt to fix the gold value of its currency, and every political initiative that raises long-term government spending leaves the financial markets free to price currencies at a lower gold value. Depreciation of currencies relative to gold has become unpredictable, chronic, and planet-wide.

Second, the massive increase in the public-sector share of the economy that occurred in World War II (and was reinvigorated in the late 1960s) has become permanent. In place of war-related debt, public finance is now saddled with long-range government spending commitments, including burgeoning debt in the form of unfunded liabilities associated with national pensions and health insurance. The popular notion that inflation is the way politicians reduce public debt without formally abrogating it is not far from the truth. In a nutshell, inflation is a manifestation of looming government insolvency.

This problem vastly overshadows the federal budget deficits with which Washington is obsessed. The military costs of the "war on terror" and the Iraq conflict are mere addenda to a mountain of obligations, which financial markets are warning that the federal government can discharge only by inflating away.

Not that the other world economies are in any better fiscal shape than America's. In fact, throughout the 20th century, the United States has been a sort of lender of last resort. If we had not been on the scene in 1923, who else could have underwritten a new and viable currency for Weimar Germany? Though in recent times our allies in North America and Europe have been less warlike than we are, they long ago adopted much more generous social "safety nets" and thereby undermined their long-term solvency to an even greater degree than here.

Inflation was negative following the Civil War, when the price of gold fell back to its pre-war parity. Inflation was likewise low after World War I when the price of gold remained fixed. In contrast, inflation charged ahead after World War II as the market price of gold was permitted to rise. Broadly speaking, although a rise in the price of gold is a sufficient condition for consumer-price inflation, it is not entirely necessary. The shortages that occur in a widespread war (such as World War I) may be sufficient to push up the price level, despite price controls and adherence to the gold standard.

Inflation is not intrinsically global - it is obvious that some countries experience more inflation than others. But currencies depreciating against gold across the board is a sign of worldwide inflation - and it has begun to set off alarm bells in many major economic capitals. But in Washington, our own central bankers remain placidly confident that everything will turn out all right.

Unsustainable peacetime spending is a much slower process than the unsustainable war spending. Far from sudden death, currencies these days are facing death by a thousand cuts. The unfortunate result is that the current crisis of confidence in paper money goes largely undiagnosed by the bulk of economists and policy makers.
At this blog I see a tremendous increase of pagehits coming from search engine queries for "money supply"and "M3" which account for about half of keywords.


ECB Warns of Inflationary Dangers - BoE Raises Key Rate

Thursday, July 05, 2007

European markets showed little reaction to today's interest rate decisions. The Bank of England (BoE) raised its key lending rate by 25 basis points to 5.75%, continuing the global upward spiral in interest rates. The BoE based its decision on upside risks in inflation. The European Central Bank (ECB) stayed put and left the key lending rate unchanged at 4% despite a runaway monetary supply. ECB president Jean-Claude Trichet said that credit in the Euroarea was ample at present high levels. He also hinted that the next G7 meeting could release a statement on exchange rates. The Euro softened 70 ticks to $1.3590 after trading as high as $1.3660 with traders expecting no more action on behalf of the ECB until September.
In his introductory statement Trichet said economic conditions were favorable in the Euroarea, but there were some potential risks.
"The risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. At medium to longer horizons, the balance of risks remains on the downside, owing mainly to external factors. These relate in particular to fears of a rise in protectionist pressures, the possibility of further increases in oil prices, concerns about possible disorderly developments owing to global imbalances and potential shifts in financial market sentiment."

While inflation has remained a decimal below the ECB's upper target range of 2% the longterm explosion of monetary expansion shows no signs of a slowdown. Monetary supply M3 growth picked up again and rose from 10.4% to 10.7% in May. The ECB's target growth rate for M3 is 4%.
Despite the surge in M3 the ECB did not have much of a choice at today's governing council meeting. Europe's economic expansion bases partly on a not too strong Euro as further appreciations of the common currency would hamper export growth. Trichet conceded that the situation of the individula economies of the Euro members present a very varied picture but did not go deeper into that matter.
It can be expected that the ECB will stay on hold unless energy prices darken the inflationary outlook again, pushing the official consumer price appreciation beyond the 2% target. This is already the case. Crude oil traded above $72 on Thursday.

7/4/7 - Does the USA Have a Reason To Celebrate?

Wednesday, July 04, 2007

Taking a gauge from Wall Street Americans have every reason to celebrate Independence Day. The Dow Jones is only a few points from its all-time record.
Recent headlines are no reason to celebrate, though.
America's popularity abroad has plummeted to new lows. Mind you! This is the opinion on the USA. Its inhabitants are still well-liked in most places.
The highest ranking administration official ever caught red-handed, Scooter Libby, will know less about jail than Paris Hilton (cheap trick on my side to boost pagehits) does now. 30 months for endangering an agents life. A mother in Virginia was handed a 27-month sentence for serving beer at their sons 16th birthday. Seems justice is a bit out of step with reality.
Both the president and his vice briefly tried to argue that they were not part of the executive branch. Excuse me!?
The USA, led by a self-declared "compassionate Christian," is home to the largest and fastest growing prison population in the world. According to the DoJ the number of inmates rose from 411 to 497 per 100,000 people which comes to a total figure of 2.245 million at mid-year's count. What a waste of money by an overly harsh justice system.
At the same time civil liberties and constitutional rights have been attacked by the current administration as never before. With a salami-slicing tactic privacy is eroded and I am startled by the immense force of judicial powers shown on US TV stations 24/7. Has anybod ever run the numbers on the extra costs for business coming from excessive security demands for all and everything?
Thanks to YouTube one can see a very different picture than the official version of propagandagress about the situation in Iraq. One thing can certainly be ruled out: This ongoing war did not stabilize energy markets. Oil closed above $71 before the holiday.
It may be a non-representative sample, but on my travels in the last 11 months I have encountered only very few Bush fans. As India is nowadays full with Israelis who chill out after their time in the army I did not meet anyone who did not see Bush rather as a threat than a benefit to Israel. Indians also mostly raised concerns but point out that their economic boom roots to a good deal in the outsourcing of US jobs in the service and software sector.
Sentiment has changed in Italy, France or Spain. It used to be laissez-faire around the Mediterranean. Now the talk is first about inflation, second about real estate prices and third about how the White House has managed to destroy the good image of the USA within the last 6 years.
Bush may still have some friends in Africa, but I would say the impoverished and disaster-ravaged continent welcomes everybody with money in his pockets. As Bush has not much more than a lukewarm handshake to offer China will be up for the grabs to be made in commodity-rich Africa. In 2006 the USA spent a mere $1.4 billion on development aid for sub-Saharan Africa. Almost half of that was debt-relief for Nigeria, the continent's biggest oil producer. Worldwide funding for this region declined in 2006 by $3 billion to $104 billion.
China will be the benefitting party. Reading regional West African newspapers I found business pages pickled with stories on bilateral joint ventures with China. As China cares little about human rights or industrial safety standards they will have favourable terms of trade, giving them an edge in the commodity sector before India could take the same route to East Africa which is predominantly English speaking - in contrast to the French speaking upper west coast. Both China and India need raw materials to satisfy the domestic needs of an emerging consumer society.
Domestically the USA is threatened by an oncoming financial crisis - suddenly hedge funds have become more closely associated with gigantic losses than with high alpha returns.
The number of worrisome reports on the housing sector is growing with every day - and it may destruct the base of the US economy, consumers already overstretched before the next re-adjustment of their first and second mortgages. The Mortgage Lender Implode-O-Meter provides a much more dramatic picture than what the Federal Reserve sees in its "anecdotal evidence." I would rather call it the beginning of a stampede out of collateralized and securitized subprime loans that will lead to a credit crunch despite historically still low interest rate levels.
All goes down - except the Dow Jones, which seems to prove the rule that markets can stay much longer irrational than expected. The ability to hold on to its lofty levels may be based on the oldest trick in the world of fiat currencies. According to Shadowstats.com, which calculates money supply M3 growth since the Fed suspended it, M3 currently grows at a rate of more than 13%, leaving gamblers with more than enough cheap liquidity. With bond markets already fearing a credit crunch at this stage it can be safely guessed that the worst is yet to come and we are not ver yfar on this road yet.
Other than greenbacks the USA does not have any real export hits and the current account deficit of $759 billion in 2006 will most certainly be surpassed this year, thanks to a weaker dollar. The USD index is not far from its historical lows and a break would very probably incur further sales of the dollar.
With no visible actions that would point towards an end of the most lavish spending of all presidents one wonders if there is another exit strategy than a collapse of the dollar. Now American individuals are taken to account for their overspending. this point will come for the nation too.
I would not become over-bearish, though. The US still offer the biggest and most liquid of all capital markets. Those trillions that look for another safe haven will not succeed in finding such with today's market structures around the world that are all based on permanently low rates and a misaligned risk-reward perception of professional investors. Or simply said, there are no cheap assets worth their name around before we will have seen a rather implosive action in securities prices in the near future when investors reallocate funds according to their new sensitivity for risk.

Grandpa, Where Should I Put My Money?

Tuesday, July 03, 2007

GRANDSON (25 years): Gran'pa, where should I put my money? The newspapers are filling up with worrying reports on the economy. I hear this word inflation on every corner and people say that the problems in the mortgage/housing sector may cause a spill-over effect into those sectors that are not yet affected. So far I see the stock market is doing well - brokers call it "to climb a wall of worries" - but the rapid rise of yields in bonds may indicate that this may go sour soon too?
GRANDPA (100 years): Well my boy, I should start with expressing my pleasure that you not only consume news but digest them as well. I agree with you that a sound economy looks different in comparison to what the facts are telling us. Actually, a lot of things remind me of the times when I was your age. You will have heard of the roaring 20s, when first a property boom and then the then-greatest bull market in history shaped a general feeling of perma-optimism...
GRANDSON: Gran'pa, sorry to interrupt you; I know what a bull market is, but now people start talking increasingly of the possibility of a bear market. What is a bear market?
GRANDPA: I can't blame you boy. You were born at the beginning of the longest bull market in history that propelled the Dow Jones Industrial Average from 1,000 to more than 13,000 points as of today.
GRANDSON: Did our economy expand 13-fold in this time?
GRANDPA: No, it only grew to 4 times of the starting value.
GRANDSON: But why did stocks produce such a stellar performance then?
GRANDPA: I would call it a paradigm shift. At the time I placed my first orders I preferred companies with a high dividend yield. I remember an old rule that said when the dividend yield of the Dow Jones components fell below 3% it was a signal to exit the market.
GRANDSON: I don't know many companies that pay such dividend yields.
GRANDPA: Then it may be a wise move to exit such positions not fulfilling this criterium.
GRANDSON: But some of these companies resort to other options in order to raise shareholder value. Home Depot recently announced a $22 billion share-buyback and I have read in modern economic books that this is actually benefitting not only shareholders but the company as well.
GRANDPA: Boy, when a company finds no other profitable uses for excess capital, don't you think that they should rather pay a special dividend when they don't know where to invest capital more eficiently and leave it up to shareholders whether they use this money to buy more stocks of the company or whether they put it at use elsewhere, expecting a higher return in other investment classes?
GRANDSON: So you mean that I should ride this latest fashion, called mergers & aquisitions. I have seen friends making huge bundles overnight by betting on potential takeover candidates
GRANDPA: Beware, a bounce in M&A often signals the end of a bull market. 7 out of 10 mergers don't work out the way originally envisioned. Also note that a lot of companies have recently pulled their plans to issue more debt in order to finance aquisitions, citing unfavourable market conditions which I translate into a gap between yields offered and yields expected.
GRANDSON: But yields have risen this year, making bonds more attractive, don't they?
GRANDPA: Don't forget that we are leaving a period of historically low rates and yields behind us. A 10-year yield just above 5% is nothing that gets me excited. When you look back you will see that it takes 8% yield on 10-year Treasuries to massively attract flows from stocks into bonds.
GRANDSON: 8% yield is something I have not seen in a long time, not even with riskier issuers...
GRANDPA: That's because investors have tended to completely disregard risk in the recent past which led to the smallest spreads between investment-grade bonds and issues below that in history.
GRANDSON: I have learned that in an environment of rising yields bond prices will fall. Is there any way to preserve my capital in such an environment?
GRANDPA: Basically you are left with two choices. You can either buy Floating Rate Notes (FRN) where the coupon is tied to a reference interest rate or you can buy TIPS, Treasury Inflation Protected Securities, that are tied to the US inflation rate. But remember that TIPS only protect the coupon payments. Every $100 of your invested principal will be worth only $82 after 10 years, based on an optimistic inflation expectation of 2% annually. If inflation rises to 3% you will be left with only $73 in real terms. Given the latest annualized inflation figure, which was 8.4%, yout initial investment will be worth only $41 after 10 years.
GRANDSON: That doesn't sound like a great deal. So what about the stock market? Wall Street so far seems resilient to act on that continuous stream of bad economic news.
GRANDPA: It depends on your interest rate outlook. If you expect the Federal Reserve to cut rates later this year to prevent the economy from going into a recession the stock market may see further gains. But I am worried about the corporate profit outlook because consumers are overstretched and are likely to spend less in the future in order to repay their higher mortgages. Higher interest rates also mean that companies have to spend more on their borrowings, diluting their earnings further.
GRANDSON: But the stock market has held up very well depite rising rates...
GRANDPA: Because people buy stocks on margin. The level of stocks bought on margin is the same as it was in 2000, before the Dow receded several thousand points, only to come back on the wings of the lowest interest rates in the last 60 years. Also note that this market has not seen a 10% correction since which is very unusual but may be explained with the easy and cheap credit of the past couple of years.
GRANDSON: Even in a bear market, as you seem to anticipate it, there are stocks that can buck the trend.
GRANDPA: This is true. In today's geopolitical circumstances we can only be sure of two things. People will not stop to eat and they will not stop to use all other forms of energy.
GRANDSON: So maybe I should allocate more funds into such stocks?
GRANDPA: I would be careful with stocks. I'd prefer to invest directly into commodities. This shields you from potential management failures at a company while you still reap the gains of higher prices. Always keep in mind that the USA has become a net food importer and that it will run into energy problems once Venezuela will have finished its pipeline to the Pacific coast in order to halve the distance for oil exports to China.
GRANDSON: As you mention China; what's your position on China?
GRANDPA: That's the shortest possible investment advice: Buy what China buys, sell what China sells. China sucks up commodities worldwide and turns them into finished goods.
GRANDSON: I have the impression that everybody and his pal is so focused on China that there is no spare room for thinking about India. Aren't they doing even better than China?
GRANDPA: India certainly has a better grip on inflation, thanks to their central bank. It also has a much bigger middle class than China, numbering more than 300 million people. It has the same problems as China as the country has only scarce commodities resources and virtually no domestic energy reserves. I tend to favor India because it is a democracy. China has only liberated the economy. But I would wait for at least a 30% correction that will come on the heels of foreign investors pulling out when all stock markets will go into reverse gear. Emerging markets always got hit more badly in a general downturn.
GRANDSON: Then what about Europe? The Euro is close to a record high and EU politicians see an upturn just around the corner and inflation has come back to the ECB's target range.
GRANDPA: If you can explain the miracle that industrial producer prices are going up at a much faster rate while official consumer prices are stable again, then I can learn something from you.
GRANDSON: We have now ticked off so many investment classes. Is there nothing where you see a chance that I could get rich with?
GRANDPA: I have mentioned it before. Buy commodities. Until now less than 10% of the global population have consumed most commodities and energy for their own well-being and comfort. I see a paradigm shift here as more than 5 billion people in the industrializing world will demand their fair share of the world's resources. As long as China and India do not fall on their nose, prices have only one way in the long term and that is up.
GRANDSON: OK, I get that one. I also learned that there is risk in almost every asset class these days. And you don't have to tell me more to know that the picture of the housing market, which was the driver of the economic expansion in the last six years, gets worse from day to day. Is there no place left where my money will bring heathy returns?
GRANDPA: Those gold ounces I bought in 1930 for $20 each will still buy me a complete man's outfit today. An ounce of gold will buy you the same amount of grain as it did 4 centuries ago. I have not come across a better inflation hedge.
GRANDSON: So you mean gold is the safest investment?
GRANDPA: 5,000 years of monetary history have proven that gold is the universally accepted currency #1 which never lost its value. Show me a paper currency with the same track record. There is none. No fiat currency has ever been around for longer than a human's lifespan. The Federal Reserve dollar will not be an exeption once more investors find out that it is backed by nothing.
GRANDSON: And what about silver?
GRANDPA: Seems you're looking into potential winners. Silver is not only the other monetary metal held in honour for the last 5,000 years, but it has a lot of industrial uses too. The supply-demand deficit in silver has not diminished over the last 16 years and it is also underpriced in a long-term comparison with gold. Historically the gold-silver ration had fluctuated around 1:15. Now we are above 1:50. This gap will close. But don't ask me when. Remember always that markets can stay longer irrational then investors can remain solvent.

Wikinvest Wire