Month: March 2014

Source: Brian Sylvester of The Gold Report  (3/12/14)

https://www.theaureport.com/pub/na/derek-macpherson-is-it-a-love-affair-or-a-tryst

Investors have again begun flirting with the junior mining sector. Will it lead to a love affair or is it just a tryst? Derek Macpherson, a mining analyst with M Partners, believes it is still too early to be taking on high-risk, high-leverage names. In this interview with The Gold Report, he advises investors to carefully choose low-risk companies, even in this early stage of a rising gold price environment, and names a handful that investors could fall in love with.

The Gold Report: Canada’s Globe and Mail reports that gold miners wrote off $17 billion in 2013. Does that encourage investors seeking greater exposure to precious metals to ignore the bigger names and look more closely at small-cap gold and silver equities?

Derek Macpherson: I think it makes investors a little more selective. During the last upturn in the gold market many of the big-cap companies purchased and built large, lower-grade projects; these projects have seen the majority of the write-downs over the last two years. This does not necessarily mean that there are no good big-cap mining equities; but it forces investors to be selective. However, many of the small-cap equities have undeservedly sold-off with their larger peers. We believe this creates an opportunity for investors to selectively add to their portfolios.

TGR: The junior mining sector is seeing some renewed interest from suitors, but is not yet the market darling. Do you believe this investor flirtation is likely to lead to a long-term love affair or is it more akin to a tryst?

DM: I think it’s a little too early to tell. We’re at the first or second date stage and we don’t know whether this is the one or if it’s a short-term fling. It is still too early to be investing in high-risk, high-leverage names. It fits well with our investment thesis and what we talked about the last time we spoke, which was that we like low-risk names even in the early stages of this rising gold price environment.

TGR: Low-risk names. Would you deem this a value sector right now?

DM: There are definitely some value plays in the sector, names that have been unjustly sold off, and there are some opportunities to catch them as they come back and their businesses recover.

TGR: In your last interview with The Gold Report you said, “In a rising gold price environment there was more room for error, and setbacks didn’t have as large an impact on project economics.” We’re now in a modest rising gold price environment yet a number of companies have trimmed costs including some that you cover. Is this a sweet spot?

DM: If we are in a longer-term gold price rally, the best time to get in is at the very beginning. The thing that drives up or is perceived to drive up the gold price is inflation, which is also what drives up underlying costs, something we saw in the last cycle. Early on it was a great time to get in and it was a great time to build projects. That’s when the most money was made. Then as the market got a little bit more frothy, we saw costs start to chase the gold price up and margins started to contract. Now is the time for investors to start taking a second look at the mining equities and start to invest.

TGR: Nonetheless, these equities present significant risk. Grade, jurisdiction and a simple mine plan/geology are common ways companies mitigate investor risk in this sector. In your coverage universe, how would you rank those?

DM: We view grade and simple mine plan/geology as 1A and 1B. With high grades there is more room for error, helping derisk a project. Similarly, a simple mine plan, like most heap-leach projects, also creates that lower risk environment. Companies don’t necessarily need higher grades for that. Second would be jurisdiction. A company can take a little bit more jurisdiction risk with minimal impact, but if the grade or the mine plan doesn’t work, the project doesn’t work.

TGR: Are there some other risk mitigators that ought to be included in that list?

DM: There are two other things that investors sometimes overlook: management and the balance sheet. They will see a great project with great grade, but they will often overlook the management team. A company needs a strong management team to deliver on a project’s potential. In this environment, there are good management teams out there that have done it before, which help derisk a project. The second thing that sometimes is overlooked is the balance sheet. Investors definitely want companies with balance sheet flexibility—low debt and a strong cash balance—which helps derisk projects, particularly as they are ramping up.

TGR: Some of these junior equities have seen dramatic price rises since the beginning of the year and even before that in some cases. There was a bit of a rally in late 2013. How should investors approach those names? With caution?

DM: Investors need to make sure a company has strong fundamentals and a valuation that should allow the rally to continue. Some of those names that have really moved in late December and early January were coming off tax-loss selling. We saw a number of equities rally on that alone, going down toward the end of 2013 with tax-loss selling and then rebounding in early 2014. From a trading perspective, after a strong rally investors want to wait for equities to take a pause, or even pull back a little, before stepping into names that continue to have attractive valuations.

TGR: What are some of what you would consider lower-risk gold names that you cover?

DM: The two low-risk gold names that we continue to like are Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) and Lake Shore Gold Corp. (LSG:TSX). We like Klondex for its exceptionally high-grade resource, the strong management team and excellent jurisdiction. Klondex is based in Nevada and Paul Huet leads the management team. With its recent acquisition of the Midas mine and mill from Newmont Mining Corp. (NEM:NYSE), Klondex is well positioned to deliver on a promise of the high grade at Fire Creek.

TGR: How easily will Midas fit into the development plan at Fire Creek?

DM: Midas fits in very easily. Klondex has been toll milling its ore at the Midas mill prior to the acquisition. The Midas mill wasn’t running at full capacity, so there’s opportunity to increase throughput with ore from Fire Creek. There is also exploration upside at the Midas mine; Klondex may be able to extend the mine life there as well.

TGR: Investors watching Klondex are eagerly anticipating its preliminary economic assessment (PEA). What do you expect to see?

DR: I think the PEA is going to have strong economics not only because of the high grades at Fire Creek but also because a lot of the capital has already been spent. It’s a straightforward mine and Klondex has the expertise and experience to develop it. Klondex has already acquired the milling infrastructure, reducing the initial capital commitment.

TGR: Lake Shore Gold has lowered costs and improved its grade in four straight quarters. Has Lake Shore Gold turned the corner?

DM: We think Lake Shore Gold is starting to show signs that it has. We are seeing the culmination of several years of work to get Lake Shore to where it is. The company finished the mill expansion in late 2013 and at the same it finished the development work it needed to do at Timmins West and at Bell Creek so that Lake Shore Gold could access its higher grades on a more consistent basis.

Our site visit in November 2013 demonstrated to us that Lake Shore Gold is focused on improving grade control at the Timmins West complex in order to keep head grades between 4.5 and 5 grams per tonne, where they need to be to keep the project economic over the medium term. Improving grade has directly resulted in its cost control efforts bearing fruit.

TGR: What are some other gold names you cover that could be poised for growth?

DM: On the growth side we continue to like Temex Resources Corp. (TME:TSX.V; TQ1:FSE). Temex has very high grades at Whitney and there are a couple of key catalysts coming in the near term. Besides drill results we probably will see an initial PEA later this year. We expect to see the drills start up again this summer, providing an opportunity to expand on a high-grade potential in a very strategic location.

The other gold name we just started covering that we think has an opportunity to grow is Marlin Gold Mining Ltd. (MLN:TSX.V). The company is at the final stages of building its La Trinidad mine in Mexico; we expect the first gold pour in the coming weeks. With that gold pour Marlin is going to make the transition from developer to producer. The valuation could easily reflect the developer multiples; there’s an opportunity for the stock to rerate.

TGR: You’re not scared off of Mexico based on the new royalty?

DM: I think the new royalty is priced into most stocks and companies have come to terms with the impact. The Mexican government realizes how important mining is for the long-term health of its economy, so I don’t think this is a case where we are going to see a series of mining tax increases.

TGR: What should investors expect from La Trinidad once it’s reached commercial production?

DM: We’re expecting La Trinidad to produce around 50,000 ounces gold a year once it ramps up. This year it’s going to be a little bit lower grade and then it’s going to start delivering on its promise. Marlin is unique. For a heap leach it has relatively high grades with the head grade forecast around 1.5 grams per tonne in 2015 and beyond.

TGR: Will that generate free cash flow?

DM: We expect Marlin to generate material free cash flow in the $20–25 million a year range at current gold prices. Being a high-grade producer with significant free cash flow sets Marlin up to either grow via acquisition or through exploration. The area surrounding La Trinidad has great potential and has seen limited exploration in recent years as the company has focused on building La Trinidad.

TGR: What are some new names that are under coverage now that weren’t when we talked to you in October?

DM: A couple of the names that we’ve added to our coverage list besides Marlin are Rambler Metals & Mining Plc (RAB:TSX.V; RMM:LSE) and Atico Mining Corp. (ATY:TSX.V; ATCMF:OTCBB). Rambler is a high-grade base metal mine in Newfoundland, a very safe jurisdiction.

Rambler is operating the Ming mine, which was a past producer. The company brought it back into production over the last couple of years and now has reached the point where it is generating free cash flow, as development spending has declined. We’re going to see Rambler’s balance sheet improve by the end of March as it pays off what’s remaining of its Sprott loan. The other advantage that Rambler has is the Nugget Pond mill, which has the ability to process both copper-rich and gold-rich ores, putting it in a unique position in Newfoundland where there are a lot of interesting deposits, but many of them would not support their own milling infrastructure. Having a permitted mill puts Rambler in a position where it could be a strategic acquirer of assets.

TGR: You said the other company was Atico.

DM: Atico is a high-grade copper-gold mine in Colombia that’s on the verge of seeing its first production results. We have followed the story for a while and launched coverage early in January. Atico was able to exercise an option and transition from being a developer/explorer to being a producer.

The company owns 90% of the El Roble mine, which has been in production for almost 20 years. The next key catalyst is the Q4/13 financial results, which are going to include about 30 days of production from the mine. Those 30 days will show the market that this company is shifting to being a producer. Again, similar to some of the other companies we have talked about in that transition stage, Atico is still being valued as a developer. It is trading at 1.1 times 2015 earnings before interest, taxes, depreciation and amortization (EBITDA), which puts it at a steep discount to producing peers.

TGR: Actually, 320 tons per day (320 tpd) is a pretty small operation. Is that ever going to get above the 1,000 tpd mark?

DM: The company plans to expand the mill to 650 tpd by the end of the year. Once you get to 650 tpd you have a fairly reasonable operation. Because Atico has very high grade, it doesn’t need a lot of throughput to generate meaningful free cash flow.

TGR: Will they use that to expand its footprint in Colombia?

DM: I think the plan is to reinvest some of that free cash flow into the larger property. Exploration has been very limited on the property; it has really focused on the main ore body. As Atico generates free cash flow and gets the current operations to a steady state, it is going to start stepping out and looking wider on the property. The mill itself is permitted for 2,000 tpd, so exploration success is likely to lead to an expansion.

TGR: You cover some companies that are now mining base metals. What’s a brief forecast for zinc and copper?

DM: We continue to prefer zinc to copper. With a number of large zinc mines coming offline and few ready to be built, we think that there’s an opportunity for zinc to recover. While we are bullish on zinc in the medium term, near term we are only modestly bullish because of the amount of inventory that’s in the LME warehouses that has to be worked off before the likely supply deficit starts to impact pricing.

For copper there are a number of large projects sitting out there. While some of them have been delayed and that takes the pressure off the oversupply in the near term, any kind of bullish move in copper could move those projects back into the construction pipeline. We’re a little bit more neutral on copper and its pricing going forward.

If investors are going to be in that mid-cap base metals space they need to stay with companies that have material growth to support the current multiples. We continue to like Imperial Metals Corp. (III:TSX) andTrevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL); both have material growth on the horizon. Trevali plans to have its New Brunswick assets come on-line in 2015.

Saving that, we suggest that investors look a little further down cap and look at the discounted valuations in the base metals space. Two companies that we cover there are Atico and Rambler.

TGR: Does Trevali have sufficient cash to act as a cushion in case of lower prices?

DM: Trevali’s assets give it a pretty reasonable all-in cost based on a zinc net of byproducts basis. In 2015 we model Trevali being at US$0.47/pound of zinc net of byproducts, which gives it a reasonable margin to operate at current zinc prices. The investment opportunity with Trevali is unique because it’s one of the only zinc producers listed on the Toronto Stock Exchange, so any kind of run in zinc price and it’s going to catch a natural bid.

TGR: Trevali announced commercial production at Santander at the beginning of February. That’s the first step in derisking that name as a whole. What’s the next step?

DM: The next step for Trevali is the New Brunswick PEA. It will give investors a glimpse into what the economics look like for the restart of Caribou and what the company can look like in 2015 and beyond. I think that is the next key derisking step for investors.

TGR: Imperial Metals is an established company. Where does it fit into Canada’s base metals producers?

DM: Imperial is going to end up being one of the larger mid-cap producers once Red Chris is ramped up to the 30,000 tpd level. We’re looking for its production profile and free cash flow to more than double once Red Chris is in commercial production. That puts Imperial at the top end of the midtier space. While we only model a 30,000 tpd asset at Red Chris long term, we think that the opportunity exists for Imperial to materially expand production, but there are limited details on what that may look like.

Imperial is looking at May 2014 for commissioning. We model Q3/14, which is about a month later, but Imperial so far has been delivering on its critical timeline items. The key thing that we’re watching for is the Iskut Extension of the power line. Imperial is completing that themselves and is scheduled to be finished in May 2014, the same time commissioning is supposed to start. We view that as probably the highest risk to both the project timeline and the budget.

TGR: Any parting thoughts to leave with us?

DM: We’re starting to see some positive signs in the precious metals space. While we like what we’re seeing currently, I think investors should still continue to be selective and focus on low-risk names in this early stage. If this is the early stage of a longer-term rally, we think that’s where the money is going to flow first.

TGR: Thanks for your insights.

Derek Macpherson is a mining analyst at M Partners; before joining M Partners he worked in mining research for a bank-owned investment dealer. Prior to entering capital markets, Macpherson spent six years working as a metallurgist. Macpherson has a Bachelor of Engineering and Management in materials science and a finance-focused MBA.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the company mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Klondex Mines Ltd. and Trevali Mining Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Derek Macpherson: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Klondex Mines Ltd., Atico Mining Corp.Temex Resources Corp. and Trevali Mining Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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By John Mauldin

 

Today’s Outside the Box is unusual in that it isn’t an original document but rather a summary of a client letter from one of the greatest investors of our generation, Seth Klarman, who is also one of the more reclusive – he rarely speaks in public or grants interviews. He is known for his very deep value investing style and willingness to pursue value where others get very nervous.

This last year he returned $4 billion cash to his clients (from a fund in the $30 billion range). Not difficult for a hedge fund, you may say, but this is what a good value investor does when there aren’t many opportunities. He won’t have any trouble raising cash if he decides he wants more at some point, as his fund is easily in the top-performing bracket by almost any measure. Some refer to him as the Warren Buffett of his generation.

I think the author of the piece you’re about to peruse, Mark Melin, did a pretty good job of giving us the highlights and a little color from what is really a thought-provoking letter from Seth Klarman.

Tonight I find myself in Houston, where I flew down for a meeting. I am always exploring ways to serve you better and help you protect yourselves from the consequences of the Code Red policies of central banks and governments. This is not a short-term problem; it will be with us for some time. More to come as we work through a hundred logistical issues.

The last few issues of Thoughts from the Frontline have sparked the most comments and letters of any column ever, including healthcare. It seems income inequality is a very sensitive subject, and I have heard from you, both pro and con. Some remarks have been merely dismissive but most have been quite thoughtful. And I was pointed to LOTS more research that I now have to cover for this week’s letter.

One thing I can count on is that readers will let me know when I miss something. I mentioned in passing at the end of last week’s letter that I had dinner with Senator Rand Paul in DC last week and that our conversation was conducted under Chatham House rules. As it turns out that is not quite the case. I actually had a very polite letter from DeAnne Julius, a former chairman of Chatham House (and a former member and founder of the Monetary Policy Committee of the Bank of England, CIA analyst, World Bank economist, etc. – one very busy lady!). She wrote:

Not to be pedantic, but there is only ONE rule. More importantly, that rule is that participants are free to use the ideas and information they gain from the discussion but NOT to identify any of the speakers or participants. In other words, the rule is nearly the opposite of what you say below. If the content of the discussion is not to be revealed, then the discussion is “off the record” rather than “under the Chatham House rule.”

Sigh. I knew that. David Kotok gives us a lecture on the Chatham House rule every summer at the beginning of our Maine “Shadow Fed” meetings. At the end of my letters, when I write my personal notes, I sometimes write “on the fly” and don’t stop and think about what I am saying. And when I blow it, I hear from very nice people who politely correct me.

DeAnne did offer to arrange for me to come to Chatham House and conduct a discussion group, after which I presume I could actually state correctly that I was in a meeting held under the Chatham House rule. I may take her up on that.

It is time to hit the send button. I am making preparations to leave for Argentina and South Africa  next week and be out for 25 days. But I will be in contact and writing and reading away. And I will have a new wifi-enabled Moto X phone that in theory will enable me to make and receive calls from even the remote Andes essentially for free. The whole thing is remarkably cheap and is a shift in the cost paradigm for cellular. And the phone looks to be cool, although I have to learn to speak something called Android as opposed to iPhone. I am told that it is easier to learn than Spanish, so maybe this old dog can figure it out.

Have a great week and enjoy the spring weather, whenever it gets to you. It is perfect in Dallas and Houston.

Your always looking for value analyst,

John Mauldin, Editor
Outside the Box [email protected]

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Seth Klarman: Investors Downplaying Risk “Never Turns Out Well”

By Mark Melin, March 04, 2014, 2:00 pm

ValueWalk.com

Major hedge fund trader says the QE stimulus bubble will burst… at some point

In his letter to investors, Seth Klarman noted that “most” investors are downplaying risk and this “never turns out well,” noting that most people are not prepared for anything bad to happen. “No one can know what the future holds, but any year in which the S&P 500 jumps 32% and the NASDAQ Composite 40% while corporate earnings barely increase should be cause for concern, not further exuberance,” Seth Klarman’s investor letter said. “It might not look like it now, but markets don’t exist simply to enrich people.”

Noting that stock markets have risk and are not guaranteed investments may seem like an obvious notation, but against today’s backdrop of never before witnessed manipulated markets Seth Klarman sagely notes “Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.”

When will this happen? “Maybe not today or tomorrow, but someday,” he writes, then starts to consider what a collapse might look like. “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ Just when investors become convinced that it can’t get any worse, it will. They will be painfully reminded of why it’s always a good time to be risk-averse, and that the pain of investment loss is considerably more unpleasant than the pleasure from any gain. They will be reminded that it’s easier to buy than to sell, and that in bear markets, all to many investments turn into roach motels: ‘You can get in but you can’t get out.’ Correlations of otherwise uncorrelated investments will temporarily be extremely high. Investors in bear markets are always tested and retested. Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

Seth Klarman’s focus on Fed

Seth Klarman then once again turned his sharp rhetorical knife to the academics that run the US Federal Reserve who seem to think that controlling free markets is a matter of communications policy.

“The Fed, in its ongoing attempt to tamp down market volatility as much as possible decided in 2013 that its real problem was communication,” Seth Klarman dryly wrote. “If only it could find a way to communicate to the financial markets the clarity and predictability of policy actions, it could be even more effective in its machinations. No longer would markets react abruptly to Fed pronouncements. Investors and markets would be tamed.” The Fed has been harshly criticized by professional traders for its lack of understanding of real world market mechanics.

This lack of understanding is a concern given that the Fed is taking the economy into uncharted territory with unprecedented stimulus. “As experienced traders who watch the markets and the Fed with considerable skepticism (and occasional amusement), we can assure you that the Fed’s itinerary is bound to be exceptional, each stop more exciting than the one before,” Seth Klarman wrote, sounding a common theme among professional market watchers. “Weather can suddenly turn foul, the navigation faulty, and the deckhands hard to understand. In short, the Fed captain and crew are proficient in theory but lack real world experience. This is an adventure into unexplored terrain, to parts unknown; the Fed has no map, because no one has ever been here before. Most such journeys end badly.”

While the mainstream media is loaded with flattering articles of the Fed’s brilliance in quantitative easing and its stimulus program, the real beneficiaries of such a policy are the largest banks. Here Seth Klarman notes they have placed the economy at great risk without achieving much reward. “Before 2009, the Fed had never bought a single mortgage bond in its nearly 100-year history,” Seth Klarman writes of the key component of the Fed’s policy that took risky assets off the bank’s balance sheets. “By 2013, the Fed was by far the largest holder of those bonds, holding over $4 trillion and counting. For that hefty sum, GDP was apparently raised as little as 25 basis points in the aggregate. In other words, the policy has been a near-total failure. Bernanke is left arguing that some action was better than none. QE in effect, had become Wall Street’s new ‘too big to fail’ policy.”

Seth Klarman: What do economists know?

There has been considerable discussion that the academic side of the economics profession has little clue how markets really work. Economic academics, who now make up the majority of the Fed governors, often look at the world from the standpoint of a game of chess, where one can explore different options and there is now a “right” or “wrong” approach to market manipulation.

“The 2013 Nobel Memorial Prize in economics was shared by three academics: two were proponents of the efficient market hypothesis and the third was a behavioral economist, who believes in market inefficiency,” Seth Klarman wrote. “We suppose that could be considered a hedged position for the awards committee, one that would never occur in the hard sciences such as physics and chemistry, where a prize shared among three with divergent views would be an embarrassing mistake or a bad joke. While a Nobel Prize might well be the culmination of a life’s work, shouldn’t the work accurately describe the real world?”

Another interesting insight on the topic was to come from David Rosenberg, Chief Economist and Strategist at GluskinSheff, who recently wondered “[A]m I the only one to find some humour, if not irony, in the fact that the three U.S. economists who won the Nobel Prize for Economics did so because they ‘laid the foundation for the current understanding of asset prices’ at the same time that these asset prices are being determined less today by market-determined forces but rather by the distorting effects of the unprecedented central bank manipulation?”

Seth Klarman: Fed Created Truman Show Style Faux Economy

Baupost Group, among the largest hedge funds in the world, returned $4 billion in assets to clients at the end of 2013 because it didn’t want to grow too quickly and dilute performance. Klarman’s fund, which in 2013 had a high of 50% of his portfolio in cash, up from 36% in 2012, posted 2013 returns in the mid-teens consistent with the fund’s nearly 22-year track record.

Seth Klarman on Baupost’s returns

Saying the fund “drew a line in the sand” when it decided to return roughly $4 billion to clients at year end, Seth Klarman reflected on the decision, saying he wanted to control the fund’s head count, noting “we could not allow the firm to grow without limit. We are wise enough to know a good thing when we see it, and cautious enough to want to cherish, protect and nurture it so that we might maintain its essential qualities for a very long time.” A 50% cash position for a hedge fund might be construed as an indication the fund has grown to the point it was having difficulty allocating all the capital in appropriate trades.

He noted the 2013 performance occurred “despite the drag of large, zero-yielding cash balances throughout the year.” Klarman, author of Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, said the performance resulted from “considerable progress in event-driven and private situations, and at least some uplift from the strong equity rally. Distressed debt, public equities, structured products, and real estate led the gains.” Tail risk hedges, the only material area of loss in the portfolio, cost approximately 0.2% as the fund reduced exposure to distressed debt, structured products, and private investments while public equity exposure increased modestly.

Market bifurcation {the basis for being bullish on equities}

In 2013 Seth Klarman noted the market bifurcation, which he describes as “a momentum environment of market haves (which we avoid spending time on) and have-nots (which receive our undivided attention) – coupled with our energetic sourcing efforts and valued long-term relationships,” and he expressed optimism for the fund in 2014 amidst what might be a stock market subject to individual interpretation. “In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test,” he wrote. “What investors see in the inkblots says considerably more about them than it does about the market.”

Seth Klarman noted that those “born bullish,” those who “never met a stock market they didn’t like” and those with “a consistently short memory,” might look to the positives and ignore the negatives. “Price-earnings ratios, while elevated, are not in the stratosphere,” he wrote, stating the bull case. “Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town. The Fed will continue to hold interest rates extremely low, leaving investors no choice but to buy stocks it doesn’t matter that the S&P has almost tripled from its spring 2009 lows, or that the Fed has begun to taper purchases and interest rates have spiked. Indeed, the stock rally on December’s taper announcement is, for this contingent, confirmation of the strength of this bull market. The picture is unmistakably favorable. QE has worked. If the economy or markets should backslide, the Fed undoubtedly stands ready to once again ride to the rescue. The Bernanke/Yellen put is intact. For now, there are no bubbles, either in sight or over the horizon.

Seth Klarman’s market analysis

Like many of the best market analysts, Seth Klarman looks at both sides of the issue, the bull and bear case, in depth. “If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about,” he wrote. Citing a policy of near-zero short-term interest rates that continues to distort reality and will have long term consequences, he ominously noted “we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences,” a thought pervasive among many top fund managers. “Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings?”

As he outlined the bear case, he started to divulge his own analysis that “on almost any metric, the U.S. equity market is historically quite expensive. A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix, Inc. and Tesla Motors Inc.

As it turns out he was just warming up. “There is a growing gap between the financial markets and the real economy,” Seth Klarman wrote, noting that even as the Fed promised that interest rates would stay low, they did get out of control to some degree across the yield curve in 2013. “Medium and long­term bond funds got hammered in 2013. Meanwhile, corporate earnings sputtered to a mid-single digit gain last year even as stocks drove relentlessly higher, without even a 10% correction in the last two and a half years,” a concern among many professional traders.

When it comes to stock market speculation and jumping on the bull market happy talk, Seth Klarman notes it’s never hard to build a “coalition of willing” who are willing to climb on the bandwagon. “A flash mob of day traders, momentum investors, and the usual hot money crowd drove one of the best years in decades for U.S., Japanese, and European equities,” he wrote. “Even with the ranks of the unemployed and underemployed still bloated and the economy barely improved from a year ago, the S&P 500 , Dow Jones Industrial Average 2 Minute, and Russell 2000 regularly posted new record highs.”

Seth Klarman noted that whether you see today’s investment glass as half full or half empty depends on your age and personality type, as well as your “lifetime” of experiences. “Our assessment is that the Fed’s continuing stimulus and suppression of volatility has triggered a resurgence of speculative froth,” while citing numerous examples of overvalued internet stocks that defied value investing logic.

“In an ominous sign, a recent survey of U.S. investment newsletters by Investors Intelligence found the lowest proportion of bears since the ill-fated year of 1987,” he wrote. “A paucity of bears is one of the most reliable reverse indicators of market psychology. In the financial world, things are hunky dory; in the real world, not so much. Is the feel-good upward march of people’s 401(k)s, mutual fund balances, CNBC hype, and hedge fund bonuses eroding the objectivity of their assessments of the real world? We can say with some conviction that it almost always does. Frankly, wouldn’t it be easier if the Fed would just announce the proper level for the S&P, and spare us all the policy announcements and market gyrations?” he said in a somewhat hilarious moment that bears a degree of truth.

Seth Klarman on Europe

Seth Klarman still isn’t much of a bull in Europe, as we noted in a previous ValueWalk. “Europe isn’t fixed either, but you wouldn’t be able to tell that from investor sentiment,” he noted. “One sell-side analyst recently declared that ‘the recovery is here,’ a sharp reversal from his view in July 2012 that Greece had a 90% chance of leaving the Euro by the end of 2013. Greek government bond prices have nearly quintupled in price from the mid-2012 lows. Yet, despite six years of painful structural adjustments, Greece’s government debt-to-GDP ratio currently stands at 157%, up from 105% in 2008,” he said, noting a growing concern among fund managers regarding the government debt crisis getting out of hand.

Seth Klarman noted that Germany’s own government debt-to-GDP ratio stands at 81%, up from 65% in 2008, and said “That doesn’t look fixed to us.” The EU credit rating was recently reduced by S&P, he noted, while European unemployment remains stubbornly above 12%. “Not fixed,” he said. “Various other risks lurk on the periphery: bank deposits remain frozen in Cyprus, Catalonia seems to be forging ahead with an independence referendum in 2014, and social unrest continues to escalate in Ukraine and Turkey. And all this in a region that remains saddled with deep structural imbalances. As Angela Merkel recently noted, Europe has 7% of the world’s population, 25% of its output, and 50% of its social spending.” While he notes the problems in Europe, Seth Klarman did not rule out that opportunity might be found in the region.

Seth Klarman on Bitcoin

Seth Klarman also weighed in on Bitcoin, noting that “Only in a bull market could an online ‘currency’ dubbed bitcoin surge 100-fold in one year, as it did in 2013. Now most sell-side firms are rushing to provide research on this latest fad,” he also noted that while “bitcoin funds” are being formed, the fund is “happy to let pass us by, the thinking behind cryptocurrencies may contain a kernel of rationality. If paper currencies – dollars and yen – can be printed in essentially unlimited volumes, and just as with all currencies are only worth what recipients on any given day will exchange in goods or services, then what makes them any better than the “crypto” kind of money?”

Comparing the economy and the Federal Reserve’s management of it to the movie The Truman Show, where the lead character lived in a false, highly-orchestrated environment, Seth Klarman notes with insight, “Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they’re sure everyone else won’t stay on forever.” Then he quotes Jim Grant who recently noted on CNBC, the problem is that “the Fed can change how things look, it cannot change what things are.”

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PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop.

 

Binary options have emerged as one of the most exciting new financial instruments. There are many reasons for the popularity of binary options. First of all, it does not take a great deal of capital to open up a binary options account. Second of all, when you’re trading your binary option account, you have defined risk. You can’t lose more than the amount that you trade. The various time frames are another reason that binary options have become popular as traders can now speculate on a market with as short as a one minute time frame or expiration.

With all the buzz around binary options trading, it has become more important than ever that binary options be available on a platform like MT4. Through a select few binary options brokers, trading binary options on MT4 is now available. The MT4 platform works with binary options exactly as it does for Forex or for CFDs.

One of the biggest advantages of trading binary options on MT4 is the fact that there is complete market transparency. Unlike other binary options brokers that use a web-based interface, on MT4, you can see the underlying currency pair in real time. A trader can also utilize the charting capability so they can run analysis on the binary option. Most important of all, the trader can also utilize expert advisors that automate many or all aspects of trading.

To learn more about MT4 binary options brokers please visit www.clmforex.com

Disclaimer: Trading of foreign exchange contracts, contracts for difference, derivatives and other investment products which are leveraged, can carry a high level of risk. These products may not be suitable for all investors. It is possible to lose more than your initial investment. All funds committed should be risk capital. Past performance is not necessarily indicative of future results. A Product Disclosure Statement (PDS) is available from the company website. Please read and consider the PDS before making any decision to trade Core Liquidity Markets’ products. The risks must be understood prior to trading. Core Liquidity Markets refers to Core Liquidity Markets Pty Ltd. Core Liquidity Markets is an Australian company which is registered with ASIC, ACN 164 994 049. Core Liquidity Markets is an authorized representative of Direct FX Trading Pty Ltd (AFSL) Number 305539, which is the authorizing Licensee and Principal.

By CentralBankNews.info

By CentralBankNews.info

On Thursday, March 13th and Friday March 14th, several key releases will be made available. Among these are the initial jobless claims report, preliminary US consumer confidence report, retail sales, and business inventory data. Analysts expect US retail sales to rise by 0.2% as well as an increase in unemployment to 330,000. Business inventories are set to decrease to 0.4% and consumer confidence is forecast to come in at 81.9 points compared to 81.6 in the previous month.

There will be an interesting result for the USD as well its major crosses such as EUR/USD, USD/CNY, and AUD/USD because those nations will also see vital data coming out around the same time.  For the EUR/USD, buying or selling on the breakout would be a wise move. For AUD/USD, selling around 0.9070 would also be a wise move as the pair is likely to see rough resistance around 0.9056, which is the 38.2 Fibonacci level.

Written by Daniel Elo, www.EconomicCalendar.com

Thursday will see the release of important data from China. As China is the largest consumer of platinum, palladium, copper and many other commodities, a decrease in industrial production will see commodity prices decrease. Analysts forecast a bullish figure for industrial production. In January, production grew at 9.% compared to 9.7% the same January of the previous year. For retail sales, the median projection is a slight increase from the year before to approximately 13.5%. Buying around 6.0700 should prove to be a solid strategy with stops placed at 6.0500 with a target at 6.1540. A deep correction may also be likely in the near future, thus showing the double bottom support.

Written by Daniel Elo, analyst for www.EconomicCalendar.com

The EURUSD Consolidating After Last Week’s Rise

The EURUSD continues to be in a sluggish state. After a last week’s rise it entered a consolidation phase, trading in a tight range. Yesterday it was limited by the 1.3833 and 1.3876 levels. Thus, the overall picture remains unchanged. Inability to grow above 1.3900 will trigger profit taking as well as falling below the support level of 1.3833, so this will open the way to 1.3782—1.3720.

The GBPUSD Testing Support

Yesterday, the GBPUSD was under pressure, but falling was limited by the support at 1.6596. After testing the pound returned to the resistance around 1.6647. On the whole, the pair looks able to continue declining as well as to break through the current lows at the 1.6583 level that will lead to falling at least to 1.6500—1.6480. Growth attempts to the 67th figure should be considered as the opportunity to open short positions at the best price. A rise above will put the 1.6800 resistance at risk.

The USDCHF Can Form Base

Yesterday, the USDCHF made an attempt to increase, but it failed to rise above 0.8804. Having been here under pressure, the pair fell to the support at 0.8765, which continues to cope succesfully with its task. Thus, the probability of forming a base at current levels with the subsequent development of an ascending correction increases. In this case, in the short term, the dollar bulls may test the resistance at 0.8900, its breakout will significantly improve the prospects of the pair. Loss of the 0.8765/55 support will lead to a fall to 0.8568.

The USDJPY Testing 102.83

The USDJPY failed to continue increasing as well as to rise above the previous week’s highs at the 103.76 level. This, as expected, led to some profit taking, against this background the bears are testing the previously broken 102.83 level, acting as support. Its loss will open the way to the 101.59 level. If the 102.83 level can hold onslaught of the bears, then the bulls will be able to test 103.76 again.

provided by IAFT

By Chris Vermeulen, Technical Traders

Elliott Wave Theory – Plenty of people will freely offer you advice on how to spend or invest your money. “Buy low and sell high,” they’ll tell you, “that’s really all there is to it!” And while there is a core truth to the statement, the real secret is in knowing how to spot the highs and lows, and thus, when to do your buying and selling. Sadly, that’s the part of the equation that most of the advice givers you’ll run across are content to leave you in the dark about.

The reality is that no matter how many times you are told differently, there is no ‘magic bullet.’ There is no plan, no series of steps you can follow that will, with absolute certainty, bring you wealth. If you happen across anyone who says otherwise, you can rely on the fact that he or she has an agenda, and that at least part of that agenda involves convincing you to open your wallet.

In the place of a surefire way to make profits, what is there? Where can you turn, and what kinds of things should you be looking for?

The answers to those questions aren’t as glamorous sounding as the promises made by those who just want to take your money, but they are much more effective. Things like careful, meticulous research. Market trend analysis. Paying close attention to extrinsic factors that could impact whatever industry you’re planning to invest in, and of course, Elliott wave theory. If you’ve never heard of the Elliott wave, you owe it to yourself to learn more about it.

Postulated by Ralph Nelson Elliott in the late 1930’s, it is essentially a psychological approach to investing that identifies specific stimuli that large groups tend to respond to in the same way. By identifying these stimuli, it then becomes possible to predict which direction the market will likely move, and as he outlined in his book “The Wave Principle,” market prices tend to unfold in specific patterns or ‘waves.’
The fact that many of the most successful Wall Street investors and portfolio managers use this type of trend analysis in their own decision making process should be compelling evidence that you should consider doing the same. No, it’s not perfect, and it is certainly not a guarantee, but it provides a strong framework of probability that, when combined with other research and analysis, can lead to consistently good decisions, and at the end of the day, that’s what investing is all about. Consistently good decision making.

We use Elliott Wave Theory in real time by looking at the larger patterns of the SP 500 index for example. We deploy Fibonacci math analysis to prior up and down legs in the markets to determine where we are in an Elliott Wave pattern.  This helps us decide if to be aggressive when the markets correct, go short the market, or to do nothing for example.  It also prevents us from making panic type decisions, whether that be in chasing a hot stock too higher or selling something too low before a reversal.  We also can use Elliott Wave Theory to help us determine when to be aggressive in selling or buying, on either side of a trade.

For many, its not practical to employ Elliott Wave analysis with individual stocks and trading, but it can be done with experience.  We instead use a combination of big picture views like weekly charts, Wave patterns within those weekly views, and then zoom in to shorter term technical to determine ultimate timing for entry and exit.  This type of big picture view coupled with micro analysis of the charts gives us more clarity and better results.

One of our favorite patterns for example is the “ABC” pattern.  Partially taken from Elliott Wave Theory, we mix in a few of our own ingredients to help with timing entries and exits.  This is where you have an initial massive rally or the “A” wave pattern. Say a stock like TSLA goes from $30 to $180 per share, which it did.  The B wave is what you wait for and using Fibonacci analysis and Elliott Wave Theory we can calculate a good entry point on the B wave correction.  TSLA dropped from $180 to about $ 120, retracing roughly 38% (Fibonacci retracement) of the rally $30 to $180.  The B wave bottomed out as everyone was negative on the stock and sentiment was bearish. That is when you get long for the “C” wave.  The C wave is when the stock regains momentum, good news starts to unfold, and sentiment turns bullish.  We can often calculate the B wave as it relates often to the A wave amplitude.  Example is the TSLA “A” wave was 150 points, so the C wave will be about the same or more.

When TSLA recently ran up to about $270 per share, we were in uber bullish “C” wave mode, and we had run up $150 (Same as the A wave) from $120 to $270.  That is when you know it’s a good time to start peeling off shares. Often though, the C wave will be 150-161% of the  A wave, so TSLA may not have completed it’s run just yet.

Knowing when to enter and exit a position whether your time frame is short, intermediate, or longer… can often be identified with good Elliott Wave Theory practices.  Your results and your portfolio will appreciate it, just look at our ATP track record from April 1 2013 to March 3^rd 2014 inclusive of all closed out swing positions.  We incorporated Elliott Wave Theory into our stock picking starting last April and you can see the results:

Join Us Today And Start Making Real Money Trading – Click Here

Sincerely,

Chris Vermeulen
Founder of Technical Traders Ltd

USDJPY: The pair has triggered a correction and looks to extend it further in the days ahead. On the downside, support comes in at the 102.26 level, its Feb 26’2014 high. Further down, support stands at 101.50 level and then the 101.00 level with a turn below here switching focus to the 100.75 level, its Feb 04 2014 low. It daily RSI is bearish and pointing lower suggesting further weakness. On the other hand, resistance is initially seen at the 103.09 level where a break will target the 103.75 level. A cut through here will pave the way for a run at the 104.50 level and then the 105.00 level. Its daily RSI is bullish and pointing higher suggesting further strength. On the whole, USDJPY remains exposed to the downside on correction.

Article by www.fxtechstrategy.com