Trading in a sideways market is not an easy task - especially in this market. Over the past year, we have seen strong runs followed immediately by strong pullbacks. This past week was no exception as the market took us for a wild ride. This makes trading difficult. Trading in this market should be reserved for sophisticated day traders who not only have a large piggy bank, but a wealth of time on their hands. Most of us don't fit in that category. Most of us have day jobs. That's why we prefer to invest, rather than trade. Sound confusing? Let us explain. Stock prices generally do not reflect what a company is really worth because they can fluctuate every minute of every day. In most cases, a company's actual outlook or performance doesn't fluctuate the same way. The actual trading of stock, which determines a company's worth, is based on investor expectation, and more importantly, psychological momentum - especially in the junior market. It's incredible just how big of an impact a small article published from a respected news source can have on the markets. But news happens and changes every minute of every day - just like stock prices. However, a corporation's progression and corporate value generally doesn't fluctuate as fast. When you trade, you're making a bet on the perception and psychological emotions of investors. When you invest, you're making a bet on a company's value and potential. Traders need to constantly act on daily price fluctuations much more than an investor does. In our last issue, Actions Speak Louder Than Words, we talked about the strong sell off in commodities-related stocks and the reasons why we believe that this recent sell off is more of a consolidation period, rather than a bear market. When this consolidation period ends, we expect to see a continued bull market for the remainder of 2011. However, this consolidation (as mentioned in Actions Speak Louder Than Words) may take a few months before we see the bottom. The trading activity this past week added more proof to our consolidation theory, as we saw a strong increase in buying Wednesday leading to a significant rise in the commodities-weighted TSX and TSX Venture exchanges. This was followed by another down day on Thursday, and back up on Friday (TSX Venture). If you're going to trade this market, it's important to understand it. When choosing the right stock, it's important to know how the sector is performing, how its peers are performing relative to itself, and how the price and volumes are reacting. Knowing how the price and volumes are reacting is important because this can give you an idea of what the smart money is doing. We saw a lot of smart money loading up on shares this week as scared traders sold cheap stock to the them. In this market, it's more important to see what the buyers and sellers are doing, rather than what the company is. Over the past month, we've seen gold producers increase production, yet their share price continues to fall. We've seen juniors make significant upgrades to their resource calculations yet continue to fall in share price. That doesn't mean the company is doing bad. When this market turns around and we find a bottom, many of these companies could see a significant climb. But how do we know where the bottom is? The bad news is that it's almost impossible to find an exact bottom. The good news is, after a stock has hit a bottom, it generally takes some time to rebuild its base and will trade sideways for months before a new bull run begins. It is during this time that the smart money, or the guys "in-the-know," are building their positions. This can often be seen by increased volumes, with little price movement after a stock has hit a bottom. If you're going to trade, this is a great time to build a position. This "consolidation" phase can last a few months, so be patient. If you trade frequently, you may want to consider buying into Level II data to see the actual price movements and bid/ask in real time - we would never invest without it and you shouldn't neither if you're going to make big bets. Trading without Level II data is like buying a house without seeing what's inside. Level II can you a great picture of a company's market. It can tell you how much support a company has and how many people want to sell at a certain price. Knowing the depth of a company's market can make the difference between making thousands, or just hundreds. Inflation is already here. Those who say otherwise are only lying to themselves: Inflation is not the only reason why we expect precious metals to hold their value this year. Gold, interest rates, and inflation have always gone up together. Interest rates will go higher, a lot higher, in the long run. Inflation is already here but will also go higher. That leaves a lot more room for gold to climb, which means added benefit to the companies in the sector. This leads us to our most recently featured company, Minco Gold (TSX: MMM)(AMEX: MGH). Minco Gold (TSX: MMM) (AMEX: MGH) A few weeks ago, we wrote a report about Minco Gold (TSX: MMM)(AMEX: MGH), calling it the "Hidden Gold Producer." (see The Hidden Gold Producer) We expect gold to not only hold its value, but climb later this year. If gold continues its climb, it should have a significant positive impact on Minco Gold once they finalize the acquisition of their new producing gold mine. Investing is risky, especially in juniors. Please do your own due diligence and conduct your own research. We are biased towards Minco Gold because we own shares in Minco Gold and bought more shares after our first report on January 16, 2011. We are also biased because they are an advertiser and we own options in the Company. Our reputation is built upon on the companies we feature. That is why we invest in every company we feature in our Special Report Editions, including Minco Gold.
If the decline in prices continue, we will be buying more stock once we determine our bottom for the companies we are following. These price movements may mark a significant point of entry if, and when, the market rallies this year as we expect it to.
Our favourite sector remains in hard assets, with a continued focus on gold and silver - despite the recent drop in prices.
Precious metals have always been a hedge for inflation and a hedge against fiat currencies. When you look at what's happening around the world, the recent drop in gold and silver prices should only be temporary.
In November, Russia and China announced a decision to abandon the dollar in bilateral trade dealings, resolving instead to use their own currencies. This latest move - a continuation in a series of efforts by both countries to move away from U.S. dollar usage in international trade - further threatens the dollar's reserve currency status.
That doesn't mean the US dollar is going away anytime soon. But drops in the US dollar will have an impact on the price of precious metals, as China and other emerging markets continue to buy more gold and silver.
To refresh your mind, Minco Gold (TSX: MMM)(AMEX: MGH) is a junior gold company that currently trades with absolutely no market-ascribed valuation given to its 51% interest in a high grade million ounce 43-101 gold deposit and no market-ascribed valuation given to their recent news release of acquiring a producing gold mine (see news release.)
Furthermore, it has the lowest Enterprise Valuation per ounce of gold (EV/oz) compared to its peer groups. Back in August 2010, Haywood Securities did some calculations and Minco Gold received a minus $1.30 EV/oz compared to an average of $36 EV/oz from its peer group. That's a negative EV/oz for Minco Gold.
We did some basic calculations a few weeks back and showed that the market has pegged a value of $12.75/oz gold for the 510,000 ounces Minco Gold has in its interest in the gold resource at Changkeng.
But we made a mistake.
That back-of-the-napkin calculation in the previous report was done without factoring the amount of cash Minco Gold has, which is approximately $10 million in cash and equivalents. If you factor that into the equation (see The Hidden Gold Producer), you would get a negative value.
That means the market has not given ANY value to all of the 43-101 gold Minco Gold has, no value for all of its 16 gold properties, and no value for their recent announced acquisition of a producing gold mine in Inner Mongolia!*
Here are the facts:
Minco Gold (TSX: MMM) (AMEX: MGH) has:
Good times ahead. Be patient.
Sunday, January 30, 2011
The market over the next 3-6months
Equedia says get ready for outrageous corporate bonuses...
This past week, outrage was sparked over the controversial executive compensation from AIG, which recently received billions in taxpayer dollars. President Barack Obama on Monday blasted AIG and pledged to try and prevent it from giving its executives 165 million dollars in bonuses.
Eight top executives of Nortel Networks got approval from the courts for up to $7.3-million (U.S.) in bonus payments under a retention plan - despite the layoffs of 1,100 Canadian workers last year who were denied their severances after the telecommunications giant filed for bankruptcy protection in January.
The list of outrageous compensation to executives of failing companies stretches for miles and will continue to stretch because they argue that these big bonuses are required in order to keep good people in the company.
I say that's bull. But it won't change. It will just get worse.
And here's why.
When you offer big bonuses to high level executives, you're giving them an incentive to start looking for the BBD - the Bigger, Better Deal. How many executives of failing corporations have watched their companies go further down the drain during their tenure?
Why would anyone want to keep the guys who have done nothing except help the corporations fail by requiring billions in taxpayer dollars to survive and millions in compensation to file for bankruptcy protection?
And once their contracts are over, then what?
Like sports, they become free agents and begin to look for the BBD.
Great employees are like great athletes. Sure they want the money, but they also want to play for a team where they can show off their talents so that they can work toward the next BBD. Do you think any of AIG's or Nortel's top producers will stay at their jobs? Fat chance.
Can you picture what these guys will face if they stayed at their jobs? Just imagine the opening line of an employee from AIG, "Hi, I am from AIG and I want to show you how to protect your money." Yeah, that will help close a deal. It's like saying, "Hi, I am Vince Carter and I'll win games for your team." Sorry Vince.
Compare AIG to the NBA's Grizzlies. Do you think there is person on that team, or any other team, that wants to play for them? Every player on the Grizzlies will be looking at other teams once their contracts are up. Every top-level employee of these bailout banks and insurance companies will leave as soon as they've received their bonuses. Once the bonus season is over, it's the BBD for them.
That's why these outrageous compensations will get worse.
Think about it. The stock markets are insanely depressed. Citigroup used to be worth fifty bucks. Now they're under three. AIG was over seventy bucks. Now they're barely breaking one. The only possible way for AIG, Citigroup and the struggling banks to retain and entice new employees is to overpay with stock options.
Every employee, especially the sales guys, know this. And every one of them will use this as leverage.
These financial groups know they can't offer them a working environment where they can be great at their jobs and show their talents. But what they can offer is a lottery ticket with insanely great odds by overcompensating them through stock options.
Let's put this into perspective and use AIG as an example:
I am going to give you ten million stock options (which is a very real scenario for top level executives) at today's current prices, which is $1.26. Last year, we were near $50. Our stock will bounce back once the markets turn around and even if we get back to a quarter of what we were last year, you've made a bundle. Oh, and the government has our back.
Now if you were in the NBA making $10 million per year and was offered a chance at $100 million to play for the Grizzlies with the NBA backing that contract, would you? That's how these banks will retain and attract talent.
And that's why when our markets settle and these banks begin paying back their TARP, you're going to see even more headlines regarding outrageous compensation. All the while taxpayers are waiting for their money.
So instead of focusing on outrageous compensation from yesterday, the Government needs to figure a system for the future because that's when the BIG money will be revealed. The amount of wealth that will be generated for these few executives and employees via the current financial sector bail-out will be astounding. It will be tax payers who will ultimately provide the biggest compensation packages in history for these guys.
With the governments preventing these large entities from failure and putting in place the new laws and regulations for financial best practices, the survival of these corporations rests more on our government and our tax dollars, rather than the skill set of the CEO's and high level executives.
The bailout has simply become a euphemism for making the executives of these financial entities richer than they were before.
Meanwhile, the lower level employees lose their jobs, their tax money, and their life savings.
Once again, the rich get richer and the poor get poorer.
What a concept.
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