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  • "The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

    Friday, August 19, 2005


    NASDAQ (QQQQ) Puts as insurance

    I believe that we are nearing the end of this bull market that started a few years ago. There are many reasons I think that this is the case:
    This has me worried primarily due to liquidity. Not the type of liquidity I mentioned above but the likelihood that investors will have to liquidate holdings of stocks that I’m invested in to meet margin calls on tech stocks. What really worries me is that the fall of the NASDAQ that I think is coming (and based on historical data will likely be lower than the 2001 bear market lows) is going to suck down the price of sound, undervalued companies. I hope that very few investors are both in Technology and Uranium (for example) but a sinking market is going to lower all boats!

    Again I am hoping that resource stocks will fall with the market, but less so and then rise again as money will flow into the only asset class not doing quite so badly. I’ve invested in QQQQ puts and if the NASDAQ goes down and resource stocks up I’ll make money on both sides (long resource stocks, short NASDAQ). However, if NASDAQ stocks go down and drag down resource stocks with them, I have a chance of making enough money on the NASDAQ puts to offset the losses. Ideally I would like a stash of cash on the sidelines to buy more if this happens, but with fundamentally significantly undervalued companies, I am choosing to stay fully invested and ride the tide.

    These are my estimations 1-2 years out:
    I expect to end up somewhere around cases 3-4 and as time passes I think case 4 becomes more likely than case 3 as the lowering of interest rates as a result of the NASDAQ fall will probably cause liquidity to flood somewhere and natural resources are a good bet given the other fundamentally positive forces.

    Anyone with exposure to the US market should well consider putting a little (10% or so) money into QQQQ LEAPS over the next 6 months. If the NASDAQ doesn’t fall you had insurance (no one ever complained about paying car insurance premiums and never having a claim!) but the risk today in the NASDAQ is to the downside.

    Saturday, August 13, 2005


    China and the Yuan Revaluation

    I wrote this the day after the Yuan revaluation but didn't get around to posting it. Many of the ideas are still not mainstream.

    What you're not being told about the Chinese Yuan (RMB) revaluation:

    There was a lot of chatter before China's recent announcement that a revaluation of the Yuan would benefit the US by making Chinese imports more expensive. This in turn would help to support domestic US manufacturing and US exports would become cheaper and more competitive in China. All in all congress had become pretty sure that a revaluation of the Yuan was going to cure all that ails the US economy.

    Here are some of the truths
    The net effect of these forces is the opposite of the effect congress is looking for.
    I doubt this was anyone's objective but Chinese tourism to the US will probably increase as a US holidays become much cheaper.

    All these factors are more or less bullish for commodities.

    Canadian Oil Sands - updated valuation

    I have just updated my valuation for Canadian Oil Sands ( COSWF.PK). I still think the stock has about 2x upside with current oil prices. Quite amazingly that means that the stock price has not increased to reflect the business or the upcoming expansion. All the increase has been a reflection of the price of oil. Back when I first recommended Canadian Oil Sands I thought it was trading at 33% of intrinsic value and I still do.

    COS is still valued above today's price of 113.75 CAD if oil were only trading at $35USD. This makes the case for investing, even if you think oil prices might moderate, very strong. COS is basically trading as if oil were at $35USD and oil is in fact nearly double that. Though you could have made over 400% on COS if you had bought when I first started to recommend it. I still think there is 2x left in it and I would not be a seller at this point because with the exception of Strathmore Minerals and Silver Standard it's still my 3rd best idea. Once the current expansion is paid off and the distributions start to rise (I think distributions could hit $25 within 5 years) the value could start to be unlocked.

    Finally, Matthew Simmons was interviewed on and said the supply and demand imbalances could easily drive oil up 5-10 times. Though that sounds amazing, prices are not linearly derived from supply and demand and he predicts there could be a 5M bbl per day deficit soon. $66 oil has not really affected people's decision to drive and Holland gets by with gas prices 3 times higher than the U.S so don't think $200 oil is going to crater the economy or even significantly lower US demand. $400 oil probably would change driving habits and would start to bring supply and demand back into balance. I smile every time I fill up my car and it costs another 10% because I know my oil could have come from Syncrude!


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