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April 24, 2007
“No More Mo?”, Tues., Apr. 24, 2007, 2:50 PM
Five weeks of trading has taken the Bulls to a place they have never been before, with the Dow at 13000, crude oil about 65 and gold almost 700. If you are thinking there is no place to hide here, then you must be thinking very short-term.
Rather than dither, why not switch your thinking from "MO" (as in momentum) to "MicrO" (as in ultra small cap companies)?
I believe the character of the stock market in North America and Western Europe will soon change (is changing!) to a stock pickers market, and that the best deals out there are names you have never heard of, companies that have all the elements in place for 3 to 5 year success. They are companies whose (i) balance sheet is financially strong, with little debt (ii) P&L shows very high gross margins, (iii) management has a lot of skin in the game, hence won't be leaving with golden parachute deployed (iv) main product or service has "an unfair advantage" (v) customers who will stay through years of economic hardship, if needed.
If you can think of public companies (reporting issuers with SEC/OSC filings) that meet this criteria and have a market cap of maybe $100 million as a minimum and $1 billion max, then send them to me and I will put them into the mix for consideration.
Except it is too large a capitalization to warrant consideration, a company that measures up is Interactive Brokers, known in the industry as IB (with a new IPO in the works). There are hundreds smaller than IB that qualify.
Because they are fast growing and will need capital, venture capital firms monitor these companies. Investors expect them to be the next bright lights on the world stage, and possibly super-stars.
This search is a difficult one, as you know; full up with near-psychotic promoters. But, as a rational group, we are looking at situations here where traders are interested in building long-term commitments. Each month we will review the performance and the company situation and rank them in decile groups top to bottom as to our outlook. A lot of the stories will not hold up under our scrutiny, I feel.
Presently I am trying to organize a Cara Micro-cap 100 that fits the "Bill" (weak pun, I know). I have been building a list of volunteers who will monitor one or two stocks each and send me their collection of news, research, ideas, once a month. I'll put the list in a spreadsheet linked to the free blog (starting June), and also offer a premium (low cost) monthly report where I will detail key changes occurring in each company during that month.
Re the Team Cara Micro-cap 100, I invite anybody from the readership to join. The only pre-requisites are one’s motivation and objectivity.
If you want to participate as a volunteer, please send me an e-mail to bcara@billcara.com. Include the names of some recommended companies if you wish.
Ultimately, these 100 companies, to be selected by late May, will not be my picks, but the Team’s picks, and rankings. I am going to use a survey form where the Team members get to rank the candidates as to their assessment of future prospects. Then the final result will be like the “crowd” speaking.
My job is to plan, organize, oversee and write about it – in my usual “brutally honest” fashion.
As to those of you who are awaiting my “Wealth Preservation Portfolio”, I am working on it and now have a scheduled publishing date of June 1, in conjunction with this Micro-cap 100 list because that list will comprise a large part of the portfolio.
I will say today that 33 pct of anybody’s total Wealth Preservation Portfolio ought to be in companies that would be suitable candidates for inclusion in the Cara Micro-cap 100 List, as it will be for me.
You see, I think the “Mo” game is over. The immediate future belongs to stock pickers who can pick the gems. The large-cap companies have loaded up on debt, merged at humungous cost or preparing to sell out to private equity, or built up their cash position, but withheld the essential long-term capex spending programs they needed to sustain future growth.
At this point, I also think there is no place for bonds, and there hasn’t been a need to be there for a couple years, as you know from reading my blog. But, in time, the cycle will turn as it does for all asset classes.
Mostly, as you also know, I continue to believe in precious metal bullion and coins as well as shares of the junior and mid-sized miners that are bringing on relatively large production in the next 3 or 4 years, like Gold Reserve, Western Goldfields, Khan Resources, Aurelian Resources, and companies like that, or quality exploration plays, like US Gold. That makes up another 28 pct of my total Wealth Preservation portfolio, with the majority of these assets held in bullion, preferably in physicals (no ETF) offshore (eg, Switzerland).
Until I see a long-term cycle peak in commodities, I still believe in ETF’s for the BRIC countries plus Canada and Australia, which presently, in total, is at a portfolio weighting of 30 pct.
The remaining bits and pieces are cash accounts (Euro and USD), T-Bills, Swiss francs either in physicals or in a Swiss bank account, and some high dividend payers (US or possibly even some of the Canadian business trusts). The total for this group is about nine pct, bringing the total to 100 pct.
I want to prepare my portfolio for the coming breakdown in the PM and commodities group. While we are just not there yet for a major pullback, I recognize the risks are rising, just as they are in the broad market.
Then at the point I believe is the commodities and Precious Metals cycle peak, which is where I no longer want to be well-overweight PM, ie the late stages of what I define as the Distribution Zone, which I expect sometime between this summer and next Spring, I would change the portfolio to move from 23 pct down to 4 pct for bullion and coins (all physicals), and the miners from 5 pct to 3 pct. Simultaneously I would move the 30 pct in the commodity-sensitive BRIC, Canada and Aussie ETF’s down to 12 pct, while moving into ETF’s for the US, UK, Europe and Japan/S.Korea, from zero up to 15 pct at that point.
After the switch, the biggest new weighting would be in USD or T-Bills, going from 2 pct to 14 pct and Long-term European government bonds from zero to 10 pct at that point. I would also increase the weighting of the long-term oriented ultra small caps (Cara Micro-cap 100) from 33 pct to 40 pct.
Then, after a crash or severe pullback in Gold, but before the bond market starts to sag again, I would make small changes by increasing the bullion from 4 pct to 9 pct, and the miners from 3 pct back to 5 pct. I’d keep the ETF’s for US, UK, Europe and Japan at 15 pct total but increase the BRIC, Canada and Australia ETF’s from 12 pct up to 16 pct total, with the purchases happening in the faster growth BRIC ETF’s.
I’d also go back to a long-term weighting in the micro-cap group of 38 pct, figuring that some of the first selections were not panning out as hoped. Remember, this is investing, and investors hope; traders merely trade prices with as little emotion as possible.
The USD/T-Bill position would drop from 14 pct to 10 pct and the long-term bonds from 10 pct to 5 pct. You see, during the crash in PM and broad markets, and in the months following, I believe interest rates will begin dropping, which would lift bond prices, and I want to be selling into that strength during those months. Ultimately I know I don’t want to be in bonds because as global economies grow in the future, there will be a renewed demand for capital in a background of tight money policies from central bankers, so rates will be rising. I’m planning ahead.
I then expect a long dragged out stock market decline like 1973-74 or 2000-2002 where, at the cycle bottom, I would expect to have been fully out of bonds and holding just 1 pct in cash/T-bills. My gold bullion and coins would eventually also have dropped down from 9 pct to 5 pct through this period. There too I would be selling into rallies. My thinking is that real wealth will be growing faster than money supply in the next long cycle, so I want to be long non-resource company stocks for the most part.
The reason I want to retain some gold physicals permanently is to prevent any sovereign government taking control of my unencumbered physical assets, for whatever reason. I still would not be satisfied that governments and central banks could be fully trusted. The offshore market of Switzerland will be safe, and so too will be Bahamas, which is why I have looked into starting a bullion vault there (for offshore trust and IBC owners).
The next Bear cycle could be a difficult one. During the stock market cycle bottom phase, it might be advisable to switch into real estate with a large part of the 14 pct in cash – even ahead of stocks. I have a belief that the real estate market will be a complete and total mess at that point, and, like a similar period in 1990, ‘cash is king’ and can be used to pick up bargains.
You remember my story of my parents buying their neighbour’s property ($1.1 million value with a $950,000 mortgage) on a bank repo at $300,000 cash. I think we’ll see more of that in the next couple years.
Not being a real-estate investor, I would, at the next long cycle bottom, increasingly re-direct cash into more US and European ETF’s, especially the smaller cap, higher beta ones. The majority of my cash, however, would go back to other ETF’s, mostly BRIC’s, and, of course, to Cara 100 companies (ie, those in the Accumulation Zone).
This is a theoretical model in which I am explaining decisions I expect to make if and when the anticipated conditions arise. A word of advice; you cannot rush the market.
At the end of the day, if you are prepared to wait for markets to come to you, you will do well by selling in the Distribution Zone (after the RSI-7 values reach extremes or (if there happens to be no spike top) when the Daily RSI-7 drops below 70. You will start to buy long positions in the Accumulation Zone, under the exact opposite conditions.
If my portfolio plan is too complicated, I recommend sticking to Cara 100 companies only – sell them in the DZ, buy them in the AZ, and ignore the media and Talking Heads. Even quality companies go through price cycles – from oversold to overbought. Just make sure you are doing the selling when they are overbought and are buying only when they are oversold.
It’s really that simple: Buy Low and Sell High.
But following a plan such as this for years, you will not worry about making the absolute top of the market’s long-term price cycle or suffering through to the bottom. And your portfolio performance will stay in the top quartile when measured against professional capital managers.
In a Bear market, your concern is to clear off all debt so that a friendly banker does not ever come looking to take assets to meet your obligations. I have been there, and done that. So for years I have carried no debt whatsoever other than in a securities trading account, which is ok because these markets are liquid.
How long it will take market prices to move from DZ to AZ is always a matter for the “crowd” to decide because “we” are the market. Governments, central banks and HB&B are powerful forces in the broad market, especially at intermediate trend junctures. But, combined, those players are never 100 pct on the same page, and they too stand back when global markets want to fall. You see, everybody recognizes the need for cycles when there is a time to buy and a time to sell, etc. (Ecclesiastes 3).
Within the Bearish long cycle, there will be numerous lower highs and lower lows. I do think the next Bear will be a big one – and a long one because there are so many financial excesses that corporations, businesses and society must purge.
That is unfortunate for traders who cannot make decisions. As you know, there were traders in 2000 who hung on through these declining cycles until selling out in 4Q02 and 1Q03, near the cycle bottom. So, you have to make decisions and your timing has to be based on market logic.
By the way, as long as there are salespeople, "Mo" will always be part of the market. My point is that our values are changing. Serious Bear markets do that. We are soon going to be primarily looking to take a risk on quality assets rather than stories told to us by people we no longer trust.
Posted by Posted by Bill Cara on April 24, 2007 02:50:01 PM | Category: Cara Today in the Market
Discourse
Hello Bill,
As you know from my posts I like WGDF. Another small cap mining stock I like is USA silver. USA.V has a fully diluted market cap of about $198,000,000 USD.They are a turn around situation currently producing about 2.5-3 million ounces of AG equivalent with a target of 5 million ounces of production or more for 2008. They have a great management team IMO. They are cash positive with no debt and will have about 14-20 million cash after their early warrant exercise period. Stock ownership is tightly held:
77% institutional, 18% management & directors,
5% other*
Under "Investors" please click on their powerpoint presentation.
USA has excellent exploration upside potential IMO and a offload contract with Teck:
http://www.stockwatch.com/swnet/newsit/newsit_newsit.aspx?bid=B-670315-C:USA&symbol=USA&news_region=C
A recent news release shows USA has about 48 million AG ounces in all categories with about 70 million AG equivalent ounces.
A newer company with a newer website. The powerpoint presentation and sedar are good places to start looking at this one.
I like this stock almost as much as WGDF. Please let me know what you think even if negative. Either way I am going to continue to hold and add to my position.
Everyone please do you own DD this may be a high risk stock.
Tom
Posted by: golden7 ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
April 24, 2007 3:45 PM [link]
Bill’s words remind me of something Buffet said:
“Markets are there to serve you, not to instruct you. You can often find a couple of companies that are out of line. Find one; get rich. Most people think that what the stock does from day to day contains information, but it doesn’t. It isn’t just something that wiggles around. The stock market is the best game in the world. You can take advantage of people who have no morals. High prices inside of a year will typically be 100% of the low price. Businesses don’t change in value that much. That is simply crazy. There are extreme degrees of fluctuation, and Mr. Market will call out the prices. Wait until he is nutty in one direction or the other.”
I hope I’m smart enough to learn this.
Posted by: Telestar3d at
April 24, 2007 3:47 PM [link]
Bill -- I was surprised your allocation to PM stocks is so low. I'd think that when bullion starts to run, PM shares will run faster. And doesn't any potential need for physical bullion come "apres la deluge"? - Jock
Posted by: Jock at
April 24, 2007 5:35 PM [link]
Jock, I think it might be "le deluge" but, of course, the French usually try to pin such events on women.
Two weeks ago I sold most of my PMs into strength and went almost 100% cash.
My plan was to wait for the usual sell off and to look for re-entry.
Brilliant.
The only real problem was my impatience:
La di da, la di da...
"Hey, I gotta figure out how to make some more $ here, and not just sit around and wait to die..."
Terrible investor mind set.
Having sold half of my ANO on the way up, and not being able to stand the prosperity, I decided to, duu, buy my old "full position" back.
What an idiot.
This was a very painful day.
We shall all recover and go on to greatness, but the lesson I seem to be reluctant to learn is that discipline and patience are essential.
As Bill said, the market can't be rushed.
Just a little mea culpa for you who have also suffered today.
But then, tomorrow offers us unlimited opportunity... if we can see it.
Posted by: Rigdon at
April 24, 2007 6:16 PM [link]
Jock,
I think we are late in the game. Also I am writing this as a Wealth Preservation Portfolio for traders who are average people, ie, not full-time, sophisticated, nimble traders.
As and when I see the gold stocks ready to go, I try to give some notice in the blog, but I also appreciate that of the 99.75 pct of regular readers, most are not frequent traders.
I did have a reservation about even doing such an article because everybody has difference risk tolerances, interests, objectives, etc. It's not easy to write for the "average" person. Anyway, I figured that some readers would try to work through my thought processes, and use my article as a benchmark.
Food for thought as I say.
Posted by: Bill Cara at
April 24, 2007 7:45 PM [link]
Dear Bill and Friends,
$3.25 CRYSTALLEX?
I've been losing trading KRY, overestimating interest in the stock.
I have an open cry for help from any skilled technician out there...
KRY is now making a "descending parallelogram" over the last week or so on the dailies. Lower highs and lower lows, days .
My question is, is this pattern a bearish continuation pattern like a flag or something like that, or is this a reversal-consolidation thing? Will I be buying back the KRY I sold today tomorrow or the next day at $3.25?
All qualified and unqualified help appreciated.
Your Friend Chris
Posted by: shark_attack at
April 24, 2007 8:09 PM [link]
Chris, here's my take on recent trading on KRY -- which, admittedly, I haven't been following minute to minute. First, the stock was run up when traders reacted to news that Gold Reserve (GRZ) received its permit from VZ authorities. Many believed the KRY permit for LC would soon follow.
It hasn't.
Second, today was the official closing of the 13.7M share public offering. It should be no coincidence that the price paid by the syndicate that purchased those shares is within a few pennies of today's closing price.
As Bill and others have repeated ad nauseum, the future of KRY hinges on issuance of that environmental permit. Whether the stock will trade higher or lower than where it is today is anyone's guess.
I hope this helps.
Posted by: number2son at
April 24, 2007 8:23 PM [link]
Constellation Software (CSU on TSX) has had a good run since it's IPO last June when I was considering buying (but did not). Would this be a candidate for the Cara 100 'Micro Index'?
It is very illiquid.
The market cap may put this out of the micro definition.
Are there any other TSX, non-resource micro caps worth considering?
I would expect that minus news on the permit KRY will trade back to its $3 support line at which it would warrant additional attention. Any extreme selling (i.e what happened January 18) would definetely be a great opportunity. Then again, Chavez is always gonna be a wild card.
Posted by: began329 at
April 24, 2007 9:16 PM [link]
http://calculatedrisk.blogspot.com/2007/04/goldmans-hatzius-on-residential.html
ducks starting to line up, possibly? If Goldman lets stuff like this out, maybe, just maybe, the time has come...
Posted by: rob d at
April 24, 2007 9:18 PM [link]
I like Clearly Canadian Beverage (http://finance.yahoo.com/q?s=CCBEF.OB). A lot of positive momentum.
Posted by: BeeThousand at
April 24, 2007 9:18 PM [link]
GRZ snuck up on me. I had read about their management, seen that their HQ was in US, and concluded they were less solid and experienced than Todd Bruce and Co. But now, I have to wonder.
GRZ (post-final-permit) is valued at $28 per reserve ounce (per the estimate of 9M oz) and KRY (pre-final-permit) is valued at $63 per reserve ounce (at the estimate of 14M oz.) Their mines will be neighbors, so production costs should be equally low.
Shouldn't GRZ be valued more like ARU.TO in Ecuador ($128/oz) whose (9M oz.) find was rated by today's Financial Post as possibly the largest and best find in decades? http://tinyurl.com/2dox9s
BTW, Ecuador's political situation drifted a bit farther towards chaos today with 57 (conservative) congressmen being reinstated, but not allowed by the police into the building where the constitutional convention will take place. Pres. Correa is just beginning his process of "chavezification" in Ecuador.
I wonder whether ARU.TO won't be a good tactical short for a while !
The above is all a bit superficial. Maybe someone who know more about valuing juniors or has studied these companies in greater depth can straighten me out.
Posted by: Jock at
April 24, 2007 9:53 PM [link]
ALOHA !!
Jock ... I have not investigated KRY in depth, just enough to know that Chavez is Fidel Jr. and out to prove himself to the World, especially the Latino World! In the end he will prove once again that socialism does not work, even military socialism!
Has anyone considered that this KRY roller coaster is being manipulated up and down by the Venezuelan government leaders and their families. What better way to fleece the "gringos"? Then throw Cramer in the mix and I believe Iran is more stable than KRY!!!
Perhaps the best plan is to wait for the official announcement of the permit. Instead of a 400% profit you'll only make a 100% profit, but at least it will be a profit and you won't have to be worried about "stops"! Watching all these "players" try to time KRY perfectly is a study in "Greed 101"!!
Posted by: kaimu at
April 24, 2007 10:40 PM [link]
Kry or Cry?
Look - PM's are volatile, accept it or find another path. In the basket of 14 gold stocks I follow the trading range was from -6.5% (UXG) to -.43% (NEM). KRY was just about at the arithmetic average of the group, -2.4%. This is no reason to single out KRY and ask why it can't do better IMO.
Or to begin complaining about the 'new castro'! First, ask yourself - can you accept the volatility of ANY gold stock? The answer to that is the most important question to ask yourself before getting in to any metal investment!
Posted by: siguy at
April 24, 2007 11:21 PM [link]
KRY:
About a week ago someone posted an interview with the GRZ President and the questioner asked why KRY did not get its permit yet. He hesitated, and the questioner said come on you know. The guy went on to say that he was sure that KRY would get their permit, but that they did not feel they (GRZ) should not be held up if they satisfied their obligations.
So the question is what did GRZ do that KRY has been unable or unwilling to do?
I will bet a lot that Todd Bruce knows the answer to that question.
Posted by: Telestar3d at
April 24, 2007 11:26 PM [link]
Quote
I recommend sticking to Cara 100 companies only – sell them in the DZ, buy them in the AZ, and ignore the media and Talking Heads. Even quality companies go through price cycles – from oversold to overbought. Just make sure you are doing the selling when they are overbought and are buying only when they are oversold.
It’s really that simple: Buy Low and Sell High.
Unquote
Ever since I started following it, I have started enjoying investing so much - it now looks elemenatry and easy! Thanks Bill.
Regarding comments in a previous post, as suggested by somebody, just keeping a button to allow people to contribute to the cost of ISP (and Editor!), I am sure you will be amazed, how much your readers are grateful to you! It is really a lot of noise out there - some has been systematically created (Remeber Cramer's youtube video) - your Blog is the best thing that has happened for people who want to avoid noise.
And please remember to take full rest - your quality of content is so good that you do not have to produce a lot of it - it is good enough in small quantity.
Posted by: Rick at
April 25, 2007 1:02 AM [link]
Bill,
One idea would be to setup a donate button to test it out. Let people donate to their hearts content for the content you give them. Then let this go towards a subscription for the premium version. Let those who want to donate 5 bucks to help with server costs and editor costs donate that, then if someone wants to be more generous now let them do that. This would also let you gauge the generosity of your community.
Posted by: Quentusrex at
April 25, 2007 4:52 AM [link]
Hi guys, I understand everbodies viewpoint on this capital market melt down thing. But as a member of the european states I'm affected in kind of a different way compared to people living in america. For example all assets noted in USD are not wealth preserving, on the contrary I expect most european currencies to appreciate against the dollar. In fact all non european investments, including emerging market stocks, are usually noted in USD and will thus also be a bad investment. That being said I don't know whether the depreciation of the USD will be so large that it will make investing in gold and commodities unattractive because of the low risk/reward. Any opinions on this matter?
Posted by: allStar at
April 25, 2007 5:40 AM [link]
Thank you for sharing your game plan Bill, disciplined allocation of one's portfolio for what lies ahead is something a budding trader has great trouble accomplishing. When one's mentality is to identify volatility to profit from, thinking more than a few days out is like learning a new language. :)
A mini-cap issue I'd like to nominate is NNRF, a pinkie that was being followed by the 'Stock Tiger'. Bought it at $.71 and yesterday it broke through the $10 barrier, pretty impressive over such a brief span of time (month or so). Nucon-RF is in a niche which hasn't much in the way of real competition and its cash flow and management appear to be in good order. Yahoo Finance/Seeking Alpha has some news on them.
Posted by: redclaydawg at
April 25, 2007 7:37 AM [link]
Dear Everyone,
Thank you all for your input re KRY. I was, however asking a question about a technical feature of a chart and what I got were smatterings of fundamentalism, but you guys know I love you and that's ok. One wise comment came from our friend in the Aloha State (I've been to Hawaii, I know why you're so happy, K.)
The idea of waiting the the moring of permit issuance, and buying at 8 am is not a bad one at all....however....
Kaimu said "Watching all these "players" try to time KRY perfectly is a study in "Greed 101"!! ( I resemble that remark!)
Maybe, but isn't the thing you just described, timing the entry and exit from various securities and asset classes basically the mandate of our task?
Posted by: shark_attack at
April 25, 2007 9:14 AM [link]
Bill,
Thanks again for the terrific map for navigating waters ahead. Will be studying it, as well as the waters, for greater understanding. Thanks so much!!
Posted by: aa at
April 25, 2007 10:34 AM [link]
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Submitting Birch Mountain Resources (BMD) for consideration. Market cap 280m, insiders own 7%, and geographically positioned in the midst of the Alberta oil sands region (nearest competitors are hundreds of km away).
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at
April 24, 2007 3:33 PM [link]