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Saturday, March 10, 2012

" The Case Against Macroeconomic Investing" by Fred Carach

When I broke into Wall Street more than four decades ago, the concept of macroeconomic investing was unknown. Even today, the term will cause many alleged investors to scratch their heads in wonder. The term may be unknown to them but in truth, they are slaves to an investment concept that will play havoc with their chances to be long-term successful investors.

When I broke into Wall Street investing was a very simple concept. You concentrated like a laser on one simple concept. It was called picking winners. You did not concern yourself with what was going on in Greece, Europe, or Washington because you knew that it did not matter. What mattered was picking winning stocks.

Today the slaves to the concept of macroeconomic investing dominate Wall Street like a goliath. Macroeconomic investing goes like this:
First, you try to figure out the status of current debt crisis in Greece. Then you try to figure out what is going on in Euro land. Then you try to figure out what is going on in Washington. Then you try to figure out how the economy is doing. Then you try to figure out what is going on in Wall Street. If in your analysis all systems are go then you conclude that today is a risk-off day. This means that for today but for today only it is safe to invest in the market. After all tomorrow could very well be a risk-on day. The horror of it all.

Having spent 90% of your time and effort to ascertaining if it is safe to invest. You now spend the remaining ten percent of your time trying to pick winning stocks. Or do you?

The truth of the matter is that picking-winning stocks, which in my day was the core of all successful investing, is becoming a lost art. To an ever-increasing degree investors are uncomfortable about picking individual stocks. They are vastly more comfortable in picking an index fund or an ETF that will do the picking for them.

In my day the name of the game was beating the market. Only a loser would have been content to duplicate market performance. The problem with trying to beat the market is that you have to be willing to research and then invest in individual stocks. For reasons that I do not pretend to understand people appear to be more and more fearful of doing this. I have never seen such passion for stampeding with the herd. Groupthink is in. In today’s world, everyone seems more comfortable if they are stampeding with the herd. Even if the herd is stampeding off a cliff.

Not the least of the problems with macroeconomic investing is that in my humble opinion it is harder to figure out what the market is going to do, than it is to pick winning stocks. It is truly amazing how hard it is for people to even figure out if we are in a bull or bear market. Then they compound the problem by constantly second-guessing their own opinion. Often with disastrous results. Just take a gander at the gurus on CNBC as they try to tap dance around the issue of whether we are in a bull or bear market. Have you ever seen such hemming and hawing?

Why bother? Why bother playing this stupid and ignorant game? It may amaze you to know that in my own investing I regard trying to figure out what the market is going to do as an exercise in stupidity. If I spend fifteen minutes a year trying to figure out what the market is going to do. I have wasted ten minutes of my time. I spend even less time trying to figure out what the economy is going to do. Another exercise in futility.

The rewards go to the stock picker. Consider this:
There are 10,000 stocks that are traded daily in this country. Every year there are thousands of stocks that outperform the averages. That is why they call it an average. Why not try to find these stocks that outperform the averages. After all in a typical year somewhere around 5,000 stocks are going to outperform the averages. How difficult can it be?

Consider the Dow’s 2011 performance. Though in truth I must tell you that I would not invest in a Dow stock with your money. The returns on these dinosaurs are beneath my dignity. I only invest in small caps because that is where the performance is, but I digress.

In 2011, the Dow was up 5.6% for the year. The top two performers in the Dow in 2011 were MacDonald’s up 30% and IBM up 25%. The worse two performers for the year were Bank of America down 58% for the year and Alcoa down 44% for the year.

How hard do you think it would have been in 2011 to figure out that Macdonald’s and IBM might outperform the Dow? Not exactly mission impossible was it? You got to admit it sure beats 5.6%.

Stop playing the losers game of macroeconomic investing and start playing the winners game of microeconomic investing. It is called picking stocks.

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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Sunday, February 12, 2012

"Buying Uranium When It Is In the Gutter" by Fred Carach

The March 2011 Japanese nuclear disaster gutted the uranium mining industry big time. Price declines in the range of 50%-80% from top to bottom were common. A bottom appears to be in but the issue at hand is can the nuclear industry recover? Popular belief about the industry’s future is that it will probably never recover. It is just too dangerous.

What popular opinion is ignoring is that the nuclear industry is not a luxury that can be dispensed with but a critical necessity.

The great white hope of the general population is the renewables solar and wind. These perennial solutions have been touted since the oil crisis of the 70s. What is shocking when you look at solar and wind is how amazingly little has actually been built. Everyone talks endlessly about these saviors but production rarely happens. There is a very sound reason for this. The more you dig when you investigate wind and solar, the more problems you discover. Humans are strange creatures. They want their energy 24/7 and not just when the wind blows or the sun shines. Go figure!

The nuclear industry is not going away because it is indispensable. There is no ready substitute that can match the sheer size and brute force that a nuclear reactor can command.

The ultimate proof of this is that despite Japan’s nuclear disaster reactors continue to be built. Today there are 443 operational nuclear reactors. An additional 62 are under construction and 156 are in the planning stage. Only Germany appears to be willing to pull the plug with out regard to the consequences. It still intends to close all nine of its reactors by 2022 and rely on the nuclear reactors of France and the Czech Republic to supply them with their energy requirements. How sweet it is!

Today’s 443 active reactors require about 180 million pounds of uranium per year. Global production is 130 million pounds a year. The 50 million pound gap is being made up by a limited fuel reprocessing capacity and Russia, which is dismantling its nuclear warheads under the so-called HUE (highly enriched uranium) Agreement. This program ends in 2013. Russia states it will not renew the program because it is running out of warheads. There is at least a 25 million pound global annual shortage and no mine in the world produces more than 20 million pounds a year.

US nukes alone consume 57 million pounds a year while we produce only 4 million pounds of uranium a year. Half of US annual uranium consumption is being supplied by Russian nuclear warheads.

Kazakhstan is the leading global producer at 27% followed by Canada at 20%. These two leaders account for 47% of the world’s production almost all of Canada’s production comes from the fabulous Athabasca Basin. The richest known uranium ore body on earth.

The price of uranium peaked in July of 2007 at $136 a pound. Today it is selling at $52 a pound. This is a big problem. The industry breakeven point is around $65 a pound. The present is grim but the future s bright. The policy that I follow is to establish an initial position in all the uranium plays that I like but not add to them until uranium breaks through the $65 a pound level.

The largest pure player in the industry is Cameco, which I do not own. I am an unrepentant small cap investor. The stock peaked in 2007 at $56 and now sells at $20 and is currently profitable. Once you leave Cameco, the carnage really begins. The number two in the industry is Denison Mines its 2007 high was $15 and it is now selling at about $1.50. It currently has a market capitalization of $704 million. It is currently producing uranium but at a loss of about a penny a share. If uranium breaks above $65, a pound its profit potential is awesome. Beneath Denison, I own a mix of non-producers that have been mauled by savage price declines but who own huge acreages of uranium mining claims in relation to their capitalization, which has been decimated. They are listed alphabetically with a brief thumbnail sketch.

ESO Uranium- this is a stock whose value has been absolutely pulverized. Its five-year high is $1 and it is currently selling for about 10 cents a share. It has 112 million shares outstanding. This means that the whole company is selling for roughly $11.2 million dollars. The Paterson Lake property is its flagship property in the fabulous Athabasca basin. It owns the mineral rights to 180,000 acres in the basin. If my math is right, the market is valuing each acre of land that it owns at less than $100/acre. It also has additional properties to which I am assigning no value to.

Energy Fuels- the five-year high on this little jewel was $4.94 a share and the five-year low is 9 cents a share. It is currently selling for about 34 cents. It has about 124 million shares outstanding for a total capitalization of about $42 million. It is concentrating its limited resources on building the Pinon Ridge Mill in Colorado. The first uranium and vanadium mill built in the United States in over 30 years. Currently there is only one uranium mill operating in the United States in Utah. Energy has acquired six ex-producers located in Colorado and Utah that can supply the mill with ore.

Fission Energy- the five year high on this stock is a $1.40. It is currently selling for about 85 cents. It has 102 million shares outstanding or a total market capitalization of $89 million. This company has ten projects located in the Athabasca basin and in Quebec. Its Davy lake project alone is 185,000 acres. This is another acreage rich play.

Forum Uranium- the five-year high for this stock is 81 cents and the five-year low 2 cents. It is currently selling at a whopping 9 cents a share. There are 160 million shares outstanding. You could buy out the whole company for a princely $15 million. Forum has 5 projects, which are located in the Athabasca basin and the Thelon basin, Canada’s second rated uranium play. For a stock selling at 9 cents a share, it offers extraordinary value. Its Key Lake Road project alone located in the Athabasca Basin comprises about 223,000 acres and its North Thelon project alone has 607,000 acres.

Now at this point the astute reader unless he has read my book should be questioning why I am so keen on acreage and mining camps or plays and why I never mention ore bodies. After all, if there in no ore then the mining claims are worthless. Not really. Do you have any idea of how many millions of dollars which the juniors don’t have to begin with would have to be spent to be reasonably certain as to whether or not a mining claim like Forum’s Key Lake Road project with its 223,000 acres did or did not have an economic ore body?

Penny mining stocks are not paid to do geological work on their mining claims. However, they should do $200,000-$300,000 if possible every year in geological work to try to prove up their claims. They are paid to assemble land packages in strategic, proven mining camps or mineral plays and to hold on to them until the next turn of the wheel sends all the stocks in the mineral play skyrocketing upwards. All will go up. The market does not discriminate and the junior penny stocks will go up more than the majors. Even if it later turns out that, they have nothing.

If it did not work that way, I would not be wasting my time with penny stocks. The market is only concerned about land packages in strategic locations. And the larger the better. Proving up ore bodies is the job of the majors.

Strathmore Minerals- the five year high on this stock was $5.04 a share and the five-year low was 13 cents a share. It is currently selling for about 45 cents a share. It has 89.9 million shares outstanding. The total market capitalization is about $40 million. To my mind, its 86,700 acres in Wyoming and New Mexico are the finest uranium properties owned by any junior in the continental United States. The market is currently placing an absurd value on Strathmore’s holdings of $460/acre.

UEX Corporation-the five year high for the stock is $9.43 and the five-year low is 36 cents. The current price of the stock is 92 cents a share. There are 203 million shares outstanding and the total capitalization is about $188 million. The share price of this high quality junior was absolutely pulverized. It has 824,000 acres of mining claims in the fabulous Athabasca Basin. Ten of its properties in the basin are joint-ventured with AREVA Resources, which is owned by the French government. There is nothing more positive for a junior than to have senior sponsorship.

Uranium Resources- the five-year high for this stock was $14.99 and the five-year low was 36 cents. The current price for the stock is about $1.00. There are 94 million shares outstanding and the current market capitalization is $95 million. This producer has been in operation since 1977 and has produced 8 million pounds of uranium from its 183,000 acres in Texas. It specializes in what is referred to as in-situ uranium recovery. In this process uranium is leached out of the ground and rises to the surface through a web of pipes.

If you have read this far I think you will agree with me that these stocks have been absolutely pulverized and represent enormous value if uranium can sustain a price above $65 a pound. One final word of warning. If you read my book you know that I am a fanatic on diversification. If you put more than 1% of your investment capital in any of these plays other than Cameco and Denison you are on your own.

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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Tuesday, August 23, 2011

"Getting Rich Through Homeownership - The End Of An American Dream," by Fred Carach

Much has been heard in the press lately about the end of the great American dream of homeownership but what the press has missed is that what has really died in the crash is a perversion of the American dream. The perversion of getting rich exclusively through homeownership. That perversion really started in the 1970s and died in the great real estate crash that began in 2007.

Prior to the 1970s homeownership was regarded as a key asset in the accumulation of wealth but it was never considered the only asset. Real estate values rose too slowly to accomplish that mission. In fact it is surprising how little real estate values have risen over the long term. According to the economist Robert J. Shiller, the recognized economic expert on this matter from 1890 when accurate records began to the crash year of 2007 residential real estate rose only 3.44% a year. Far less than most people would assume. Then the rise in inflation rates changed everything.

In the decade of the 1970s inflation turbocharged real estate and values rose a blistering 8.12% a year, the greatest rise in history and in the 1980s values rose an additional handsome 5.86% a year. These two decades convinced millions of American homeowners that they could now get rich solely through homeownership.

Their home they were now convinced was the truth, the light and the way to getting rich.

People adore owning real estate. They lust for the stability and permanence of the land. They can roll around in the stuff and as the saying goes they are not making any more of it. What’s more everyone knows or rather knew that you can’t lose money in real estate. People have always had an exaggerated notion of how profitable an investment real estate has historically been. This opinion is based to a great extent on the enormous leverage that is common in homeownership. If your down payment is 5% you are employing leverage of 20:1. Wall street speculators would kill for this kind of leverage.

But there was more to it than that. By the 1970s the American people had changed. They were for the most part no longer willing to make the sacrifices that their parents and grandparents had made.

Scrimping and saving and living below your means was too tough for them. Instant self-gratification was in. What was attractive to them was blowing every dime they had on a big-beautiful home and get rich while they were wallowing in their big-beautiful home like a pig wallows in slop. Saving and sacrificing was for dummies. As for the stock market it was way, way to risky. They were far too smart for that crazy gamble. Risk taking was for dummies. Their home was the perfect investment it required zero risk and zero sacrifice. Which was just what they were looking for.

An interesting component of this belief was an amazing lack of interest in any real estate other than their home. When there was enough equity in their home to support an investment in any real estate other than their home for the most part they turned it down flat. After all any investment outside their home would require a sacrifice on their part. We couldn’t have that happening now could we? Instant self-gratification always comes first. The smart career move from their point of view was to shoot for the Mcmansion. Boy could they pig wallow in that baby.

In 2007 their big-beautiful homes imploded on their heads. It is hard to overstate the financial devastation that the housing crash has had on the American middle class. The unemployment rate that everyone is whining about is almost a side show. For millions of middle class, home owning Americans their home was their only financial asset. In a matter of months millions of home owning Americans went “upside down.” They went from having $100,000 to $250,000 or more in equity in their homes and often much more. To being that much or more underwater.

For those who have twenty years or more before they retire recovery is possible but for the millions who are approaching retirement there is very little hope. The statistics are so grim that many of them are hard to believe. According to the famous Case-Shiller Housing Index home values hit rock bottom in the depression year of 1933 with a decline of -30.5% from the 1920s peak boom period. As hard as it is to believe according to the latest Case-Shiller findings we have just broken that record in the 2nd quarter of 2011 with a decline of -32.7% from the 2006 market peak.

About one-third of all the homes in America are paid off and have no mortgage. The remaining two-thirds of all homes have mortgages. An amazing 25% of homes with mortgages are underwater. The outstanding mortgages exceed the value of these homes.

Then there is the seldom reported vacant housing crisis. There are 126 million housing units in this country or about one housing unit for every 2.38 Americans. That is an awful lot of housing for each American. The classic 3/2 American home is overkill if there is only 2.38 people rattling around in it.

The census figures tell the tale. When I first read these numbers they were so bad that I could not believe that they were true. The 1990 census reported that there were a staggering 10.3 million vacant homes in this country. It gets worse, in the 2000 census that figure had risen to 15 million vacant homes and in the 2010 census that figure had risen to 19 million vacant homes. About 15% of all the housing stock in America is vacant. You could level 19 million homes and there would still be housing for every American. This is not good! What were we thinking? We were thinking that you can’t lose money in real estate. Every new home is money in the bank.

The chickens have come home to roost. There will be no quick recovery. We are not only broke but we have a mountain of inventory hanging over our heads. It will take us years to work our way out of this mess.

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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