Saturday, January 03, 2009
First it was the large bank bailouts, but now it appears lots of big entities are in bad financial condition, including government entities at all levels (local, state, federal), pension plans look horrendously underfunded. Some of that is the flip side of how they looked great when the market was happy. We have the possibility of an anti-business government biting the hand that feeds it (and feeds everyone else) just like in the 1930s. This seems like a longshot, but who knows? I think if stocks go up this year, it will be unlikely, as people will be worried about the government harming their re-growing 401Ks. And I think Obama is good at measuring sentiment rather than crusading for some fixed ideology.
It makes sense to see Buffett bullish on US stocks now, but you'll notice that he was still waiting for the market to get/stay worse before jumping in with both feet with his personal money. There's a lot of stuff cheap out there, but there's also a lot of stuff that's going to fail in this climate. I think the big gainers going forward are going to be the solid companies that have been tossed into the garbage pile. Behind that will be the solid companies that have not been tossed into the garbage pile.
But I think there's a lot of bad stuff that needs to play out in the future. I tend to think we're going to see big parts of the economy look like the Titanic. Things that seemed rock solid are going to sink. But it won't be everything. The US economy and big parts of the global economy are very powerful, productive engines that are flexible (especially in the US as long as we don't regulate ourselves into being like Europe) and better than they've ever been in history. The economy can handle enormous amounts of stupidity and waste and still plow ahead. Regardless of bailouts, the garbage is going to eventually flop.
It's funny that everyone is horrified that consumer spending is dropping when the big fear of the past was that people were overspending and not saving. Consumer spending should drop. That's a good thing.
I've been putting as much cash into the market as I can, but like most other people, I need to keep a significant amount aside due to the uncertainties of things now. It's clear to me that things I've personally done "right" are now extremely beneficial: having almost no debt [and having high credit ratings], keeping a solid cash flow, living a cheap lifestyle, not getting caught up in the real estate frenzy whatsoever, and focusing over the decades on solidly marketable skills. In areas where I've been "out on a limb", I've gotten hit badly: owning some stocks that relied too heavily on things going right in the future instead of cash flow now. A lot of that was chasing after high returns in a time when too many things were overpriced. Once again, Buffett was right.
I've sold most of my Strathmore Minerals and Fission Energy stock and shifted what's left of the money into Cameco. There's no question that Cameco will not have the sorts of gains that Strathmore and Fission might have going forward, so it spells a huge permanent loss. Strathmore needs to raise a lot of money going forward and in this climate it's not clear if they can do it, although Hathor and another junior have been able to raise cash. In hindsight I would have been better off waiting until yesterday to bail, but I can't predict the market in the short term.
My view on uranium in the long term hasn't changed. Everything that David Miller at Strathmore has been saying over the years has been happening: demand continues to grow (for a variety of reasons all over the world), established miners have had constant problems getting uranium out of the ground due to 20+ years of neglect, and the hundreds of uranium companies that sprouted up are falling by the wayside.
I believe that the current economic situation favors the big established players in the uranium industry. [It's not clear to me whether Strathmore can pull itself into that category.]
I've also been slowly selling shares of Conforce International (CFRI). One reason for not posting anything here for a long time is that I wanted to give myself time to slowly unload CFRI and I'll probably keep selling more. At this point, I think their success is a crapshoot. At least they have a source of cash flow.
I've been looking at several companies that I had looked at over the years (but not posting anything here). I seriously considered investing in POSCO when they dropped down below $50, I even considered Berkshire Hathaway when they dropped a lot for a while there (the "A" shares were below $80,000). I consider the price of Berkshire to be a reasonable measure of the sanity of the market. When Berkshire drops a lot, it's a reasonable indicator that the market is not sane. In this climate, Berkshire's value goes up, not down, especially with Buffett in charge.
Given how bad the market performed last year, it wouldn't surprise me to see a big gain this year. It also wouldn't surprise me to see a big drop. Who knows?
I found your blog shortly after buying STM, and I’ve enjoyed your running commentary. So for selfish reasons I’m sorry to see you sell, but I understand the reasoning. BTW, your switch to Cameco mirrors what the guys who originally turned me on to STM did a while back. There was no financial crisis at the time, but after some ups and downs they felt they’d rather remove the small company uncertainty and get some returns that they felt were/are highly likely. For my part, I think things will work out well for STM if the overall uranium thesis holds. Owning the land with the proven low-cost reserves and having the permit to mine it seems to me to be the biggest part of the equation, and workable even if they themselves don’t have the cash to dig it out, and even if all past and current JVs have gone awry due to the financial crisis. But we’ll see.
I have been questioning the uranium thesis itself recently though. It was years ago that I bought the idea that reprocessing of demilitarized uranium filling the gap today would have to end eventually, and that when it did there would be some freaking out in the marketplace and a rapid rise in prices. But it seems now that what we’ve seen since then was largely speculation by guys like me (but with real money), not so much the end users. And the US/Soviet pact seems to be in place for several years still. Until 2013 I believe? Doesn’t a reasonable possibility still exist that yearly uranium production will trend upward in time to fill in the eventual government-based supply shortfall without a super-spike in uranium prices? The trend looks pretty hopeless now, but I wonder what might change that. More liberal permitting by governments, for instance, once concerns about a future supply shortfall and implications for “energy security” become more widespread? The recent DOE “excess inventory management” plan for instance seemed to be very much geared towards removing uncertainty in the marketplace by clearly broadcasting intentions.
Does this thesis compete well with other likely events, like “old Warren will do some clever things in the next few years and BRK IV growth will once again belie the size of the company” or “a basket of gold-plated blue chips with prices that have been crushed into the dirt will produce exceptional returns over the next few years due to mean reversion and strong worldwide economic growth”?
There are some other pros to consider for uranium production. The commodity crash has shut down lots of other miners. That may help solve the problem of the shortage of mining workers and equipment. Plus, these other miners will not be trying to raise as much capital which will leave uranium as one of the few places to invest if you want to invest in commodities.
Another issue is that there is a serious chance of a real dollar crisis. I don't know what the chance is but maybe as high as 50%. If the dollar crashes, uranium and other commodities will soar. Uranium might even do better than others since energy prices would go up and uranium is itself only a small fraction of the cost of nuclear power. So nuclear energy might be the biggest beneficiary of a dollar crash, more so than oil and gas. It benefits both as a commodity but also as one that becomes more competitive as energy prices increase.
Overall, I am very bearish on the US economy and stock markets. I am not buying now. I don't think stocks are nearly as cheap as they look. Earnings are going to plunge in 2009 way more than analysts have budgeted. They are not cheap based on book value which means profitability is still on the high end compared to the historical range. Wait for that to change.
The economy is in more a major restructuring to one less based on US consumption. That change will ricochet through the world in unpredictable and disastrous ways. I have gone to 70% cash from 50%. The best days for investing will be ahead of us, I am sure. I see another 50% drop in the S&P. The financial crisis is mostly behind us but the bigger economic crisis is ahead.
What do you make of this deal. Looks like 6-12 Months from now they should be out of the pinks and into some green. As you have stated in the past things don't happen as fast as they would like. Do you still like this one for long term.
Thanks and good luck with your other investments.
I'm working on a long term project in a different area. I expect to start posting again someday, but it will probably include a lot more stuff in the regular market. When I do start posting again, it will probably be without any warning.
Buffett says he has no idea what will happen in the market and I believe the same thing to some extent. But I still think the market overall is too expensive and based on a lot of optimism, given the things going on worldwide. There's a huge amount of junk that needs to fall down and flush out of the system.
The actions of the US Federal Government seem fairly reckless. I think the prices of owning businesses needs to factor in the changes that are inevitable. 2 out of 3 branches of government are like an angry bull in a china shop. The US will eventually repair itself, but not without a lot of damage and inefficiency.
I think the case for uranium is stronger than ever especially since these companies are priced so low.
CFRI also looks to be be making progress. Ocean going trails will be reported this year and if they are successful, they should be off and running especially with the military contracts.
There are some headwinds as I see it. For Strathmore it will be raising capital. Still, they are a well managed firm with solid properties. I think they will be successful. They are prices as if the market thinks getting uranium out of the ground is highly unlikely.
For CFRI, you have to worry about the state of trade and shipping which appear to be suffering. Still, they are so small you would think any orders coming their way would be in the noise. On the other hand I heard one shipping company was getting rid of napkins in the lunchroom in favor of paper towels to save money. That isn't a good sign. But the deal with Bayer is very promising.
I have a small position in both of these.
Did you see Mickey Fuld's writeup on Strathmore? It is very good.
Don't Stress The TestsI hope this is the upswing we're looking for!
I might actively start posting here again some time if there's something significant to post. Especially if I do any serious searching again (which is very likely at some point).