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Gold stocks, steel, Amy Winehouse and Cold War
By Rob | March 19, 2008
“The Chinese B2B site Alibaba reported more than threefold increase in profits for 2007. The number of registered users rose 40% to 27.6 million. China is now the biggest Internet market with 210 million users. The EU stands in second place.” Rob Ivanoff
This chart straight from Trader Mark depicts the S&P500. See how the volume on Tuesday kicked in. However, most of the stocks that did well had the highest short ratios, which means that the rally was based on shorts covering their positions in addition to Euro-hedge funds getting in at bargain prices. Still, Goldman, Morgan and the the rest of the financials had one of the rarest up-days in their histories. Goldman Sachs and Lehman Brothers reported quarterly results that were cheered by the markets. Both investment banks reported about $2 billion apiece in writedowns, however, Goldman is a essentially a hedge fund which makes money in any market. Lehman is considered Bear Stearns’ closest cousin on Wall Street and we all know what that means. Say “Hello” to my little friend. 
This below is Amy Winehouse (one of the top singers this year). I am sorry to post this so vivid, but a friend asked: what’s eating Amy Winehouse? I have no answer, and who knows if it is connected with Britney Spears, and the crack that has been eating her over the past year.
That said, if you like watching documentary films, for example, on why we are in Iraq, or why the Cold War never existed, or why Einstein juggled multiple wifes, check out this post from MakeUseOf.
Here below is an article on the best texting cell phones. While people keep bragging about their Blackberries I think my I-Phone is the best texting machine.
Gold prices reached a previously unimaginable $1000 an ounce in March.The stunning rally in the price of gold and other metals has understandably piqued investor interest in mining stocks. I believe gold prices will stay high, however, most of the gold stocks are overvalued. Among other things, their costs are rising almost as fast as the gold price.
Many gold companies haven’t generated free cash flow in years and in order to expand, they just issue shares. For example, copper companies have been generating huge amounts of free cash flow, they pay special dividends, and they buy back stock. Copper stocks trade for only 12 to 14 times earnings, while gold mining stocks trade at 25 or 35 times earnings.
I like Barrick Gold for its strong pipeline of new projects, mostly unhedged production, and its ability to make acquisitions without diluting the stakes of existing shareholders. On the other hand, I don’t like Newmont Mining (NEM), the second largest gold producer. Recently S&P said that Newmont is struggling to replace reserves and has a stagnant production profile. Despite a revenue boost from rising gold prices, in 2007, Newmont’s gold output fell in 2007, its costs rose, it recorded more than $1.1 billion in one-time charges that left it with an annual net loss, and its cash flow from continuing operations didn’t cover its capital spending. Other firms that seem very overvalued and keep making costly investments are BHP Billiton and Rio Tinto.
On other hand investors looking for exposure to gold prices now can buy gold bullion through an ETF, and avoid all the company specific risks that go along with owning shares in a mining operation. Mining stocks are exactly that: stocks. If you want to participate in the gold rally, you don’t have to buy a stock. Buy an ETF and not worry about all the attendant risks of gold mining.
Wall Street is also very positive on is steel, where higher raw materials costs are driving mergers and helping U.S. producers to gain domestic market share at the expense of importers. Good stocks here are Steel Dynamics (STLD), Carpenter Technology (CRS 59), and Reliance Steel and Aluminum (RS). Slightly more than 50% of U.S. steel production comes from scrap, where prices have risen less than for iron ore. Also, rising energy prices are lifting transportation costs, making imported steel more expensive relative to domestic production. Costs are rising more for overseas producers than for domestic producers, so even though demand may be less than last year, domestic producers are gaining market share. Two diversified metals producers I like at the moment are London-based Anglo American (AAUK) and Canada’s Teck Cominco (TCK). A report from S&P research tells why:
“We view Teck as a vehicle for participating in consolidation of the global mining industry
and a secular increase in demand for base metals. In our view, rising demand for durable goods from China and India, along with less rapid increases in the supply of copper and other base metals, should support generally higher prices, sales, and profits. Also, we think Teck’s future earnings will benefit from rising demand for energy and metallurgical coal. Finally, we think the company’s 2007 acquisition of Aur Resources will boost Teck’s ability to replace its copper reserves and maintain production levels. We believe the shares are attractively valued. As for Anglo American, increased production of coal and iron ore will offset lower platinum production resulting from disruptions to electric supply in South Africa in 2008. Longer term earnings will benefit from consolidation of the global mining industry, the divestment of non-core businesses, share repurchases, and a secular rise indemand for base metals.”
See you all here tomorrow,
Rob
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Topics: Uncategorized |
March 19th, 2008 at 7:43 pm
Just a remark about the Gold Etfs, I consider them to be a much higher risk than the ETFs.At least you own part of a gold mine directly , rather than a financial commodity derivative.
March 20th, 2008 at 11:54 pm
Hi !
Excuse my ignorance, but what do you mean when you tell that Lehman Bros is considered Bear Stearns closest cousin on Wall Street ?
Thks for your answer,
Regards,