Oil Crash

The collapse in the oil price has been the center of attention and a popular topic of debate. How low will it go and how long until it rebounds? The consensus view is that sub $70 oil is not sustainable in the long run but it wouldn't be a surprise if prices stay low for at least a few months as the markets digest the glut. Well, we all know the motto of this blog and if it hold true then either the oil price will rebound a lot quicker than people expect or we are in a new bear market for oil which will last a lot longer than people expect (2+ years). Another real possibility is that we do see a rebound shortly but it ends up being a short lived oversold bounce.


The logic behind the LT bullish case is as follows. OPEC nations needs on average $100 oil to balance budgets, the marginal cost of production for shale oil is about $70-75 and so  it would be a matter of time before some of the high cost US supply starts declining. The crash appears to be supply related. US production of oil has been rapidly increasing over recent years hitting 30 year highs. I've noticed it all along and said to myself "It's a good thing they found all this oil for imagine what the price would be without it". Well there's a flip side to that coin because all this new found oil turned out to sow the seeds for its own demise as supply finally caught up with demand and exceeded it. So, the issue is how long will it take for the oil market to make the adjustment. Like I said, there's a lot of people hopeful that it won't be long but recall what happened with natural gas a few years ago when the shale boom resulted in a supply gut. The bust that followed was painful and prolonged and gas traded a unfathomable low prices for a long time, and although it finally bottomed in 2012, it still remains historically low . Then there's the bust in gold and uranium in recent years as well which were multi-year events not mutli-month ones and that's the way it usually it with commodities. Projects takes years to come online and many can't simply be turned off like a light switch and so oversupply conditions can last for a long time With oil however there's the unique dynamic of  OPEC which other commodity markets don't have.  OPEC seems to have the ability to turn off the taps quickly and are playing a game of chicken with US producers. But will they cut or can they cut and when? At what price?

In the midst of the oil crash I noticed some complacency. On a whole, oil companies have not announced material reductions in spending plans during 3rd quarter reports unlike what happened in q3 2012 when oil prices had declined in the summer that year. Perhaps they just need a bit more time and spending cuts will be announced in the near future or during q4. I can't see how there won't be material spending cuts with a 40% drop in oil as well as a huge wave of analyst cuts to earnings. Much of that could already be factored in to the stocks prices. I read an article about how the CEO of Continental Resources Harold Hamm lifted hedges as oil slid towards $80 in early November as he's so confident that a rebound is immanent. That kind of bravery is not what you want to see when looking for a bottom. However, after this latest plunge to sub $70, we're not seeing complacency anymore and more people are starting to believe that these "low" prices are going to be longer lasting. Where are all the peak oil guys now? BNN and other financial media are featuring segments that discuss which sectors and stocks will be beneficiaries of low oil prices. That's nice but you guys are $40 late.

In Canada, the plunge in oil is a double threat. The obvious one is the damage that will be done to oil producers especially the higher cost oil sands projects but the other, less obvious threat is with the nascent LNG industry. There's been a lot of hype and high hopes about it in recent years. The pricing of LNG contracts are oil linked and so they too have crashed along with the oil price. Right now with the spot price of LNG in Asia is about $10.50/mcf which makes LNG in Canada uneconomic. From what I've read most projects need to lock in LNG prices of $14-15/mcf to justify the risk of spending billions of dollars and so I was very much expecting last week's news that Petrnonas is delaying their final investment decision regarding LNG in Canada . They cited high costs as the reason but the true culprit IMO is low oil prices for not only does it make LNG pricing less attractive but it also squeezes their existing cash flows making them less able and willing to take risks with multi-year capital intensive projects like LNG.

If this downdraft in oil is simply a major correction similar to the summer of 2012 then the energy sector is a very attractive sector to invest in right now. If though, we have entered cyclical bear market in oil then it's going to be bad place to be in for the next 2-3 years at least unless you take a trading approach and play the swings. While we can certainty see an oversold bounce soon, I really don't have a good feel for oil here longer term at this point. There's mixed signals but there have been indeed signs of excess which typically accompany the peak of a boom. One of the hot spots of the shale oil boom was in the state of North Dakota where incomes are booming and unemployment is at lowest rate in the US at sub 3%. I  read about how there was an advertisement for pizza delivery jobs offering a $56K/yr + benefits and how one Walmart was offering $17.40+/hr for entry level employees. It gives me dot-com mania nostalgia when I see things like that and makes me think that this has to end badly. This is obviously just a couple of examples and it would require more DD to get a more complete understanding as to just how much excess there  really is in the US shale boom. I've been looking at a few natural gas weighted plays because I think that ultimately, gas prices will go higher with or without LNG but I don't want to have to deal with any oil related headwinds that could weigh on it for several months, plus the markets overall are overbought and I don't want to get caught in any general market weakness. I'm frustrated at this point. 

Still Alive

It's been a while since my last post. After a month long trip to Korea, I've had lot's of time to reflect and think about what's happened to me this year. It's been a terrible year and I put myself in the position to get hurt the way I did. I still believe that in life you need to be bold and take risks but I crossed the line from being bold to reckless. How can you tell if you're crossing that line? You will know if you answer yes to this question: If things don't go my way will I regret it? Obviously you're not going to happy if you take a risk and you lose but that's not what I mean by regret. What I'm talking about is regret rooted in the notion that the action you took was fundamentally or morally wrong. Despite the fact that I was so confident in Greenstar and got to purchase the bulk of my shares at a discounted price to what the market price was at the time, it was reckless for me to have risked as much as I did. It warranted a sizable bet but I broke the number one golden rule I had for myself which is never put yourself in a situation where you get wiped out or crippled if you're wrong. I believed I had good reasons to make an exception to this rule but I was wrong in the worst possible way. There are no exceptions to this rule because there's no way you can be certain of anything in this game. Whether it was bad luck, bad judgement or both you simply can't expose yourself the way I did.

I've been beating myself up a lot going over the thought process I had during ever step of this fiasco but I over it now and come to terms with it. The bottom line is that what I did  was what a naive, overconfident amateur would do. Given my experience I should have known a lot better and I'm so ashamed of myself but there's really 2 ways to handle something like this. You either let it destroy you or you learn from it and do whatever it takes to recover. I've chosen the latter. I've had many setbacks in life but I was never the type who stays down for long wallowing in self pity. I've always bounced back becoming stronger in the process. I went through some very dark times in recent months. Many days I felt dead on the inside and I  didn't even want to get out of bed. But I'm doing what needs to be done to recover. I've taken comfort in my family, namely my daughter. She motivated me to get back on my feet because I don't want to end up being a loser deadbeat dad and have a negative impact on her life. That would be something I could not live with. I'm taking steps to recover. I've found a "real job" which I know I can do well and could lead to growth and I continue to look for investment opportunities with the capital I still have.

As far as Greenstar goes, there is currently a class action against the directors and auditors led by Siskinds. They had success against another Chinese company named Zungui which basically allowed investors to recover 30% of their investment cost but the whole process took 3 years to play out. I'm not holding my breathe on this but these guys appear to have a good track record.

I recently watched a documentary about the World Wars on the history channel. In it they document the struggles and triumphs of the allied leaders. Winston Churchill is regarded as a hero of WW2 but few people know that in WW1 he spearheaded the invasion of Gallipoli which ended up being a disastrous defeat costing many lives. His political career was effectively over at the time and he was forced to resign. What did he do? He picked up a gun and fought in the War. In time he regained his former post and eventually became Prime Minster of the UK leading the allies to victory in WW2. I like Churchill, feel  I have to return to the front lines in order to build myself back to where I was. If I fail, then I fail but I will never surrender.

Game over with Greenstar

As expected there was something sinister going on with Greenstar and mgmt finally coughed it up. There is no chance it will ever trade again and depending on what the status of the company and its assets are, investors will either get a fire sale salvage value or nothing at all. My greatest fear when this debacle first began was that the asshole CEO Guan was purposely sabotaging the company to get it delisted so that he could in effect take it private and try to run away with the assets somehow or have GRE sold to an arm's length 3rd party for peanuts (and then later getting involved with them) knowing that investors would be inclined to accept such deal so as to salvage at least something. Why would he do such thing? Because he's either a ruthless, greedy asshole who was unhappy about how Greenstar was being valued by the market or he ran into personal financial problems, needs money and is setting up to offer GRE to lenders/creditors at a fire sale price in exchange. It's also possible that the company is a sham but if that was the case how and why did they start a dividend then raise it 50% and why would|Guan put $300K of his own money in the PP? Nobody knows the truth of Guan's motives right now but he's either either fucked up mentally or is a sneaky, conniving asshole who did everything he could to stall the board from uncovering his hidden agenda for as long as possible. In late August after several weeks of haggling/stalling he finally agreed to fly in the auditors so that they could complete their work. He even authorized to pay for their flights. Then when they got there he made excuses to deny them access to the bank and tax info they needed. What piece of shit.

If Greenstar is indeed a viable company and the financials were at least mostly accurate then there is a lot of value that would be theoretically available to investors. Assuming the above, GRE would have at least 0.60/sh in cash by now with at least $1/sh in working capital. Hanfeng was another Chinese company that went through a debacle similar to that of Greenstar and their situation appeared worse yet their board managed to salvage a deal whereby the company is to be liquidated to a 3rd party giving shareholders a payout of what looks like to be 0.60-0.65/sh which is not bad considering the 0.71 price the stock last closed at. If GRE is indeed viable and Guan is trying to take this company private on the cheap by purposely not co-operating with the board then there's hope that something could be salvaged such as  0.40- 0.50/sh. That would be a fucking ridiculous low ball value but I'm sure most people would take it. One thing we have going for us is that there are Chinese investors who are also holding the bag and are going to go after Guan. They would be much more effective in getting legal authorities to take action against him than any Canadian would. I know Newman is also going to exhaust every means possible to salvage something for the sake of investors and his own.  If however the company was a mirage like APX was then forget about it. The only recourse for investors would have is to go after Guan personally and the board and that will probably not yield much if anything. 

Despite everything I said, I think it's best to not have much hope and assume the worst outcome here. This is not to say don't bother trying to recover something but rather to assume that this will most likely end up being a total write-off. False hope is a terrible thing to have.

Orca Exploration - a turnaround in the making

Another one of my holdings is Orca Exploration (ORC.B). I've been following this one for about a year and (luckily) took a position a couple months ago just before it started this breakout rally.  Orca is basically a natural gas producer operating in Tanzania in partnership with a government owned company called TPDC. During the past few years the company has been plagued by problems starting in 2011 with the accusation that they were cheating the government for some $20M in revenues. Those accusations turned out to be false as this $20M was due to an accounting error in the government books. Meanwhile Orca's largest customer, government owned utility company TANESCO, was cash strapped and started delaying payments to Orca and to this day still have $45M+  in arrears. This has been the biggest problem with the company. There is also an ongoing dispute between Orca and TPDC regarding $34M of costs that were recovered by Orca from 2002-2009. This issue is not as big as the overdue accounts receivable from TANESCO in my opinion and may end up being resolved by an arbitrator.

The stock broke out above $3 about a month ago when the company announced that there was negotiations with 3rd parties regarding a range possible transactions with the company which includes the possibility of a financing, the sale of the entire company or a sale of assets. The rally was further extended when Q2 results were released last week which indicated that the arrears situations with TANESCO has notably improved. TANESCO had made significant payments to Orca during q2 and subsequent to it whereby Orca now has a cash balance of $60M or $1.69/sh. That's quite large and it's about double the cash they had at the beginning of the year. TANESCO is still $40M in arrears but in the words of the company, the situation has "stabilized" and if this trend continues a large black cloud will be lifted from Orca.

Tanzenia is hungry for more electricity and the country is subject to brownouts. As a result, there is  presently a capacity expansion project in the country which should be completed by mid 2015. Orca owns significant gas assets that would be able to supply the feedstock for this expansion which would give the opportunity for Orca to just about double their current production. However, to do this Orca would need to invest a large amount of capital and is not willing to deal with TANESCO regarding this expansion unless among other things, TANESCO pays up what they owe and there's some sort of payment guarantees for future delivery of gas. If not, Orca has the right to seek other buyers for their additional gas but I'm sure it would be in everyone's best interest if they sell their additional gas to TANESCO.

Orca's fundamentals look pretty good right now and momentum appears to have finally swung in their favor given the significant improvement in the balance sheet due to what appears to be a turnaround in the arrears situations with TANESCO. Tanzenia is getting aid from the World Bank which is probably why they are starting to pay their bills more. Orca also has a huge potential growth catalyst in the not too distant future. Compare the q2 stats that Orca has now to that of 2010 which was prior to when problems started occurring:

                                                             q2 2010      q2 2014

Net CF from operations (YTD)           0.33          0.45
Cash per share                                    0.61         1.69 (present day)  
Working capital per share                    0.85         1.04
Debt                                                    nil             nil
Book value per share                           $2.51       $3.62

This is a  very basic analysis but the fundamental situation with Orca appears quite better now vs 4 years when the stock price was $4 and the company had no "issues". The stock climbed further to $7 before getting derailed by recent problems. The arrears situation with TANESCO resulted in mgmt making what I think are overly dire remarks in the financial reports in recent years always warning about how Orca may not be a going concern in the near future if TANESCO didn't pay up. Well, if  you looked at cash flows from operations in recent recent years, it suggested that Orca was doing just fine.

                                                      2013    2012     2011    2010

Net CF from operations (000's)   22491    30883    4577    15537

The big drop in CF is 2011 is when TANESCO started becoming late in making payments but as you can see they didn't stop paying all together. These numbers are quite healthy given the market cap and debt free position of the company. Despite the problems the company has had in recent years,  it has steadily grown both its cash and equity values which means there's not only been positive cash flow from operations but also free cash flow generation.  With Orca's current $60M in the bank, they are by far in the strongest financial position they have ever been but yet the company still mentions going concern issues in the financials! Q3 financials are poised to be quite good from a cash flow flow perspective given that $18.6 M TANESCO has paid Orca since June 30th.

The company is fundamentally quite undervalued even with this move to $3.60 especially given the news of their significantly improved financial position. They have a reserve value of $11/sh and are poised to double production starting in mid 2015 but they will need some luck for that. The bottom line with Orca is that the "problems" that have plagued the company in recent years were not as dire as they appeared to be and they look to be at least stabilizing if not dissipating which should provide for improved investor sentiment and therefore higher stock price should the trend continue. The company may end up getting acquired or consummate some other transaction which presumably would result in further upside but if those talks should fail there would be sizable dip. The fact that 3rd parties are looking to possibly acquire Orca or get involved with them somehow indicates I'm not alone in thinking it's an attractive company at these prices.

The ultimate spec play - Nautilus Minerals

I don't think I've ever come across a stock like Nautilus Minerals (NUS). This company is proposing to build the world's first underwater mine. The implications of this is beyond enormous to say the least. Most people are probably unaware that the ocean's floors hold an abundance of untapped minerals/metals in what's called SMS deposits These deposits contain primarily copper, zinc and gold with grades far superior to that of the average land based mine. Since the discovery of SMS deposits over 50 years ago, nobody has ever attempted to exploit them until now. NUS believes that thanks to the developments in offshore oil drilling in recent years, we now have the technological capabilities to mine the ocean's floors and they believe they can do it profitably and safely (which is debated of course).

NUS first began exploring for underwater SMS deposits as far back as 1997. They became a public company in 2006 and had identified targets for underwater mining in the Bizmark Sea just off the coast of Papua New Guinea and since then they have been working towards getting all the necessary permits, studies, equipment and partnerships to achieve their vision of mining the seabed for the first time in history. The road to this vision has not been an easy one to travel. There have been serious stumbles along the way which included the financial crisis in 2008 along with a 3 year dispute with their joint venture partner, the PNG government.

In April of 2014, it appears as though NUS hit a major turning point after many years of suffering. They came to an agreement with the PNG government whereby PNG took a 15% stake in their joint venture to mine the Solwara 1 deposit with the option to increase to 30%. As a result of PNG's 15% commitment there is $113M in escrow which will be released to NUS on the condition that they secure the vessel that is required to carry out the project by November. NUS is confident they can do it and in the meantime are in the process of building the equipment and machinery needed to mine the deposit. Once the vessel is secured, mining is expected to begin 2-3 years afterwards. That's still quite some time from today but never has NUS been this close to carrying out what they set on doing 17 years ago. If NUS is successful with their first mine, the sky is the limit. They have explorations licenses for about 500,000 square KM of prime seabed real estate.

This is not just some pump and dump pipe dream stock. These guys are actually in position to make a serious go at this and they have a government partner along with some big name investors behind it.  There's no doubt many serious risks and uncertainties with this play including the potential for more stumbles, but for the first time in several years NUS has the wind at their back and have never been in a better position to make their dream a reality. The hype alone could make this stock soar once they are on the verge of production and it could easily turn into a bubble stock as is the case with most "new paradigm" companies. The question I've been asking myself is how much should I commit now given that we are still 2-3 years away before mining begins (assuming things go as planned). I think some sort of a commitment now is warranted. I'm sure a lot of people including big money players are going to take a wait and see approach and only be convinced once they see results but by the time they see what they're looking for the stock will be much, much higher than 0.54. One near term catalyst is when NUS secures the vessel which would unlock the $113M from PNG. That could cause the stock could pop another 20-30 cents easy.  At this valuation I think the risk is well worth the potential reward to commit 40-50% of what I have in mind and then take a wait and see approach with the balance over the next year or 2. Of course with this type of play I can't bet big but  I think you gotta have a piece of this, even if it's just 500 shares.

Foran Mining

I normally don't look at long shots because I try to avoid gambling when it comes to putting my money on the line. While every investment is a gamble to some degree, when you buy companies that don't have a proven product and are burning through cash, the risk of major or total loss is high. Having said that though, if you buy at the right price and with the right circumstances, it can be worth making a play given the potential reward although you still have to keep such bets small. One such play I believe is Foran Mining (FOM).

FOM is an exploration company located in East Saskatwean that owns a few VMS deposits which contain primarily copper and zinc. VMS stands for Volcanic Massive Sulfide. Pretty interesting stuff. Its flagship project is McIlvenna Bay which has the potential to be a significant copper and zinc mine. Here's the thing about exploration companies on the TSXV - they are a dime a dozen and all of them would seem to have "potential" but the vast majority end up either going bust or diluting their shareholders into infinity which is why I generally avoided these plays, but because of the carnage that has taken place in this space in recent years I have become more open minded as there's gotta be some worthwhile prospects trading on the cheap that were unduly trashed. One of them appears to be FOM which has a rare confluence of  positive factors going for them. They have management and significant investors with great reputations and deep pocks. The Chairman is Darren Marcombe who once worked for Newmont Mining. He restructured this company in 2010 and brought in his former colleagues Pierre Lassond and David Harquail as significant investors. He then hired the CEO Patrick Sores who had just come off a success leading a company that got acquired.  FOM's  flagship property is sizable and appears to have attractive fundamentals, it operates  in a safe, mining friendly jurisdiction, has infrastructure already in place (roads, power) and is located 60 km from the mining town of  Flin Flon which means there's readily available personnel. There's a mid sized mining company called Hudbay Minerals nearby (which is the founder and vital employer of Flin Flon) which operates 2 mines similar to the one that FOM hopes to be to build. They only have about 7 years worth of ore remaining in their mines surrounding Flin Flon without any worthy prospects (apparently) which means FOM is in a perfect position to be acquired by Hudbay sometime in the future and it wouldn't happen 6-7 years from now either as it would probably take at 2-3 years to permit and build the mine before it's ready for production and Hudbay would almost certainly not wait until the last minute to replenish their inventory which means FOM could be acquired in the not too distant future. The more they can prove their resource is in fact economical the greater the chance they will get acquired by Hudbay or someone else.

They are conducting a Preliminary Economic Assessment a.k.a. Scoping Study which should be complete by year end or early next year. If that checks out, the next step would be a Feasibility Study which I've learned is what you need to have done in order to provide the highest level of confidence/proof to financiers that the resource in question would make for a profitable mine. I spoke to Darren Marcombe at length and based upon his calculations (not the company's) he thinks McIlvenna Bay could have a NPV(8%) of $250M with a capital cost of about $250M. This NPV number  is based upon a 24M ton resource which assumes that the current indicated and inferred resources in their most recent 43-101 technical report end up becoming actual reserves. That's a rather aggressive assumption and I'm not sure what other numbers he's plugging in but he knows more than I do and even if he's just half right it would be quite significant given FOM's current $16 M market cap.

Looking into mining companies such as FOM and NSU has forced me to learn new things. Prior to this I had no idea what a Scoping Study was or that you need to be aware of the major difference between a resource and a reserve. Mining is no doubt a tricky and complex business and there's no way I will be able to understand all the details of a report but I can tell you that I know a lot more now than I did just a few weeks ago. I'm getting to know what the important terminology is and the basic rules of thumb.  For instance, it usually takes several years i.e.7-10, to go from discovery of a deposit to building a mine. After reading the historical news releases of these companies and others, I can see that there's a lot of ups and downs with the mine development and operation of it even with the successful, profitable companies like NSU. There always seems to be unexpected developments that even geologoist experts couldn't have predicted and things often take longer to develop that you would hope for which is why timing and the price you pay is important. With FOM I may very well be a little early unless base metal prices heat up in the next few months and the "animal spirits" create a rising tide that lifts all boats situation. Either way, I think FOM is worthy of a small bet at 19 cents given the potential catalysts and large payoff.
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Show must go on

Still no word from Greenstar and my disposition towards the situation remains the same. The prolonged silence tells me it's pretty much game over. I've moved on though. I've gone through some of the darkest days in my life and I feel like I'm walking around with a hole in my chest but I'm not going to give up. I will do my best to come back from this and if I fail, I fail. At least I won't fail without a fight.

For the first time in a while I've come across a handful of interesting companies and that has helped me to get my mind off of Greenstar. These names are all in the resource sector and each of them have interesting stories. I think that junior base metal plays in particular are looking interesting here. The sector has been badly trashed from 2011 to 2013 but it looks as though may have found a bottom about a year ago and if that's the case we're still early in the recovery phase making this what I like to call the "sweet spot" whereby you have the wind at your back early in a turnaround situation. Here are a couple of solid cash flow generator stocks with clean balance sheets, attractive valuations and promising growth potential I have started positions on.

Dynacor Gold Mines (DNG)

This little company owns a gold mill and a few exploration properties in Peru. They purchase the ore for their mill from small local miners which account for a lot of the mining activity in the country. The beauty of the business is that they always purchase the ore at a discount to the gold spot price, therefore, it doesn't matter what gold trades at, these guys always make money. Well, that's not entirely true.  I've been told by IR that the company would feel the pinch if gold were to drop to $700/oz or so as it would no longer be economical for a lot of the local miners to extract and sell the ore. Also, the discount from spot they get from buying the ore will widen or contract slightly as gold price rise or fall respectively but the bottom line here is that so long as the gold price doesn't tank really big from current levels, the mill is a steady cash flow generating machine. They are planning to double their capacity by constructing a new mill for which they are still awaiting a permit from the government. This expansion will be organically financed given the company's cash position which means no dilution to shareholders and a potential doubling of EPS to about 0.60. The new mill will be scalable giving DNG the ability to increase capacity as much as 6 fold from current levels in the future. I was told it would take about 8-9 months after the permit is issued before the new mill would be constructed and operational. Once they have the new mill operating they will likely start a dividend.

Early this year the government cracked down on illegal mining activity which had a temporary disruptive effect on all mining in the country including the legal operators like DNG and their customers which caused DNG to report a weak Q1 and a delay in receiving their permit. Things appear to be back on track though given Q2 results and the oulook for Q3 and the company hopes to get the permit in 2-3 months. The government crackdown was actually a LT blessing for the company because it resulted in the permanent shutdown of 50% of DNG's competitors!

The company also has what appears to be a promising flagship property in an area called Tumipampa which is the cherry on top. I admit that I am quite clueless when it comes to assessing mining properties but  from what I've read, this property could be worth $100 M based on drill results so far but  I stress the word could as there's been no preliminary economic assessment conducted (getting a formal, albeit early, rough estimate as to what the property could be worth).

When you take into account the existing fundamentals (which includes the pristine balance sheet), how the company is poised for significant organic growth and the blue sky potential with Tumipampa, you don't need to be a gold bug to like DNG at its current valuation. The main risks to the play is a crash in the gold price and political risks of operating in Peru although it should be noted that the company has been operating in Peru successfully for several years.

Nevsun Resources (NSU)

Here's an interesting mining company that operates in Northern Africa in a small country called Eritrea. These guys are making tons of cash from the one and only mine they operate which is 40% owned by the government. The mine is primarily copper with a cash cost of about $1.05/lb. When you consider that copper current trades at about $3.10/lb you can see that their margins are huge. The stock trades around $4.20 (Canadian) and pays a .04/sh quarterly dividend  They have a pristine balance sheet with $360 M or $1.80/sh in cash with no debt. They trade at an EV/EBITDA multiple of about 2.5 which is incredibly cheap. There are some reputable institutional investors like Blackrock who are significant shareholders. So the question one should ask is what's the catch? One factor is the location of where the company operates. Eritrea is not what you would consider a politically safe place to do business, however the company has been operating there for many years without incident. Last year the company was accused of using forced labor to work in their mines but apparently it was one of the company's sub contractors was that guilty of doing this which they were not aware of. That issue seems to have dissipated but it just goes to show you the type of risk that exists when you are in a country like Eritrea. Although Eritrea claims to be democratic, it's a one party state whereby the residing president has been in power since 1993. Here's the thing though. With NSU's massive cash position  (held in US banks) and no debt, they are in a position to make a significant acquisition in a more politically stable country which would significantly reduce their operational risk while providing major organic growth.  They've been on the hunt for an acquisition for some time to do just that and I think it's a question of when, not if they will make one. From what I can see, next year's copper production is slated to decline about 15% and then drop about 50% from current levels in 2016 which will then be supplemented by zinc production. I've read that the zinc is very high grade but I'm not sure yet what the cash flows will look like and perhaps neither does the market. This uncertainty could also possibly account for the low valuation as well, but that would be short sighted thinking since the company is in such a great position to expand organically and is motivated to do so. The company also has prospects surrounding their existing mine that they are exploring.

When you size up up the risks vs rewards NSU looks very appealing to me. It should be also noted that the day to day movements in the price of copper will impact the stock but with NSU's cash cost only about $1.05/lb they will be cash flow positive no matter what copper does (unless of course it totally collapses).

I'll talk about a few "long shots" in my next post

I'm ready

There has been no news released by Greenstar for over a month. It has been far too long without an update and at this point I've thrown in the towel in terms of hoping for a positive resolution to this.  For what seems to be a straight forward issue to resolve it's taking way too long and with the company being so quiet like this it can only mean there's a major problem of some sort. I've assumed the worse and I'm ready to take a total loss on this. It will be devastating and I don't know if I can ever fully recover but I've done my grieving and accepted it and so there's been no more sleepless nights for me.  I'm ready for the worst. I always knew there was the risk of this happening but I just never thought it would happen like this. I suppose a lot of people in my situation will say that. I suspect news will be coming soon as the company can only stay quiet for so long. Whatever they say won't hurt me as I'm already dead.

So far so good....

Things seem to be moving forward with Greenstar. They are still not out of the woods but it was a big relief to know that the CFO, who flew over to China, confirmed the story of the CEO and that there's nothing else going on. It was my biggest fear that there was more than meets the eye with this crisis....and there still may be, but such fears have been quelled given recent news. Major hurdles have been cleared. Now that the finance chop has been replaced the audit can be completed and  it should be a matter of short time before it gets done and the financials can be filed. Management is targeting the end of the month but don't be alarmed if it ends up taking a little longer. There's a few moving parts for this thing to get done and so the company probably needs a little good fortune for all to go smoothly. One possible remaining concern is the cash in the bank. Was there any funny business going on with the cash while the controller had possession of the finance chop? It's highly unlikely as it requires both the finance and legal rep chop to make transactions. So, the only way the cash was tampered with is if the controller and CEO were conspiring and that too seems quite unlikely. If that was the case, I don't think the CEO would have been cooperating with the board the way he has as well as supporting the company with his own money (the bank accounts are frozen without the finance chop). If he was guilty of wrongdoing I think he would have behaved a lot differently and pulled the plug much like what the CEO at APX did.

If and when the financials are filed, I suspect the company will also have to provide an explanation to the regulators as to how they intend to ensure that a similar crisis will not happen again before trading gets reinstated. As mentioned in a prior news release, the company has plans, but will they be enough to satisfy the regulators? That is another remaining risk but I don't think it's one to be overly concerned about.

As I stated last post, if Greenstar can survive this crisis they could end up being stronger as a result. In completing the audit, they will have satisfied higher standards as per the mandates being enforced by CPAB which I also touched upon in my previous post.  They will have identified and corrected a major weakness to their corporate structure and I'm quite sure they will also be examining other potential weaknesses and take a proactive approach to address them as well. They will do everything they can to win back investor trust. However I'm sure some people are not going to look at this way. There will be those who will take a pessimistic view and claim Chinese companies can't be trusted no matter what.  There are bitter shareholders out there I'm sure, who will be eager to sell at some point if and when trading resumes. I will not be one of them.

This crisis as serious as it is, did not involve fraud nor has it harmed the company's operations or prospects in a material way. From what I can tell, there have been no major disruptions and the Canadian acquisition is still on the table. People make mistakes. Some mistakes are forgivable others are not; in my opinion this is the former. The CEO Guan appears to be mainly at fault here for letting the situation with the controller get too far out of hand and didn't inform the board until it was too late. I think he learned his lesson here and deserves a second chance. Let's hope he gets one.

Crisis

It's been an absolute nightmare for me since my last post given the events of Greenstar. I didn't want to talk about it until there was sufficient facts. On April 28th Greenstar announced they would not be releasing their year end financials on time because the auditors were not able to complete their audit procedures. It was later revealed that the reason for the delay was corporate governance and admin deficiencies due to an internal dispute between certain members of the company's finance department led by the controller and the CEO. They basically want more money and the controller has took possession of  the finance chop a.k.a seal to gain leverage. Without the finance chop the company is unable to access any banking and tax information which is necessary to complete the audit.  The CEO is in possession of the more important legal representative chop. He has the ability to replace the finance chop and the company is in the process of doing so. Once that's done, the company could move forward with completing the audit.

Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.

A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a  lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.

The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from.  To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.

Out of sight out of mind

First a few market comments. Since my last post we've seen a notable pullback in the NASDAQ and a more modest one for the markets in general. The frothiest sector of the market  has been unwinding somewhat as there seems to be a rotation away from the tech high flyers. Anytime the markets pullback 2-3% I continue to see quite a bit of angst out there....people talk as if the market has crated 15-20%. It once again shows the wall of worry psychology that's still out there. This makes the prospect of shorting the market in the hopes of captializing on a correction quite unappealing to me because it's difficult to get downside traction when you see worry rather than complacency on just a minor dip.

 If you pull up a 1 year chart, there's 2 ways you can look at the market - you either see a top forming or a consolidation. From the ways things are unfolding, I believe we are seeing the latter although there could very well be a downside "headfake" sometime in the summer to make it look like the former. I think we could see something similar to 1994 or 2004 whereby the market traded sideways for the majority of  the year as the market takes a wait and see approach to the withdrawal of fed stimulus. In 1994 and 2004 the fed was hiking rates from low levels.  This time around, we got the withdrawal of stimulus via QE. It's dangerous and rather foolish to believe the market will unfold the exact same way it did in some previous time frame but there are a few times where the action does "rhyme" to some degree when circumstances are similar, but the market never plays out the exact same way. I can't tell you how many times I've seen people overlay a current chart with that of some previous time frame claiming how there's a repeat in history taking place and it never turned out.

Switching gears now. In my year end review, I pointed out how one of the things that I needed to stop doing was checking my stocks every day. It's often the case that I would check them multiple times a day as I'm sure most people do. I've learned the hard way how damaging this behavior can be both to your bottom line and mentally. It causes you to become fixated with the ST and may lead you to take inappropriate actions namely, selling in disgust/fear when the price has been sliding  for some time or selling too soon after the stock had a good move to the upside when the fundamentals and valuation warrant doing neither (the mistake I tend to make).  Given that I make "conviction bets" with a value focus and LT horizon it's pointless to focus on the day to day or even month to month fluctuations in the stock price (unless your target price is hit which you can be informed via a price alert). The only focus should be on fundamental developments. Even if you are able to resist making an inappropriate ST trade;  watching the day to day action will put you on an emotional roller coaster with highs and lows that can take quite a toll on you and impact the other parts of your life. Some people handle it better than others but the more you have on the line the more likely you are going to be impacted by the day to day ups and downs.

There have been a few times in recent years where I have suffered mentally because of adverse ST moves that were not fundamentally driven - they were liquidity driven due to a large seller who wanted to liquidate for non-fundamental reasons or perhaps trivial ones. Despite being pretty sure I got the fundamental story right and being fully aware that the microcap space is prone to nonsensical volatility due to liquidity events as I described above; when a significant adverse move happens I still can't help but worry at least a little if someone knows something I don't or I overlooked some important factor. Those nagging worries can easily turn to doubt and paranoia if the stock has a prolonged slide. It will also make me prone to selling too early once the stock does turn around as I don't want to have to go through another agonizing experience again on the next correction. If I had not gone through the emotional roller coasters I'm pretty sure I would not have made many of the premature sales I made over the years.

It's been about 2 weeks since I've gone "cold turkey" by not checking the price of my stocks. I have real time alerts that will notify me when news is released and I will receive a price alert if the stock hits an upside target price so it's not like I'm just sticking my head in the sand here. If there is a fundamental justification to take action I will. It was hard to do this at first and I felt very anxious but now I've been able to just let it go and there's no urge to check. I feel so much more relaxed and clear headed. I'm more productive with my day as well. If you have a similar LT approach to the market I strongly recommend you try this. You must however, not confuse this strategy with being in denial about a bad situation whereby the company you own is in bad shape fundamentally and you don't want to look at the price anymore refusing to sell a loser.  A perfect example of this would be Nortel 10 years ago.

This "no look" strategy really makes a lot of sense if you're a LT value investor. As such, you are not interested in what the stock price is unless it hits at least fair value. You view the purchase of a stock the same way you would the  purchase of a private business and so if that's the case, would you then check the value of your business the day, week or month after you bought it? Of course not. The only thing you care about is the business itself and how it's running and if it's doing well, you won't be interested in selling it unless you get at least a fair price for it.

As a result of my new-found strategy I will disable comments and will not answer emails (because I will not check for them) at least temporarily.

Top picking

There's no shortage of bearish calls out there. There's even comparisons of the market to 1929 based upon a chart overlay. That's a joke. Yes, there are some signs of froth namely the IPO market - the Candy Crush IPO seems ridiculous.  I read a report that said about 75% of announced IPOs in the US were money losing companies which is about the same percentage as early 2000 near the peak of the tech bubble. I suspect the social media and cloud computing space  is largely responsible for a lot of this froth. These types of studies are worrying people - even Cramer is concerned! However, there's no comparison between where are now vs early 2000.  Economically speaking, the US economy was running at full steam with record low unemployment in early 2000. The Fed was concerned about overheating and was tightening rates to the point where the yield curve was inverted;  a condition that always precedes a recession and major bear market. Optimism in general was palpable with consumer confidence at record highs. There was also this notion that we were in some sort of new economic paradigm thanks to the internet and the market as a whole was historically very overvalued on pretty much every metric you can think of. We are nowhere close to the conditions that existed in early 2000 or the start of other major bear markets. Monetary conditions are still very accommodating even with tapering. The economy is expanding but only modestly, unemployment is coming down but is still at unwanted levels and widespread optimism in general is non-existent - consumer confidence is still well below 100.

Another thing you will tend to see near the peak of a bull market is how most people embrace or find reasons to justify what appears to be froth as opposed to looking at any sign of optimism or froth as a contrarian reason to be worried as is the case today and in recent years as well. Take Cramer for example. In February 2000 he posted an infamous article about how you had to own  these 10 "new world "  names  (high flying  internet stocks) if you wanted to make money in the market. He was not alone. I remember how in 2000 practically every equity mutual fund in Canada had Nortel as a top holding. At its peak Nortel made up a ridiculous 1/3 of the TSX. You see, retail and many of the "pros" embraced the market and eschewed logic. They made justifications for the nose bleed valuations (the internet will spawn a new era of massive growth and so traditional valuation metrics are not applicable). Can you honestly say that this sort of sentiment prevails today? Hardly. This time around Cramer is siding with the bears pointing out the froth in the IPO market instead of embracing it  and other skeptics are not in short supply. Sure, there's more optimism out there vs a couple of years ago but that's only natural after a bull run like this. And let's face it, you, me and everyone else still has 2008 fresh in our mind and worry of a repeat anytime there's a problem. A lot of people out there are also still convinced that the this bull market is "artificial" in that it's all due to the fed.

So, the bottom line is that despite the signs of froth out there (specifically the IPO market),  there's no comparison to 2000 or 1929. The unwinding of this froth could lead to a correction but unlikely the death of the bull market. The fact that's there's so many top watchers still out there suggests to me that there's still a LT wall of worry out there. I think it's also indicative of sour grapes. A lot of pundits out there were reluctant to embrace the bull market and largely missed out on it and so now it seems they want to make up for it by nailing the top. Too fucking bad.

As I've been saying for some time, the correction when it comes will be elusive. Many people, including LT bulls like me, have been on guard for it for several months and all we've seen are rather minor dips. These kind of situations are rather frustrating but I still think the best course of action is maintain your positions in high conviction names and keep your standards higher than average when it comes to adding new longs while maintaining a healthy cash reserve. I'm not outright hedging with puts/shorts at this time, but you do whatever you gotta do.

Personal circumstances

Nothing much has changed in regards to market action since my last post. The market continues to frustrate both bulls and bears. Both camps have been expecting the market to have a sizable correction for some time now but it hasn't happened. This watched pot never boils syndrome is nothing new, we've seen this situation happen many times since the bull market began. As it turns out, the correction tends to happen a lot later than most expect and only after maximum frustration has been reached.

Switching gears now. I've often said that the greatest obstacle to success in this game can be yourself. Mental/emotional mistakes will significantly prevent you from reaching your potential and at worst can do you in completely. One of the biggest roadblocks to success is that people often make buy/sell decisions based upon their own personal experiences or circumstances instead of the fundamentals. Let me explain what I mean. Let's say you have a twin brother with the exact same skill and mindset as yourself who is on vacation at the moment. You discover a very undervalued stock with great risk/reward qualities that trades at $1. Instead of buying it right away, you decide to just watch the stock  for a while to see how it does, and it moves up immediately. A month later it's at $1.40. You still view the stock as undervalued but chances are, if you're like most people, you will have a hard time pulling the trigger at $1.40 because you discovered it at $1 and feel like a idiot chasing it at $1.40 when you could have bought it for $1, but like most people, you would be willing to buy it if it dipped back to $1.20-$1.25.  Your brother returns from his vacation and discovers the same stock. Like you, he thinks the stock is a great opportunity but unlike you, he's not anchored to that $1 price it was trading at because he was not around when it was trading there. Your brother has no problem pulling the trigger at $1.40 while you still hesitate because you are still anchored to that $1 price. No matter what the stock does from this point, your brother's action is correct, while yours is not. You are basing your decision upon your personal experience with the stock and mental hangups rather than the company's prospects/fundamentals. The market doesn't give a rat's ass that you discovered the stock at $1. Second of all, if you see a very undervalued stock that you believe is worth multiples of it's current price, you shouldn't wait for a dip in the hopes to buy it a bit cheaper because in doing so you risk missing out on the big upside that it's likely to have - the risk/reward scenario in waiting for a dip in this case is very poor.

It's this type of thinking that also makes us sell our winners far too early which is something I continue to be guilty of doing. Rather than selling based upon the fundamental factors of the company, most people will incorrectly sell largely based upon their own personal circumstances such as how much profit they have or how large a percentage of their portfolio the stock is (rebalancing). I'm 100% certain that anyone who's been playing the market for some time has make this mistake. It's probably the biggest detterant to making a killing in the market.The saying "you can't go broke taking a profit" is bullshit. If you want to travel the path of mediocracy then by all means follow that advice.

The right way to play the market is to make your decision based upon always looking at the stock with "fresh eyes". When the stock in question has make a good move up ask yourself this, if you had just discovered the stock that day, would you still consider it a buy? That answer should be the primary factor of your decision to buy or sell. Forget about the past or what your avg cost is. That means fuck all in terms of where to stock price is likely heading in the future. The only time you could justify selling a stock "prematurely" is if you uncover an equal or more compelling opportunity.

It is very difficult for even the great investors out there, to avoid the dreaded mistake of taking profits too early. As Livermore said

I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

I have made this mistake with hwo.to. The stock now trades at $4.50 and I sold out 92% of my position at an average price of about $3.20 leaving big gains on the table. Although I rationalized my decision to sell with some fundamental factors, a large part of the reason I sold was due to my personal circumstances. My avg cost was $1.45 and I collected nice dividends along the way and so I made out well, but I obviously could have done a lot better. I could be a little hard on myself here because although I believe it's a mistake to sell based on personal circumstances, my situation was unique in that I had made a large initial investment  in hwo and I did the same with gre.v and so I had 80% of my portfolio in just 2 stocks. I think I had bitten off more than I could chew and didn't feel comfortable being exposed this way. So I think in this case, making a trade based on personal circumstances may be at least partially justified because I made such large bets which I normally don't do, but in any case, I don't think I handled hwo.to properly. I sold too much of it even though I was exposed the way I was. I should have sold some shares, but I overdid it and I lost my nerve.

There's a lot of delicate balances to keep in order to have optimal success; I've said this before. Discipline vs conviction. But I will say this: If you want to make big money you gotta have the balls to bet big when there's a golden opportunity and you gotta have the balls and the patience to ride that mofo to the point where it's at least fairly valued. If you try to ride the whole thing from undervalued to overvalued then you're being greedy. Again, delicate balances.

New all time high...again.

The market has managed to make a fresh new all time high once again foiling the burned, likely suicidal bears who thought that January decline was the start of something really nasty. Naturally, there has been a surge of inflows and a sharp rebound in bullish sentiment which suggest that the easy money of this rebound has been made and that one should be alert again of a top but not be over anticipatory. As I've always said, you have to be respectful when a market is making a fresh 52 week high and especially respectful of an all time high for it signals strong momentum which leads to further gains. That's not an invitation to go all in long, but rather to refrain from going short. I think status quo is a good move - maintaining core longs with a nice cash reserve. It will be interesting to see how the market reacts to the "Russian invasion" news over the weekend. As I've always said, these types of one offs don't derail bull markets; they only cause short lived dips at best.

This weekend Buffet released his annual letter to shareholders. You can read it here. For any aspiring value investors pages 16-20 are a must read. I have advocated many of the points he makes here on this blog. Buffet is a very knowledgeable and intelligent man but like he says in his letter, you don't need to be expert or have superior intelligence to achieve great investment success. There's many lessons Buffet teaches; some key ones are these:

• Be very patient and wait for that fat pitch before taking action. Look for those no brainer situations whereby the price you are paying is so cheap relative to what a conservative estimate of long term earnings will be, that it's not even necessary to know much about the actual operations of the business. 

• Buy stocks the same way you would buy a private business which means you don't care what the "market" values the business on any given day aside from the day you are buying it; all you care about are the cash flows the company is generating and the return on your investment from these cash flows - not from your ability to sell to a greater fool. This means that you shouldn't be looking at the value of your stocks every day.

• Stick with predictable businesses whereby you are reasonably sure that their products are going to be around many years from now and not be a victim of technological obsolesce. This allows for good earnings visibility in the long term and thus allows you to have conviction with your risk/reward analysis. This is the reason why Buffet loves insurance, bank, food/beverage, and utility companies and pounces on them when they sell at a discount due to a panic or general economic downturn.

Weekend Ramblings

The market has enjoyed one hell of a rebound to the point where all the losses of the year have been recovered.  In addition to the improvement in sentiment I noted last post, there was also a massive equities outflow of $20B that week as well which was the biggest outflow since the summer of 2011 near the depths of that 20% correction (this week $6B was added back). As a result,  I think there's a pretty good chance the February low will not be violated for a least a couple of months. We'll see how it goes. Sentiment can be fickle and we can just as well see a rush back into the market in the coming weeks which would once again make the market vulnerable. One thing I've continued to notice is how there is still that underlying deep rooted pessimism about the market from retail trader types that's been there since day 1 of this bull market.- Bizzaro World as I've often called it. The majority of the schmucks who post on the yahoo message boards still cheer and squeal with delight during sharp sell offs  and complain when the market rises. This makes me leery of being bearish for a prolonged period of time for I don't want to be on the same side as these losers LT.

GRE has finally shown some life. The move up started with the closing of the PP which was well under-subscribed. The Chinese mgmt may not be too happy about this "testing the waters" financing  but I sure am as it means there is much less dilution than expected and perhaps others felt the same way as per the action the stock post PP.  On Thursday GRE released yr end production numbers which looked pretty good. This added to the upward momentum in the stock price.  These numbers should dispel any kind of concern that the slide in the share price for the better part of the last 6 months was due to some sort of fundamental deterioration as it certainty appears GRE will have a strong Q4.  My theory that it was a supply overhang pressuring the stock these past several months appears to be right and it looks as if that overhang has been cleared although it's too early to know for sure just yet. There is still this trader who uses the anonymous marker that dribbles out board lot orders at the bid price and he's been doing so in a manipulative way because he usually acts when he knows he can down tick  the stock price especially if he can do so at the close. On Friday he sent the stock price from $1.11 to $1.04 with a 100 share sell order with 6 seconds left in the day. That's such bullshit. One can only wonder what this guy's motive is, but I have taken action by reporting him to IIROC and I suggest other GRE shareholders to do the same. GRE mgmt is aware of this clown and are trying to take action against him as well. This manipulative trading shouldn't matter in the LT but that doesn't mean it should be allowed. You can get into big trouble if you try to mark up stock prices at the end of the day using this tactic and so it's only fair that the same rules apply to downside manipulation.

Alright, let's talk fundamentals now. If GRE  can close the CDN distributor deal they will probably require another financing but I'm sure it will be much higher than at 0.85. I think also, that they will be able to find more willing institutional money to come in on such a financing as they will be a lot more comfortable with the idea that they are funding a CDN based acquisition and the company itself will be transformed to being a lot more Canadian as there will then be significant sales generated in CDN dollars whereby the proceeds will remain in Canada. I would not mind at all the dilution that would would result in financing a CDN acquisition at a higher price,  because it would mean that big money will have committed to GRE which would be a big vote of confidence and could also result in other big money players to follow suit. The number one thing holding the stock price has always been confidence. If a couple of big money players take a stake in GRE they will likely provide support on the open market and mop up any weak holders from say some of of the original Chinese investors who have a low cost basis and want to cash out. This is all tactical stuff. In the LT, if the company stays on the current path the strong fundamentals will assert itself in the stock price one way or another but obviously the sooner this happens the better.

Switching gears now; there's been a lot of negative articles about China for the past several months and  "the looming credit crisis in China" as the media likes to call it. There are indeed problem loans in China but all this negativity reminds me of  how the media was calling for the collapse of  Europe via PIIGS. Remember how everyone was saying  PIIGS were the equivalent of subprime mortgages? Well, yes, there were problems in Europe, serious ones, but there was no collapse and things turned out much better than pretty much everyone expected. Here's the thing about dire predictions and why they seldom occur. If everyone is expecting something bad to happen it means the problem/issue is well known and so people will take swift action to ensure they don't get hurt by it, especially the authorities; and as a result the fears either don't come to pass or the damage is much less than expected. I touched upon this phenomenon in the past such as when everyone was fretting over the debt ceiling and I predicted it would be a non-event as  fear will motivate the authorities to take action.

The damage from 2008 crisis has left scars and is still fresh in everyone's memory. It resulted in central bankers and governments around the world to not be complacent towards budding problems and they are motivated to take decisive actions to diffuse them. This is a strong underpinning for a secular bull market. This fear of a repeat of 2008 whenever there's a problem out there  is a perfect example of the recallability trap fallacy.

Notable improvement in sentiment

AAII sentiment and NAAIM sentiment released today have shown a significant decline in bullishness. AAII is at a ratio of 1.25 bears vs bulls and NAAIM long exposure is down to 51%. Ultimately, I expect bullish sentiment to unwind further as has been case near a major low when you typically see 2:1 ratio of bears vs bulls and < 35% long exposure, but these things often don't occur in a straight line and there's definitely enough unwinding at the moment to warrant a multi-week bounce. Try to play these bounces if you dare....

I'm still having a hard time finding any table pounding long side candidates aside from GRE.

Mandatory reading

Have you ever accidentally smacked your head into a door or a wall?  Your first reaction is to wanna punch that door, as if it's the door's fault! This is obviously a stupid reaction but one nonetheless we tend to have. It's an example of an emotionally driven X-system response which usually dominates the way we initially react in a stressful situation. Emotionally charged responses often drive an investor's decision when they buy and sell. This flawed tendency and other flaws are covered by the studies of behavioral finance. During my CFA studies my favorite topic by far was behavioral finance. Not only was it the most interesting but it's the most effective in terms of helping you actually make money in the market and preventing you from losing it. The biggest enemy you face in this game is yourself.  In addition to emotionally charged decisions; biases, anchoring, herding, overconfidence are some other key pitfalls. Behavioral finance studies the flaws in human thinking and behavior which leads to poor decision making and inefficient markets....and man, there are dozens of flaws  that we have. It's very critical to be aware of these flaws. There's a book you can find online called "The little book of Behavioral Investing".. I strongly recommend it. The stuff you learn in this book is also useful for non-investing life as well.

No Man's Land

That's where I feel the market is right now. There's enough evidence to suggest a ST low is at hand but there's still a ways before the coast is clear on a medium term basis. I have vowed long ago to resist  playing ST wiggles in the market because the shorter the time horizon the more random the market is and the closer you are to pure gambling. However, if this year is going to be a flat or down year as I expect, then I don't want to just sit around every day with my dick in my hands. I want to make money and so that means I may have to take a more active approach in the market and get out of my comfort zone of micro cap investing. However, I know all too well that the moment you start forcing things trying to make something out of nothing,  i.e. making trades without a strong edge, you will lose money. When there's no mouth watering opportunity you just have wait for as long at it takes before one shows itself. It may also mean that you need to start looking elsewhere in different markets/sectors  for opportunities but you gotta make sure you know the territory.

I've said it here before that you only need to make a few moves every year to have big success in the market. It's obviously easier said than done but it's true. It's also true that sometimes the best move could be no move at all and take long breaks away from the market when conditions aren't appealing. Not only is this a disciplined move but it allows you to mentally recharge/reset and come back with a fresh set of eyes. If you are a bottoms up stock picker then you don't care what the market does and so there's no reason for you to take a break. If you take a top down approach then taking a break as per the above is beneficial. I consider myself a bit of both. If I see a really compelling stock I'm going to make a move regardless of where I think the market is going and I will hedge or keep a cash reserve if need be. A lot of value investors don't pay attention to the macro but I do because I know individual stocks don't always exist in a vacuum although they can at times; but as we saw in 2008, 99% of stocks took a beating regardless of their own specific set of fundamentals. In the 2000-2002 bear market there were some stocks/sectors that did well and did not get caught up in the bear market vortex, but the majority of stocks did go down and so having success stock picking is much, much harder to do in bear markets than in bull markets where you have the rising tide lifting all boats effect. Newbies who never experienced a bear market learn this the hard way. 

The bottom line is that you don't have to play every single hand. You can fold and fold and fold again until you are dealt pocket kings or aces. The market is not going away. You can take a sabbatical for a month, 6 months, a year or whatever it takes. 

One trade I'm eyeing is long TLT calls. I'm kicking myself a bit already for missing this move. I won't chase it though and I'll wait for a consolidation if and when it happens. 

Biding my time

Markets have been hit primarily because of  Emerging Market jitters as the currencies of some of the smaller countries like Turkey and Argentina have taken a big dive. This is apparently the result of QE tapering fears and China showing a continued slowdown. You can pretty much pick any excuse; when the market is frothy from a sentiment perspective as I described in my previous post, it becomes much more vulnerable to negative news.

If we continue to see negative consequences to the unwinding of QE, whether it's actually responsible for it or not, then it's likely going to be the case that the upside of the market will be capped until QE tappering has ended or is close to ending and the market senses that there is no serious fallout from it. This means that we could see a choppy or down market for the majority of the year much like 1994 and 2004, which were also years where the Fed was taking away monetary stimulus. Mind you, in 1994 and 2004 there was outright tightening via rate hikes whereas this time around it's only unwinding of QE and monetary conditions would still be very accommodating without QE. However, there's this wide held belief that the market is dependent on QE and I'm sure you've see the charts which show the correlation of the market's performance with every round of QE.  This effect could be more psychological than anything much like how a child feels brave if he has his favorite blanky and so if you deprive this child from his blanky he will be afraid and has to go cold turkey for a while before he realizes that there was nothing to be afraid of all along. By no means do I claim to know the actual impact of QE or lack thereof but I suspect that it's not as critical as many are suggesting. One thing I'm quite sure of is that QE is no magic bullet and that any positive economic response it may have achieved was because it was initiated at the right time, i.e. it was initiated at a time where the economy had largely purged itself from the excesses of the prior cycle and pessimism was thick; therefore the economy had a lot of pent up upside potential making it more likely to react effectively to stimulus. If for example QE was initiated in early 2008 when the economy was only just beginning to rollover I doubt very much it would have prevented a major bear market. Anyhow, that's my worthless 2 cents on the subject. Debating these kind of things can be interesting but then you start getting into the realm of dogma and the more dogmatic your beliefs are, the less investable they are. 

The bottom line for me is that I want to see the froth taken out of this market before I get can comfortable committing more to it and when this happens it will show up in the same indicators that warned me about the froth. As I said in a recent post, I got the distinct feeling that there are too many weak longs in the market who are only long because of momentum. Now we are probably starting to see these longs bail. I don't know how long this process will take and I'm sure there's going to be sharp bounces in the interim and perhaps we're gonna get one of those soon,  but I'm just going to bide my time keeping my bat on my shoulder for the most part while waiting for the medium term risk-reward situation to significantly improve. If I see something really, really enticing I should probably go for it - at least partially, and perhaps put on a hedge. I don't want to be a hostage to the broad market but I'm well aware of the rising tide lifting all boats phenomenon and how this applies to the downside as well.

Beware the dreaded P6

I find myself in the bear camp these past couple of months not because of the dogmatic, miserable fuck bullshit from the permabears which helped bankrupt God knows how many traders, but because the evidence just keeps piling up.  There's a market strategist named Don Hays who I have followed off and on since 2000. I think the word "followed" is not the right way to describe it...reading his commentary is more accurate. Anyhow, he's a top down strategist and his "system" consists of 3 pillars which are valuation, monetary conditions and psychology (investor sentiment). I like to keep tabs on the last pillar, psychology because it tends to be pretty good at marking significant medium and LT turning points. This pillar of his system is composed of a variety of sentiment indicators such as investor survey's, insider activity and fund flows. Psychology is ranked in 6 levels ranges from P1 to P6 with P1 being the most bullish condition for the market (bearish sentiment is extreme) and P6 the most bearish for the market (bullish sentiment is extreme). It is rare to see P1 and P6 readings and when they get triggered they almost always happen near significant turning points in the market. The only time a P1 reading was notably early was during the 2008 crash, which is understandable given the once in century type collapse that it was.

The bad news for the bulls is that a P6 reading was just triggered. The last time it happened was in June of 2011 near the peak of the market which led to that 20% correction (A rare P1 reading was then registered near the depths of that nasty correction). The other time prior to 2011 a P6 was registered was in May 2008 which was the selling opportunity of a lifetime.

It's important however to keep things into context. In bull market conditions, extreme bullish sentiment  leads only to corrections (which can be scary) while in bear markets they mark the end of a dead cat bounce which then leads to major damage via new lows (as was the case in 2008). So, a P6 doesn't automatically mean the end of the world. In 2004 for example, a P6 reading was registered in March but only led to a 10% correction which took 6 months to play out before the bull market resumed with a vengeance. Having said that though, it's clearly not a good time to be putting money to work during a P6 condition even in a bull market for odds are very high you will be able to get better prices if you wait. It also seems likely the correction will be greater than 10% given the gains we've seen in the recent 2 years and let's face it, after a 165% run in 5 years, we could be in for a major scare much like in 1987 which occurred 5 years after a great 5 year run as well.

So, this also begs the question. Should I consider making a bearish play here? The short answer is yes but because we are not in a bear market and tops can take several weeks to form especially when you have this kind of momentum with the market still very close to the highs, be prepared to be very frustrated if you attempt to do so and so give yourself plenty of staying power. Buying long dated puts would be the best solution. I am strongly considering to do so but since I'm already in 60% cash with my major holding non-correlated to the market I'm already defensively positioned and can patiently wait for the market to show signs of cracking first while keeping my sanity in tact. If history is any guide we will see a couple of small dips followed by sharp rebounds before the "real dip" starts. If I'm wrong and the market simply tanks on a dime then at least I won't be caught with my pants down as I'm already 60% in cash. The bottom line for me is that I can be patient with any attempt to profit on any downside. If I was closer to fully invested then I'd be raising cash in a hurry.

Bottom line here is that it appears the risk/reward for the market in the medium term (6-12 months) is piss poor. We can certainty go higher before we go lower but it would very likely be a running on fumes/blow-off type move in my opinion. The last time I felt this negative about the market's prospects in the medium term was in the early summer of 2011.

Greenstar, my glory or my undoing

Never before have I invested in a company whereby the operating results/fundamentals have been so disconnected from the stock price for such a long period of time and to such a large degree. In the CFA level 3 program there's a section which describes "chronic inefficiencies" of the market whereby there sometimes can exist a mispricing of an asset that can last for a long time due to either structural or behavioral factors. Greenstar is clearly suffering from this and it's making me suffer.

When I first bought the stock just over a year ago at .50 it was trading at 2 times 2012 earnings. A ridiculous discount given how clean the balance sheet was and how constantly profitable the company has been. The knock against the company is that it's a reverse takeover Chinese based company, the same type that Sino Forrest was and so automatically and idiotically, many investors view the company as having high scam risk even though the company has done nothing in any way suggest it is so and they have a pile of cash in the bank. It's no different than labeling me a mafioso just because I have Sicilian blood. In 2013, to combat the skepticism, the company started paying an enticing dividend, added several Canadians to the board. and then hiked the dividend by 50% in the summer. The company also continued to post excellent results with growth in profits likely to be about 35% in 2013 vs 2012. The Canadian dollar has fallen significantly vs the RMB which added further to equity via currency translation gains. I estimate that book value to be about 1.90/dilulted share as of the end of 2013. So, given all of these very positive developments in 2013 you would think that the stock would get a more respectable multiple than a measily 2 times earnings by year end...well, you thought wrong....or at least I did. While the stock price did go up from a year ago, it still trades at 2 times earnings. In the summer it did appear that the stock was finally getting some well deserved respect but that didn't last long and it's been a rather frustrating and agonizing slide since then. I talked about how there is an overhang from what appears to be 3 sellers out there, one in particular that is trading under the annoymous broker. I dealt with a similar situation with hwo.to last year whereby the company has done nothing wrong operationally speaking, yet the stock price drifted lower and lower for months to very undervalued levels primarily because of one asshole who traded out of UBS relentlessly pounding bids. When this happens not only do you get very frustrated but you start to wonder if someone knows something that you don't and your frustration turns to worry and doubt. Eventually, after 5 months of torture, the stock broke out of its funk and eventually soared to significant new highs which means those who were relentlessly selling knew fuck all, but I'm sure there were lot of people who either threw in the towel during those 5 months of hell or sold very early in the recovery thinking the stock would retrace again. 

As far as I can tell, there is nothing at all that suggests something is wrong with GRE's business. In fact, it's the opposite. The company just announced major expansion plans and I conservatively estimate the company will be making $40M in annual profit in 2015. Put this into perspective with the current $26M market cap of the company.... it's fucking beyond asinine, beyond insane. Now, there is going to be a private placement closing next week which will bring about a dilution to existing shareholders. I'm not thrilled that they are doing it at such a cheap price but they need Canadian funds to do an acquisition and the expansion they have planned will require all of the cash they have in the bank plus an increase in working capital. But even with the increased share count due to the PP, I conservatively estimate that fully diluted EPS in 2015 will be at least $1 which means the stock price is trading at 0.84 times 2015 earnings!  How the fuck can the stock price not soar after this news? Anytime the stock tries to pop on good news, sellers come in aggressively hitting bids knocking it down again and the buyers back off. What are they thinking? They can easily fetch higher prices if they wanted to. They are such fucking idiots. 

At some point, I figure that the market is going to give GRE the respect it deserves. I said this at least a few times during the first year when I bought hwo.to. It took 2 years after I bought for the market to finally come to its senses and so I wonder if it will take the same amount of time with GRE....it may take even longer given that the company is Chinese, but there's only so long the market can penalize a company that keeps producing these kinds of results while consistently raising dividend payments as the company grows, and speaking of which, based upon the growth that's to come in 2015, I think there's a good chance of  another 50% hike in the dividend for 2015 which would be announced this summer if history repeats. 

In the meantime I may very well continue to suffer and be frustrated beyond limits. The only way I can combat this is to simply not look at the stock price day to day and only monitor fundamental developments. I can't second guess myself thinking that maybe someone knows something I don't. I've made my move and I'm sticking with it unless there's clear evidence that something is wrong.  I said this once to someone; as a value investor the best strategy is to buy a cheap stock you've done your homework on and have strong convictions, turn off your computer and go live in a cave for a year before checking the price because it can take a long time for the market to recognize the value that's there.  And yes, these extreme value disconnects CAN and DO happen especially with microcap stocks. The market is often NOT effecient and so it's wrong to assume all cheap stocks are "cheap for good reasons". Case in point is with bev.to. In early 2009 the stock was trading at 0.23 when they announced a major government contract which pretty much guaranteed at least 0.50-0.60/share in earnings. What did the stock do after the announcement? Fuck all and it did fuck all for several weeks later and only really started moving when the money from this contract actually started coming in. The stock price got as high as $3.45 just over a year after the contract announcement. I bought at 0.50 only because I discovered it a little late. Why was the market so slow to react to such good news? Because the company nearly went bankrupt  a couple years prior, plagued by scandal from its former CEO and so nobody trusted the company anymore even though they restructured and got rid of old mgmt. A similar thing happened with hwo.to. The former CEO Jed Wood nearly ran the company into the ground in 2008. They booted him out and restructured but despite producing great results early on, the market did not give the company any benefit of the doubt for years due to its history and its operations in PNG which was deemed risky, but eventually it simply became too hard to ignore the strong balance sheet and great results the company was delivering and the company finally got it's due.  The lesson I learned and profited fro is that in the LT, good financial performance gets recognized by the market one way or another and there's only so long unwarranted negative sentiment can hold a stock back, but I also know the journey a shareholder must take to see this through is filled with frustration and doubts galore. In hindsight the best thing to do is like I said earlier, don't look at the stock price for long periods of time and simply focus on the results that are being delivered and other fundamental factors. 

Now I just need to take my own advice before I lose my nerve. I may not post for a while unless I find some new stocks to buy which I'm currently on the hunt for. 

Tough call for 2014

I'm not so sure what's in store for the market in 2014. I'm thinking we could see a flat year with a major scare sometime mid year but I don't say this with any great conviction and I'll be quick to change my mind if evidence suggests so because I'm still LT bullish. Last year I was expecting the good times to continue in 2013 and we certainly saw that, but now that we've had a hell of a run these past 2 years,  it sure seems like the market is due for some sort of consolidation especially given some serious warning signs flashing out there. I'm not alone is such a view and so if the market is due for at least a major shake out  it's quite likely going to be elusive and frustrating for anyone trying to time it. Many people I'm sure have been laid to waste in recent years betting on corrections.

The thing that concerns me in the medium term is that I get the distinct feeling that there's a lot of weak longs in the market, i.e. those who are long stocks simply due to momentum and so it follows that they will exit en masse once the momentum is gone and violations of trend lines, moving averages and other useless t/a garbage triggers stops. In 2013 margin debt rose substantially and we've seen retail come back in a big way. None of this is as dire for the market long term as the bears are suggesting (and man were they premature with such worries in 2013)  but it does suggest that the market is frothy/vulnerable in the medium term similar to how it was in the first half of 2011 after 2 strong years which saw margin debt spike as well. Another thing that suggests the market is ahead of itself is how some really sharp value managers with great track records are having a hard time finding any bargains and so they are sitting on a large cash position. Value line appreciation potential index is at a multi-decade low which is bearish too. Finally there's sentiment as per newsletter writers, NAAIM and AAII which also indicate too much enthusiasm for equities in the short to medium term.

Having said this though, the conditions for a bull market peak are not present, namely,  monetary conditions are still ultra loose even with tapering on the horizon, inflation is not a threat and public greed/complacency is absent. How do you test this notion? Ask your neighbors what they feel about the economy and the stock market. How does the media perceive the strength of the economy? I doubt very much you can make the case that the public is optimistic yet alone complacent. An objective measure of such is consumer confidence. It's currently at 83. Bull market peaks have been made when confidence hits 100+ for at least a few months. I  posted the investor "risk appetite" chart not too long ago which showed investors are not yet at the "risk loving" stage which again indicates an absence of the type of greed you see at bull market peaks.

So, the bottom line here is be cautious for the medium term but still optimistic long term. If you see a great individual stock opportunity by all means go for it, especially if it tends to not trade in tandem with the general market, but keep healthy cash reserve until we see the "medium term froth" get washed out. I suspect if we are going to get a nasty correction it won't happen until sometime closer to mid year with many little dips and headfakes along the way and so it's quite possible, like in the first half of 2011, that the market goes higher first before going lower in a big way but this is more of a guess than anything. Don't get too cute. Be disciplined.

I'm currently holding 60% cash with the majority of my equity exposure in Greenstar. I'll talk about GRE next post.