The Rude Awakening
Laguna Beach, California
Thursday, September 6, 2007 ------------------------- - Sell the froth, buy the panic - The fortitude of contrarian investing,
- Volatility - The savvy resource trader's closest ally,
- An inverse correlation to take note of and more…
------------------------- Eric Fry, reporting from Laguna Beach, California… "The rain falls on the wicked and the good," according to the writer of Proverbs…but that's only half the story. Sometimes the "good" don't want any rain. Sometimes they would prefer brilliant sunshine…and so would the wicked. It isn't easy burning crosses during a thunderstorm, for example. Both the wicked and the good would probably prefer that it rained only during working hours, or only at night…and that the sun would shine brightly every weekend. But the Divine Plan does not feature such meteorological conveniences. To the contrary, almost every change of the weather victimizes some folks, while benefiting others. A powerful Pacific hurricane, for example, could destroy homes in Acapulco, while delighting surfers in San Diego. Extreme sunshine is even more capricious than extreme rainfall. Last weekend's record-setting heat in Southern California claimed 16 lives in the sweltering inland regions, but boosted business in restaurants and bars all along the refreshingly cool coastline - a windfall for local restaurateurs. To the extent possible, therefore, most of us try to place ourselves in the right places at the right times…or at least to adapt as best we can to nature's inevitable volatility and cyclicality. Bitterly cold weather is not so bitter if you are equipped with crackling fires, snifters of Hennessey and bearskin rugs. Likewise, oppressively hot days are not so oppressive if you are floating down a cool stream in an inner tube. Every extreme meteorological event imparts both misery and delight…So does every extreme financial event. Context, perspective and dumb luck all combine to determine the outcome of these extreme situations - either to accentuate misery or to capture potential benefits. Stock market selloffs, for example, always inflict pain, but they also create enormous opportunities. "You can be a contrarian or a victim," Rick Rule asserted in yesterday's edition of the Rude Awakening. Being a contrarian, as Rule would define it, means "selling frothy rallies and buying into panics." "Natural resource industries are cyclical, volatile [and] emotional," he explained. "That's the good news…Volatility is not just a condition, it's a tool." In other words, says Rule, you've got to step in and buy quality stocks when every one else is dumping them. That's a hard thing to do, he admits, but it's the only thing to do. "Being a contrarian is hard," he says. "But that's the other good news. Most speculators cannot act in contrarian fashion…" 
As the nearby chart illustrates, natural resources, as a group, tend to bounce around quite a bit. They are volatile. But they are not merely volatile; they are also inversely correlated with the S&P 500 Index. In other words, natural resources tend to perform best when the stock market is not - all the more reason to consider the recent slump in the natural resource sector as a buying opportunity. But how do you buy? What do you buy? And when do you buy it? Rule addresses these critical questions in the column below, while also providing a few insiders' insights… ------- Resource Investing Special Report ------- Get Ready to Take Profits in as Little as 2 Days… Unlock the Market's "Secret Logic" That Could Double Every Dollar Invested Before the End of 2007 You may not realize it, but there's a certain "Secret Logic" that commands just about every movement on Wall Street. And those few individuals who have cracked it… have managed to take in gains of 84%…379%…396%…even 516%… in as little as two days. In fact, they've been doubling their accounts in as little as three months. Details Here: The Resource Trader Alert -------------------------------------------------- Contrarian or Victim, Part II
By Rick Rule We are in the mid-stage of a broad bull market in natural resources. Therefore, my strategy will be to cycle out of popular sectors, like uranium, and into unpopular sectors like Canadian natural gas. In other words, I will sell frothy rallies and buy panics. The broad resource markets are in the midst of a classic "wall of worry" correction. Small-cap ("junior") resource stocks, in particular, are flirting with multi-month lows. This selloff provides both risk and opportunity. Let's take a closer look: FIRST: The junior resource markets as a whole were, and still are, insanely overpriced. Only about 10% of 5000-odd junior companies have any real value (but very few investors have the ability or the will to discriminate between the good, the bad, and the ugly). The uranium mania is a classic example of this. In 2000, the price of uranium was very cheap. It had to go up. But because uranium had been dormant for so many years, nobody cared. When the price did go up, people began to care…and eventually became obsessed. About 550 "uranium" companies now litter the investment landscape. The vast majority (maybe 500 of the 550) share two serious faults: First, THEY HAVE NO URANIUM. Second, they have under-qualified management. After a 25-year "bear market" in uranium, there are only perhaps 30 qualified exploration teams left to run 550 companies, (meaning that the probability that a given company has a qualified team is about 30 in 550 - or about one in eighteen).
SECOND: Many important market players are incompetent. A twenty-year "bear market" in resources has thinned the ranks of competent participants in resource financial services. The brokers and investment bankers are increasingly "fee whores," rather than gate-keepers, and the level of professionalism among many institutional investors would be laughable, had it not become tragic. Well informed investors, therefore, hold a distinct advantage in the marketplace. THIRD: The market is liquidity-driven. Global flows of liquidity - from the Japanese Central Bank bailout of its finance industry to the US Fed's bailout of the American mortgage industry - have left the world awash in paper currencies. This great deluge of liquidity sloshes around in the global financial markets - causing huge gains whenever it pours into a given sector…and causing huge losses whenever it empties out. During the last couple of years, a lot of "dumb money" has been flowing into uranium companies with no uranium, run by people who can't even spell "uranium." A bunch of that "dumb money" is going to go to "money heaven" - i.e., it will disappear into the same thin air out of which it was created. The evaporation of vast quantities of "dumb money" - along with the evaporation of easy credit - has led to a severe liquidity crisis in several financial markets, notably, the junior resource markets, which are generally very illiquid, even during the best of times. FOURTH: The market and its participants suffer from irrational expectations. After several years of a raging bull market, participants have come to believe that inordinate success is a condition they have a right to expect. Investment conference participants often boast that they use the maximum margin available, and ask the speakers, "What do you have that will triple in ninety days?" The probable answer is that the questioners' upcoming capital losses will be the most likely "triple" of all. This market has good money left in it, don't spoil it for yourself with idiotic expectations The factors that caused the euphoria in resource markets earlier in the year are still present, but now they are available at a discount. We need to learn to profit from cyclicality, not become its victim. We need to cherish volatility, not fear it. We need to remember that there is no commandment from God that says we must emulate the stupidity of the mob. Instead, we must use liquidity, and avoid being used by the "fee whores" of Wall Street and Bay Street. In essence; we must employ common sense, and buy financial assets on sale.
The month of August was "wake up" call for resource investors. And now that the markets have bounced back a bit, we've got a nice opportunity to examine our investments from a fresh perspective. Take this opportunity to review the reasons you became a resource investor and/or speculator. Are those reasons still valid in your view? Do you have the emotional strength to be a contrarian, using cyclicality, welcoming volatility, buying panics, and selling rallies? If not, do yourself and your broker a favor, and close your account. If this sector still entices you, then use this recent panic as a slap in the face. Sell the securities that are not absolutely "best of breed" in terms of management, balance sheet and asset base. Sell even those that are best of breed, if they are very overpriced. Consider making tax loss sales in September and October, as the market recovers, so that you can offset gains taken earlier in the year. Be very, very exacting with each of your investments. If they don't make the cut, then cut them out of the portfolio. Look at your total personal balance sheet. Are you where you need to be, or would like to be? Are you over-exposed to resource stocks? Are you overly speculative? Do you have sufficient liquidity? I suspect that the response of global central bankers' to the unfolding credit crisis will be to pump massive liquidity in the global monetary system - i.e. "print" money. This response will be bad for ALL fiat currencies. As the dollar devalues, I believe others must and will follow. More currency from thin air devalues the existing supply. So own some gold. Gold is a medium of exchange, the best in recorded history, and a store of value. Gold is also catastrophe insurance. Own it first as insurance. Speculate on the high-quality gold stocks, buying panics, and if you like, selling rallies. Own energy. Conventional oil and gas is reasonably priced, given the supply\demand balance. Again, focus on "best of breed," not "story stocks." Buy on the basis of net-enterprise-value-to-net-asset-value. In addition, buy corporate efficiency, based on operating margins and reserve acquisition efficiency. Speculate on the junior Canadian gas producers… This sector is cheap, but it will take two to three years to work out. Remember, it is irrelevant whether we like these conditions or not. We must use market volatility to our advantage or be used by it…and the choice is ours! [Joel's Note: If reading Rick's "Contrarian or Victim" Rude two-parter has invoked a sense of déjà vu, you may have been among the lucky few to hear him deliver it in spoken form at this year's Agora Financial Investment Symposium in Vancouver. Aside from the inimitable Mr. Rule, the symposium also boasted such contrarian luminaries as Bill Bonner, Kevin Kerr, Chris Mayer, Doug Casey and Dr. Mark Scousen. Luckily for anyone unable to attend the conference, we captured the whole thing on audio CD. If you would like to discover the inside track and market secrets of the masters, I suggest you grab yourself a CD package and give it a concentrated listen. They are available right here: Agora Financial Investment Symposium: Complete Audio CD Set ----- Wealth Insurance: Zero-Downside Gold Investing ----- Introducing a revolutionary investment… A "WEALTH INSURANCE" POLICY with a potential 201% upside in two years… and zero downside With the stock market gyrating wildly in recent days, wouldn't you like the security of an investment guaranteed to never lose money… while giving you the ability to cash in on a gold price that could reach $2000? I'm so confident about gold tripling in price and protecting your hard-earned wealth, I'll even make a triple-your-money guarantee… Click Here For The Full Report: Wealth Insurance: Zero-Downside Gold Investing ---------------------------------------------- Rude Endnote: Travel-weary and heat-beaten, we arrived at our hotel after midnight last night. We've relocated to the booming Middle Eastern city of Dubai to bring you all the exciting news from the frontline here. While we're settling in, we'd like to hear from you. If you have a particular issue you would like us to investigate, anything you are interested in learning more about while we're here, please send us an email at the address provided below. Cheers, Joel Bowman
Rude Awakening aussiejoel@the-rude-awakening.com | 
