investment tips

Goldcorp: notes

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Well, it seems that those who say you can’t time the market are right.  Yesterday I sold a put on Goldcorp (Jan 2013, $52.50 for $9.40); on April 28, I bought back my last position (July $45 $4.60) for $0.33 on April 28 when GG was at $56.  Then, Goldcorp announced yesterday after hours that they were cutting their production forecast by 9%.  The Globe & Mail decided to highlight this aspect of their announcement with the headline: “Goldcorp scales back production forecasts“.  Sometimes I wonder if the major media wants industry to do well.  Their focussing on the negative all the time is quite ridiculous sometimes.  (As I write, GG share price has dropped $2.10 from yesterday’s close).

But the announcement was not at all bad news.  Their 2Q reports says that revenues are up 62%.  If the share price goes down because of the cut in the production forecast, then it probably represents more of a buying opportunity than it already is.  As it is–and this applies to GG as much as any gold miner–gold mining companies are a bargain compared to their typical price vis-a-vis the price of gold–see Fabrice Taylor and Monty Pelerin (here and here).  I will sell another put if the share price drops to $45.

Update:  TD Newcrest has downgraded GG from “Action List Buy” to “Buy” and lowered its target price from $70 to $68.  (Price is now down $2.76).

Note: All prices in U.S. dollars (which has no intrinsic value).

Shorting the US dollar

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I continue my winning strategy of shorting the U.S. dollar.  Since about the summer of 2009, I devised a strategy whereby I use the available margin in my combined US/Canadian trading accounts to borrow US dollars to buy CDN oil & gas and mining companies.  This trade has been a consistent winner.  Then in the Spring of 2010, I started to sell option puts on ABX, GG, NGD, PWE, PGH, ERF–Canadian companies which trade in the US stock exchanges and options markets.  This trade has been consistently profitable as well.  Indeed, I’ve only had two assignments on the US side, and within a week in each case, I was able to trade out of the assignment (with a small profit) and to sell another put on the same position.  As of today, puts in the Canadian market have been a net losing venture (on paper) and I still  own assignments in PBN, PBG, and DAY.  But it is just a matter of time before these companies recover.  Selling the puts has given me downside protection which I don’t have in my junior oil exposure or in my long positions that have gone south (e.g., TOL, PMT).

Questrade has made it easier for me to implement my strategy as a DIY investor, because their platform, unlike TD Waterhouse, gives the DIY investor direct access to OTC (over the counter) markets in the US.  With Waterhouse, I had to call the trade in, and while they gave me the discount brokerage commission rate, I could not change a bid in mid-stream without also calling them.  So, for example, I was able to use today my available margin to buy CDN equities in US dollars directly–and the OTC markets give me access to the companies too small to be listed on the New York stock exchanges.  Today, I bought LSG/LSGGF (Lake Shore Gold) at US $2.25, which has a NAV and book value now exceeding its share price.  They are having current production issues.  Raymond Brown downgraded it yesterday, but still considers it to have a one year target price of $3.40.

Macro Trends Supporting this Trade

Let’s just face it.  The US dollar is a failed currency.  It’s buying power must wane because in three short years, Ben Bernanke has created 3x the adjusted money base.  It is now only a matter of time before the dollar dies.  I doubt that anything can be done to save it now, even if Congress were to balance the budget.  But balancing the budget won’t be enough.  They would have to go and arrest Ben Bernanke and replace this tired out Keynesian with an Austrian, because nothing will stop him from creating more money out of nothing.  Sure, keep the debt ceiling where it is and Bernanke will simply monetize the old debt as it turns over.  Almost a half trillion dollars of debt will come due by the end of August, and Bernanke has been buying 70% US debt in the last few months.  Where is the US going to find buyers for this debt now?  Furthermore, nothing will stop Bernanke from buying the debt owed to the Social Security Trust Fund so that Obama can continue his spending spree.

The Canadian Loonie is climbing against US dollar.  It reached $1.06 today.  And this is not because it is a good currency; it is a terrible currency with the Bank of Canada holding interest rates below what is reasonable.  This has caused a housing bubble in Canada.  But the Canadian debt to GDP (30% acc. to the link) is much lower than in the US, which stands 350% according to the following chart (supplied by Lacy Hunt, Hoisington Asset Management):

Now we are hearing rumours that there is a debt deal between Boehner and Obama which will really disappoint a lot of hard-working Americans with savings:  3 trillion in spending cuts over 10 years for a 2.5 trillion ceiling raise.  When hyperinflation takes over and the dollar sinks to nothing, hopefully then, there will be some responsible adults who can take over the government of the United States.  Now it’s being run by children and criminals.

Ultimately, to do well in investing you have to own what the people who have money want. The creditors have told the world explicitly that they don’t want US dollars any more (and that’s why Bernanke is buying 70% of US debt)–though they continue to prop up the dollar,  biding their time so that they may exit this trade with the least damage to themselves; what they really want are hard assets: oil, gold, silver, rare earths, food and all other commodities. That’s why I am long physical gold and silver (Sprott Physical Gold and Silver Trusts) and Canadian oil & gas and gold mining.  This is how the Chinese are investing, you know the people with the largest currency reserves in the world that I am aware of.  What are they buying?  The Chinese are sinking another 2.1 billion into Canadian oil.

Meanwhile the American consumer is using his credit card to buy staples.  When that’s no longer possible, many people will be facing starvation.  Don’t look to the government for help because all they will be able to do is hand out debit cards (the new food stamps) filled with worthless dollars or welfare cheques likewise denominated in worthless dollars.

Ron Paul should have asked Bernanke if the US dollar was money.  If Bernanke had said it isn’t, he would finally show some understanding about economics.

Lake Shore Gold: notes (updated July 22, 2011)

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Lake Shore Gold: Timmins operations

UPDATE:  TD Newcrest has maintained a buy rating for LSG but has lowered its NAV5 estimate to $2.83 at LT $1000/oz gold (I don’t know what they mean by “LT”–and this is a huge problem with analysts who not infrequently drop unexplained abbreviations into their reports with no explanation) and its target price from $5 to $3.  But when was the last time we saw $1000 per oz gold and is there anyone who thinks we will ever go back to that price?  If gold were to stay at $1600, that NAV5 would be over $4.

LSG: current price CDN $2.04

Is Lake Shore Gold (TSX:  LSG) a value now?  TD Newcrest in its Action Notes May 30, 2011, stated that it’s NAV5 was $3.45 when gold was selling at $1535 and LSG had a estimated cost price of $575.  Two days ago, LSG came out with revised their production cost and lowered their production estimates for 2011 to 85,000-100,000 oz from 125,000, and they indicated their production cost from the Timmins mine was $583 per ounce.  Today, gold is at $1590 per oz.  There is a possibility that NAV will have to revised downwards, but still, for the speculator, LSG may be a bargain right now.  I’ve therefore doubled my position today.

Apparently, according to a bullboarder (not necessarily a reliable source), the institutional investors are now increasing their positions while the retail investors have become frightened:

Not to worry.   Top seller of the day is TD — just a panicked herd of retail and small time players.   TD over past three days was a big buyer at higher levels and now is emerging as a big seller as apparently some retail investors bit off more risk than they could chew.

MacQuarie, today, has loaded almost $6 million and has not sold a share.   Sprott is also moving up the ranks and is now net buyer #4.   I wouldn’t worry about the “unlimited” retail selling — it is not unlimited and will fizzle off.   Then the stronger hands will take over.

Is this a case of dumb money out, smart money in?  Or is it a case of fraud?

Buying back and rolling over near but in-the-money puts just before expiration

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Option contracts have two kinds of value, time value and intrinsic value.  On the last day before expiration, a put seller has a few possibilities for dealing with near but in the money puts.  By afternoon, the put contract has only intrinsic value and time value has fallen to nothing.

A person can do the following:  (1) do nothing and accept assignment; (2) buy back and take a new position with more time value.  I had the following two experiences:

The PWE (Pennwest Energy) June $23 was near the money, but as long as it was within a few cents, the price to buy to close remained 10-15 cents.  But when the price of the underlying dropped to $22.75, I was able to buy back the put at 25 cents plus commission 2.7 cents; and then sold the October 23 at 2.273 after commission.  So I cleared roughly $2.00 per share by rolling over and I never received assignment.  The assignment would have been 6.1 cents per share, so that the two commissions of 2.7 cents were less than the commission at assignment.  So that was a consideration.  But then, if I waited until after assignment for the shares to go above $23, I figured that the PWE October $23 would lose also a little time value and little intrinsic value–though this could depend on other factors such as implied volatility.

The PGH (Pengrowth Energy) July $13 put was about to expired in near money.  Last week I was a volunteer our church’s Vacation Bible Camp, and I came home on Friday morning to deal with it.  First, I wanted to sell an January $13 put to replace it, then buy back the expiring put.  But when I used the Questrade platform I made the mistake of buying a put instead of selling.  It is a new platform for me, and I was being a little careless.  But all of these DIY platforms default to a certain option, and so you must physically change it if you do not want “to buy open”.  I think that there should be no default option, but the programmers never talk to traders, I guess.  Immediate panic set in and it took me two tries to sell these back (as I didn’t put in the correct number of shares the first time) but finally at a loss of only 6 cents per share (including three commissions!) I was able to exit a position that I never intended to hold.  At that point I had no more time and I had to return to the camp.  In the afternoon, before market close, I went to buy back my July $13 put, but the underlying (PGH) was at $12.75 and had therefore 25 cents intrinsic value, but the ask price was 40 cents.  Unwilling to pay 15 cents above intrinsic value, I let it expire and took assignment.  Then, two trading days later I sold my shares at $13.05, which provided me a small profit after all commissions (2.35 cents).  I then sold a PGH January $13 put $1.185.  Now on Friday, I probably could have sold the same put at $1.335, so that the difference between what I got on Tuesday and what I would have gotten on Friday was 15 cents (including all commissions).  This seems the same as my loss on Friday had I rolled it over then, but it has to be remember that (1) I would have paid 3.5 cents commissions to roll it over that day, and I made 2.35 cents profit on selling the assigned shares.  So I saved 5.85 cents which almost pays for the 6 cent blunder that I made.  So the net profit was 1.185+.0235-.06 (blunder)=$1.149.  On Friday, I figured that I could have only cleared as much as $1.15 before commissions so I was happy with how it finally played out.  So it was a wash in the end, despite my careless trading on Friday.

So I guess the lesson in these two scenarios is that it is good to buy back an option on expiry if you can get it for intrinsic value.  The commission cost on assignment would easily offset the commission costs of buying back and selling the new position.  But if market will not sell at intrinsic value, it is probably just as well to take your chances with assignment, particularly if you are still bullish on the underlying security.  The advantage of PGH is that it’s 7% monthly dividend would have more than paid margin interest charges–so even if it takes months for it to return to the strike price, you are able to cover all the carry charges.

My trading objective: To increase net worth as a function of book value

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Yesterday we attended a seminar with Jason Ayers of Optionsource.net on how to create cash flow using options.  He spoke a little about his trading and how his company has taken their holdings to 50% cash before this recent downturn and how they plan to buy back in at reduced rates.  Sometimes I regret not being a better trader and having such superb market timing.  Kudos to Jason!  If you have an opportunity to learn from this guy, it’s really worthwhile, for he’s an excellent speaker and knows his stuff.

I have a different trading strategy.  If you ask me if my portfolio is up or down, I’d have to admit that my “net worth” based on market capitalization is down 7% since February peak.  Ouch!  But what if my goal is not to increase my net worth in market capitalization–but instead to increase it in book value?  Book value is itself not an indicator of the market value of a company, which is really about the profitability of that company in the years to come, but of the total assets (cash, real estate, lands, equipment, inventory) minus liabilities.  Book value is much more stable than market capitalization because it points to the value of the company as a company:  i.e., if another company were to buy out your company you would expect that company to pay book value plus a premium based upon the future profitability of the company:  you will only sell if you think that the premium–i.e., the cash in hand today is more valuable to you, for whatever reason, than your own ability to extract profits from the company in the future.  If the potential buyer offers less than book value then either there is something terribly wrong with your company (Nortel) or you just simply show them the door.  Why would you sell your company at less than book value?  You would only do that if you were insolvent and were forced to sell.

I like junior oil companies and I discovered a means to de-risk them–pay attention to the book value.  This requires looking at the quarterly reports because it changes regularly–as the oil companies use cash to develop their lands.  If the reported book value is higher than the market capitalization, then you are buying the assets of that company at a discount while obtaining its future profits for nothing.

As a strategy, buying junior oil and gas companies at below book value has worked for me with Midway Energy, Crocotta Energy, Prospex (just bought out by Paramount) and Great Plains Exploration (bought out by Avenex).  These were the first junior oil companies that I bought and their share prices are now all well above what I paid despite the recent weakness in junior oils.  Each one was originally purchased below book value.

So while I am down 7% in terms of net worth as a function of market capitalization, as a result of averaging down on junior oil companies, I now own more book value than ever before.  So I consider myself to be doing well despite the current market.