Extremely Discounted Assets and Mass Theory

In this week’s Letter, Ivan Lo talks about his Mass Theory, the growing speeds of communication, uranium outlook, the copper and S&P correlation, the unloved mining sector, North Korea’s latest threats to the U.S., and the outlook for March.

Dear Readers,

Experts talk about historical events and technical charts. While we should study history and learn from our past, we should also understand that we’re in an age of information and technology.

That changes everything. It causes everything to move faster; from cars and planes, to computers and data.

In 1993, the McLaren F1 was the fastest top speed street legal production car, reaching top speeds of 231 mph. Now, the new Bugatti Veyron Super Sport goes up to 268 mph. Just recently, the Hennessey Venom GT got clocked at going 0-300 km/h in 13.63 seconds (watch it here). That is just ridiculous.

Less than 20 years ago, dial-up internet started the modern Internet speed revolution; it began at speeds of 0.1 kbps per second. Today, you can get up to 250 Mbps right here in Canada through Shaw. That`s an increase of nearly 800,000%.

Think that’s fast?

If you happen to live in Kansas, Google’s internet service offers up to 1,000 Mbps; that’s four times faster than the fastest residential speed here in Canada and 3,200,000% faster than the speed in 1994. Imagine how fast information and data will be transferred 10 years from now.

All of this ultimately leads to faster communication and transfer of information; thus, faster reactions and emotions.

What do I mean by that?

Just take one look at the market. It is completely fuelled by emotion and mass confusion, rather than basic fundamentals. One minute Bernanke makes a statement and the market soars; the next minute, employment numbers look bad, the market sells off. There is no rhyme or reason to the fluctuations of the market anymore.

Investors have turned into day traders. Day traders have turned into algo-traders, who not only make trades in 10 milliseconds or less, but typically hold stocks for no more than 16 seconds. The days of watching the ticker tape to get a sense of where a stock is headed is over.

It’s time to start looking at the market from new perspectives.

Everything that we’re experiencing right now has never happened before. The combination and culmination of technology, massive QE, and a worldwide race to debase is reinventing all stock investing theories.

It’s time for old dogs to learn new tricks.

Mass Theory: The Pace of the Market is Not Dictated by Fundamentals, but by the Mass

Last week I said that, “When it comes to investing, fundamentals never dictate the pace of the market. The market is dictated by the mass that often cannot see what’s really ahead of them. That’s why you should never bet against the power of mass conformity, but should always be prepared to take advantage of that knowledge.”

Let’s put that theory into perspective using uranium as an example.

Almost two years ago, the Fukushima Daiichi nuclear disaster sent uranium prices tumbling by nearly 40%. The media led the mass to believe nuclear power plants would no longer be a large provider of power to the world.

But was that really the case?

Back in a previous Letter, I wrote:

“…While the average person is quick to shy away from nuclear energy, I think they forget that more power plants exists in their own backyard than any other country. The US currently has 104 reactors in operation, 1 under construction, 9 more planned, and 23 proposed.

Even though the Chinese government reacted to the crisis in Japan by announcing a moratorium on nuclear project approvals, I doubt that will change their plans. Right now, the Chinese has 13 operating nuclear reactors, 27 under construction, 50 planned, and get this…110 more proposed. By 2020, the country’s nuclear capacity is expected to increase tenfold.

Worldwide uranium required in 2011 is estimated at 68,971 tonnes. Worldwide uranium production in 2010 was only 54,000 metric tons, which is still up over 6% from the previous year.

Of the 479 new nuclear reactors planned globally, a third are to be built in China. With barely enough uranium output to meet half its current needs, China is tapping global producers aggressively. Last year (2010), its uranium imports more than tripled to 17,000 metric tons – about 37.5 million pounds.

While uranium isn’t especially scarce, it is difficult to extract profitably in large quantities. That means price will need to rise in order to meet demand.”

Just recently I wrote:

“…Russia’s state uranium firm ARMZ (has) moved to purchase Canada’s Uranium One Inc. in private in deal worth $2.8-billion.

Meanwhile, a 20-year agreement to decommission old Soviet warheads and convert the uranium for use in reactors is due to expire this year. This agreement currently supplies one-eighth of world uranium needs. Experts don’t expect it to be renewed which should put upward pressure on prices.

Considering that ARMZ is state-owned and has shown an eager appetite to acquire uranium deposits, I would say they know something we don’t…

In my past letter, I said that, “uranium will soon be back in the spotlight. The World Nuclear Association has just issued a warning that world-wide uranium demand might exceed supply next year. Given the growing intensity of the currency war, expect to see the price of uranium – and thus uranium stocks – move higher.”

It’s clear that uranium demand is increasing while supply decreasing. Yet, all the talking heads on TV had to do was tell the world uranium was no more, and the mass reacted; leading to a 40% drop in uranium prices.

Was the price drop warranted? Not based on fundamentals. But as the Mass Theory proves, the mass dictates the pace of the market.

In the last 3 months, the Global X Uranium ETF (URA) is up 10.24% on the heels of the ARMZ buyout. Perhaps uranium stocks have finally found a bottom? I may look to add some uranium positions here as I expect uranium prices to move much higher this year.

Time to Eat Some Worms

“Nobody loves me. Everybody hates me. I am going to eat some worms.”

It’s only natural that as investors see their stocks move down, their sentiment becomes extremely bearish. So bearish that they often sell at rock bottom prices, just as many did in 2008.

Stocks never move up in a straight line forever – especially not mining and resource stocks. That’s why I believe in selling small percentages of a stock as it rises amongst others in the market. If you did last year, congratulations to those who got involved in our Select Portfolio companies.

The resource and precious metals stocks are so unloved and ignored that there is absolutely no volume driving the prices down; no bid support and very little selling. Because of the lack of bids, even a little selling is enough to drive prices down 5% in any given day. We’ve seen this happen across the board with precious metals and mining stocks over the last month.

But there is a bright side. When buyers have completely capitulated, any amount of buying has an exponentially greater impact to the upside on stock prices. That is why we often see an unusually steep line up for many of the stocks during a run. Should any strong buy side investors come into the market, many of these stocks will fly.

We’re not yet at the point where it’s time to pile in, but when the time comes fortunes will be made. There are companies whose assets are at extreme discounts in relation to their market cap.

Full disclosure: I am on the hunt for many of these companies not just for their shares, but for their assets.

Some of these companies have no choice but to let go of their assets during this current cash constraint cycle in the resource sector. From a stock perspective, investing in these companies is still a major risk because a company with a great asset and no money will not be a company for long in this market.

But from a project perspective, now is a great time to bargain hunt. Many institutions have reached out to me to assist them with this hunt; conversely, there are many public companies who are asking me to fund or sell their assets.

Whether you are a public company looking to sell or fund your asset, or an institution who understands the opportunity of this market, send me a note.

No one needs to miss this opportunity.

Copper, China, and the S&P 500

Copper just dropped more than 5% this week, after the widely expected increase in demand from China failed to materialize.

This may be a clear look into our near term markets. After all, China is often a leading indicator of the world. In the last two years, copper’s move down was followed shortly by a downturn in the S&P 500.

China Removes Liquidity? Currency War Update

China is so worried about inflation that it just announced that its Central Bank is now taking cash out of the system:

“Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.

The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year-but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.

“The PBOC’s move Tuesday was also likely triggered by an increase in capital flows into China and worries about inflation,” said Yang Weixiao, a senior fixed-income analyst at Lianxun Securities.

China is clearly worried about inflation. When other central banks print, the capital inflows to China grow. The problem? China already has enough money of its own…

Unless China can calm the printing presses of the other central banks, inflationary pressures may soon be at the forefront of the Chinese economy again, which will then filter into the rest of the world. Perhaps this could be the next driver for gold’s next move up…

Meanwhile, as China moves to remove liquidity, devaluation of currency around the world continues. From Bloomberg:

“India plans gross market borrowing of about 6 trillion rupees ($111 billion) in the year through March 2014, a record high, according to three Finance Ministry officials with direct knowledge of preliminary estimates.”

Keep the money flowing…

North Korea Continues to Threaten the U.S.

According North Korea State media, North Korea just warned the top U.S. military commander stationed in South Korea that his forces would “meet a miserable destruction” if they go ahead with scheduled military drills with South Korean troops.

Will the U.S. make a move? More to continue…

March Outlook

Historically, March is a bullish month for the American market. At the same time, it usually moves in the opposite direction of February. Since February has been flat, I don’t expect March to break any records. While the media continues to tell everyone to buy stocks, I would be cautious in the coming weeks as the decline in copper prices have signalled a near-term dip.

Remember, the mass may lead the market higher, but it can also lead it lower.

End Notes

As a result of PDAC 2013 in Toronto, one of the world’s largest mining investment shows, the Equedia Weekly Letter will likely not be published next week. I apologize for any inconvenience.

Until next week,

Ivan Lo

Equedia Weekly

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Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies. Our reputation is built upon the companies we feature. That is why we invest in every company added to our Equedia Select Portfolio. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will.

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