Take physic, pomp

The opening rant of IKN226

The last two editions of The IKN Weekly (IKN225 and IKN226) have been along the lines of “ok, fair rebound in gold, but don’t buy into the rah-rah too da moon Alice BS” and as such the touchstone has been caution, with some minor profit-taking on the way. 
Here’s how it was set out in the opening rant of this week’s edition (with tickers redacted):
Caution rewarded
By way of reminder, here’s how IKN225 ended last week:
The bottom line to the three trades I’m making next week is one word, caution. I’ve read plenty of market literature over the week, from those I respect greatly to others I take with a pinch of salt to others for whom i have zero regard. The overwhelming message from nearly everywhere is that “we’re going higher”, which is something that gets your author’s contrarian teeth (which are directly connected to his contrarian body and contrarian mind) grating all by themselves. As all near-term predictions on gold, the metals and the miners boil down to what the dollar is going to do right now, and I fail to see why the dollar should collapse into oblivion on command in the next 48 or 72 hours, I’m again obliged to return to my clearest observation that there are plenty of overbought stocks out there which need further rises in gold&co just to maintain their new, higher valuations. The result is that at least on the trading, near-term end of my portfolio exposure I’m going to take some more long money off the table.
This turned out to be the correct call, for last week at least (as always, everything depends on the preferred timescale). The decision to cash in two near-term trades and add some width to the XXX short came at an opportune moment and all three choices look good in hindsight. It makes a pleasant change to have called the scene right and to have acted upon the call, too.
Not that it’s a very good thing, though. The junior sector didn’t need to wait until gold started dropping in order to go South; blame flavour-of-the-month Syria if you like, though why junior exploreco XYZ Dot Vee that works in LatAm and trades for pennies should be affected by yes/no decision to fire some missiles in the MidEast or a parliamentary debate in London is a question that deserves more thought than junior traders and retail holders tend to give it (evidence that Dirk Gently and his ‘fundamental interconnectedness of all things’ is on the right track, perhaps) but once it was clear gold didn’t have much upside voom left to offer our focus segment of the financial world acted in the way I expected it to. Yes, XXX at $4.93 on Tuesday was overbought. Yes, XXX at $9.43 (!!) on Tuesday was overbought. Yes,XXX at $19.59 on Tuesday was overbought. But before you start rolling your eyes and thinking about picked cherries, other things need to be said about those examples:
1)      They would have stayed overbought and may even have kept moving up if gold had obliged the bullish rah-rah brigade who’d been making all that collective noise the week before (who in the space of a single week have either gone very quiet or have been busy revisionists) and risen through $1,450/oz.
2)      Those three above are from my list of potential short plays, but it’s equally true that my preferred long plays also dropped hard, such as XXX (down 8.7% week-over-week) XXX (down 8.5% WoW) or XXXL (down 6.0% WoW), to name but three companies I like and consider undervalued opportunities. So dumbass me, too.
One conclusion to draw from this (and if we don’t learn from our mistakes we’re screwed, so I try hard to rescue something from my reticence to dump all trading positions rather than a couple of them) is that we’re not yet in a situation where bright and strong looking individual companies get to shine out from amongst the crowd of ok plays, mediocre plays and downright cruddy, scammy plays. We’re evidently still in an “all boats rise/fall with the tide” market that treats the whole of “the juniors” as if it were one big stock ticker and that, my esteemed and respected audience, is not good news. Last Thursday a mining sector pro mailed me, put before my eyes a rant written and published by John Kaiser on Wednesday and asked for an opinion. Kaiser’s thoughts were mostly about one specific company that I don’t follow that much (and have no intention of doing so either) but what grabbed my attention was the part at the end of his rant where he announced he’d been invited to a debate on whether the current is merely a cyclical downturn or is one that brings the potential for catastrophic structural problems. In Kaiser’s words it “…is a debate I’d love to lose, but the reality is that a small group of juniors will do very well going forward, while the rest suffer the death they deserve.
I’ve never really followed Kaiser much or dwelt on what he thinks are good stock picks, but he’s a commentator with a strong grasp the big picture for the junior world and that line sounded spot on to me. And that’s a problem. Here’s what I wrote back to my friend (who, by the way and before you ask, isn’t John Kaiser):
“We agree that the crud has to sink, shrivel and die. The rally we’ve seen this last ~3 weeks has had at least some of the crud rising with the cream.  Therefore, if the sector isn’t ready to separate itself, it has to drop as a whole. At least in the near-term. We need to see some “de-coupling” (for want of a better word) of the good stuff and the shit stuff. I’d float the idea that in order to see this happen, we need first to see producing FCF+ names rise while the rest of the junior world treads water.”
The problem as seen is that most commentators on the junior exploreco scene recognize that the sector has become flabby, with too many companies holding too much moose/llama/yak pasture that doesn’t have a ghostly chance of ever becoming anything close to a working, profitable mine. There are hundreds of companies that need to disappear from the TSXV (and main board for that matter) before the junior sector can be deemed healthier and more worthy of serious consideration as a whole. This harks back once again to my preferred scenario chart, last seen in IKN221 and reproduced here, that’s looking for the best to separate from the rest and move up and higher first, but the worst of the bunch has to wither and die as well.
What we saw in the relief rally in August wasn’t that; by and large what we saw was the whole market, zeroes and heroes, cream and crud, stars and scams, moving as one. The de-coupling of good and bad has yet to be seen on a macro level, as although we have had certain bad stocks hit the legal and financial skids, there are enough stories out there of the bad ones that have performed every bit as well as the good ones. Equally last week, we had the sector as  whole taking a drop, not just the crummy stocks with either no production or no chance of making positive free cash flow at current prices in the case of producers trying to hang in there and get lucky on a bounce in gold. Sorry folks, this state of affairs cannot continue because it means the cleansing of the junior sector has hardly begun yet, we need a whole lot more of the no-hope end of the market to pack up and go home, so if the better ones can’t de-couple from the worse, it suggests the whole sector needs to drop until the weight of the no-hopers is diminished.
The bottom line is that unless something unexpectedly good happens to gold (well, unexpected by any normal or rational person who doesn’t live in the cloud cuckoo land of the hardcore goldbugs) the junior sector isn’t out of the woods yet, not by a long way. Alongside those companies I consider as undervalued there’s a long list of others that are still getting unrealistically high valuations from this market and until they go away, once and for all, things won’t get better for the good guys.
On a practical level, here’s how I intend to manage today’s chapter of the unfolding scenario:
1)     Hold the investment positions without worry.
2)     Not add any further investment-timelength positions (e.g. I’m still toying with XXX and now that I have a relatively OK handle on the financials I feel in a position to make an informed decision, but a buy isn’t in the cards for the moment)
3)     Hold the shorts in the portfolio with the potential to add another (see the IKN224 list for clues)
4)     Look to sell the other trading positions at a suitable opportunity
5)     Keep the boosted cash position in the portfolio the way it is. The half-sale of XXX padded the most, the other recent trade closes have helped, the XXX addition took some away but here today it’s still a good and comfortable padding to the port. It’s likely to stay that way (barring minor stuff) for the moment
My thoughts once again return to Gary Tanashian’s line of weeks ago in his NFTRH239 edition (he sent out #254 today, which I’ll read later) , reproduced here on a couple of occasions:
“This is not a time to be guessing. It is a time to be right by not being wrong.”
We’re back there again, people. Gold has come off its lows and doesn’t look likely to crash again. It may even go higher, but for the time being I’m holding off from any endorsements of the $3,500/oz and $10,000/oz numbers that have started to show up on the fringes and in the freakshow blogs (or Ron Paul’s ‘infinity per ounce’, but that’s for more obvious reasons such as the way there’d be no electricity to power my computer or let you read anything that couldn’t be sent via the non-working world internet system). I see no reason why it should go lower or higher and, as if by casual luck, it seems to have picked a level at-or-around $1,400/oz that is suited to separating the Rio Altos from the Samexes (1) wheat from the chaff, the ones that will survive from the ones that will not. Today is a time to hold the quality stocks that will do OK (not necessarily well, but OK) at the current gold price, not to bet on the middling or plain bad stocks that need gold etc to go higher before they reach financial security.

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