If everyone is looking for a bottom, it is not a bottom yet

The market is bouncing back and back strongly. Before you blame me for warning you that I did not believe we were out of the woods yet and before you are too bemoaned for not being getting in to catch the "bottom", I will still warn you that you should be very careful and not act emotionally to rush in too early and only regret later for being trapped. Unless S&P can convincingly bounce beyond 1250, the important resistant line, I would not believe this is renewed rally.

I just read an interview done with David Rosenberg, who is well known for his widely read economic commentaries, which offer insights into market trends. Rosenberg was one of the first economists to warn of a U.S. housing market collapse and the ensuing consumer and financial market meltdowns. He responded to a question about the bottom of the market with something very interesting, which I wanted to pass it to you. Basically he said that if everyone was asking and looking for the entry point for the market bottom, it actually meant the bottom had not been reached yet. More painful volatility and a new low would likely ensue. The real bottom will only come when no one wants to get in anymore and everyone only wants to run away. Have you seen this kind of pessimism yet? I haven't felt that. Rather I was also asking whether it was likely the bottom when the market plunged 6% or so.

I will stay on the course as I laid out a few days ago in the script of my game plan.

The best silver company in the world- Silver Wheaton

If you have never heard about Silver Wheaton (SLW), you should pay attention to it. I think this is the best silver company in the world. You may notice that I did not say it is a silver mining company. Why? First, here is the summary for the company per Yahoo Finance: "Silver Wheaton Corp., together with its subsidiaries, operates as a silver streaming company worldwide. The company has 14 long-term silver purchase agreements and 2 long-term precious metal purchase agreements whereby it acquires silver and gold production from the counterparties located in Mexico, the United States, Canada, Greece, Sweden, Peru, Chile, Argentina, and Portugal. Silver Wheaton Corp. is headquartered in Vancouver, Canada." What does it mean by "silver streaming company"? That's the key to differentiate it from other conventional mining companies. Silver Wheaton is a royalty company for silver. In a nut shell, it has cash in hand and lends its capital to those small early stage silver mining companies that desperately needs cash for their business. In return, SLW gets certain percentage of sales of silver mined by those companies when they go into production. That is the royalty checks SLW simply collects and cashes in the bank day in and day out. Given this unique business model, SLW does not need many employees (I heard it has about a dozen employees) with no real operations, and the best is that it does not take any mining risks other miners must take. Don't sneer at such royalty checks. According to the latest company estimate, it may bring in $700 million worth of royalty checks in 2011 at the silver price around $36 per oz. That's right, $700 million in a company with very few employees and no real operations!

If you really understand its business model, you should realize Silver Wheaton has an unbelievable potential. Here is what CEO Randy Smallwood recently talked about its amazing business: "The mining industry once again finds itself facing significant inflationary pressures, resulting in accelerating operating and capital costs. The benefits to Silver Wheaton in this environment are twofold. First, Silver Wheaton is immune from inflationary cost pressures as our unique business model guarantees essentially fixed operating costs of approximately US$4/oz. Fixed costs provide our investors with significant margin expansion as silver prices climb. Second, as mining companies' capital commitments continue to materially increase, and cash needs arise, Silver Wheaton can offer a very attractive source of funds compared to other forms such as debt and equity." 

I could not believe my eyes when I saw at how low price SLW could acquire the silver rights: $4 per oz! Think about it, the current silver price is about $39/oz. In other words, its profit margin is $35/oz. Do you get the point? What kind of profits SLW will have if silver price goes up to $50 or even higher? I have no doubt this will happen. It is not a matter if but just when silver will significantly appreciate. At the current price of $37 for SLW,  I think it is a good value to buy. But please remember, I'm not saying it is the absolute bottom for SLW. It is a futile game to try to time the bottom. For value investment, it is even stupid. Although I'm not predicting and I simply don't know, it is not unthinkable that SLW may drop to a much lower price. When it happens it simply means it becomes even more valuable. I'm already in and I will add more if its price comes down.  By the way, SLW even pays a small dividend, which I expect will significantly increase over time.

Annaly: a guaranteed winner at least till mid 2013

I have talked about Annaly (NLY) many times in my blogs (here, here and here). Personally I have got quite some money in it for many years as its business model fits the best to the current financial environment. In a nut shell, the worse the US economy goes, the more money NLY can make, which then translates into more dividends for share holders. A few weeks ago, NLY prices started to stumble. When S&P began to threaten to downgrade the US credit rating, people started to be worried about NLY's bottom line. NLY is 100% relied on the no-risk credit rating of the US government. No one knew what it would mean if the US credit rating was downgraded. People worried that NLY's cost base could increase if the US triple A rating was removed. Investors hate uncertainty. So they dumped NLY en mass end of July. As I said I still very much believed NLY and thought it was likely an overreaction that was typically seen among investors. Indeed, this is exactly what has happened. NLY's prices have bounced back very quickly in the past 2 weeks.

Now why am I so sure that NLY will guarantee to make good money at least till mid 2013? This is related to the latest Fed announcement a few days ago. Not sure if you paid any attention to what the Fed said. One of the key statements from the Fed was that they had made a very clear timeline for the near zero interest policy, i.e. the interest rate will be kept near zero till at least mid of 2013. NLY jumped immediately and it was traded at around $18 again. Why so? The critical premise for NLY to be able to make good profits is that it can borrow cheap money. In other words, the lower the Fed interest rate is, the better it is for NLY to get cheap money. That's why it can be such a good business during the bad economy period because the Fed dares not to raise the interest rate. Although we knew the Fed would likely keep the low interest rate for a long time (I expected at least till end of 2012), no one knew for sure how long it would be. Uncertainty is simply not good for any stocks. Now it is crystal clear that the Fed rate will be low in the next 2 years, which is absolutely good news for NLY. Given what is going on in the US and around the world, I even doubt whether the Fed will be able to raise the rate after mid 2013 but this is not my immediate concern at the moment. I will keep my NLY shares till before mid 2013 and then decide whether it will be the time to unload. In the mean time, I simply enjoy high dividends quarterly from Annaly with an annual yield of 14%. It may be much safer than your bank savings and definitely more profitable. Hope you have got in with some positions for NLY. An alternative is AGNC (see details here).

A pounding the table moment

It seems the gold traders were listening to what I was saying. I said last night that gold was too high and was probably not sustainable in the short term. Gold went as high as $1818/oz over night but suddenly turned around and dropped by over $50 today to come down to around $1760 or so. As much painful as it appeared to be, it is actually healthy for a long-term bull trend. If you want someone to continue to run for a long time, you got to allow him or her to take a rest or slow down. Otherwise, he or she will collapse.

Gold is not the topic for today. Actually I want to talk about Cisco, which I discussed late Apr. Cisco (CSCO) is a value investment for me. I considered it a good value to own when it was below $20 at the time I introduced it. The market apparently did not agree with me. It came down further. When it dropped to around $15 about 10 days ago, I was thinking to write this blog as I was really consider it as "a pounding the table moment". It was so valuable to me. But I didn't. I figured it was never a good idea to talk about a long position when the overall market was crashing. However, for myself I could not help but taking the risk to go in. Below is the position I got last week. It was a poor timing since you know what happened Monday this week. The market crashed by over 6% and everything except precious metals came down with it. CSCO plunged to below $14 after I went in. The position I held went down with a paper loss of over $4000 at its nadir.  I was really not worried. Cisco is doing all the right things now. It is streamlining its business to refocus on what it is doing the best as the Internet plumber. It is also cutting costs to improve its finance and profitability. Finally it surprised the whole world with a great earning report yesterday. CSCO is jumping by 16% today. All my paper loss recovered with a jump of over $4200 today in my position value.

CSCO Jan 19 '13 $15 Put

2.29

-1.16

-33.62%

$4,280.00*

-40

$2.60

$839.34*

8.04%

I'm more confident now about CSCO as a long-term value investment. While it is still possible that CSCO may come down again with the overall market, it will just become more valuable with a decreasing share price. I may add more to it if such an opportunity presents itself.

I'm worried about the gold pace

I have Bloomberg news on my TV all the time when I'm at home. It's rolling at its bottom screen to show the real time prices for various stocks, funds and commodities. In the past few days, every several minutes when I scan at it, the gold price is different and increasing. It took about a month to add $100/oz from $1600 to $1700 but it only took a week to increase by another $100. As I'm writing, the gold future has reached $1808, which seems continuing to appreciate. Given substantial various positions I have for gold, naturally I'm very happy to see this but I'm really worried about its pace now. Regardless how strong something is fundamentally, it is always worrisome if it jumps too fast, too soon. Some sort of correction is very possible for gold. I probably should buy some put options as my insurance to hedge against the potential fall.

The script of my game plan for the next few weeks

The market was extremely oversold. Even with not so good news from the Fed today with apparent disappointment, the market still overcame the initial huge sell off after 2:15 pm and bounced back to surprise everyone by ending the day with an over 429 points jump for Dow and 53 points jump for S&P. Certainly no surprise for me. I actually got a few contracts for the SSO options in place to anticipate the bouncing back. So are we out of the woods by now? Is it likely the bottom for this correction? I'm not so sure yet. When a market crashes, it always tries to bounce back and it has the habit to lure retail investors into believing that it has done with the crash and it is going to rally for long. As soon as the herd is convinced about the rally and starts to chase the seemingly upward trend, it crashes again and usually more severely to test the new low. This is what has often happened in the past during crashes. If the history is any guide, here is the script of what I'm going to do.

As I told you, S&P 1250 was the support line before the crash. Since it was broken through, it now serves as the new resistance line for it. If the rally is real, it must first break through this resistance line. Most often however, it will come back to test this line in its attempting rally but will then plunge again to a new low. If you have good paper profits for your existing stocks, it will actually be a good time to take your profits when S&P comes back to near 1250 before its renewed downtrend. That's exactly what I'm going to do. I will wait at the sideline for now and see the market try to rally in the next few weeks. When it jumps to the level close to 1250 for S&P, I will start to unload many of my positions with good paper profits. That will enhance my cash position to be prepared for the real bottom to come. This should come in the next 1-2 months. Stay tuned.

I don't know what can be considered low for gold anymore

I have to be honest with you. I really don't know anymore at which price I can consider gold is low. For those who follow me for some time, you know that I have been waiting for gold to correct for quite some time. For most of the past year or so, I thought gold was too high for me to establish new positions, given that I have already got all kinds of different positions for gold and silver. About two months ago, I started to doubt whether I could see any meaningful correction before gold went up too high from the current levels. In less than a month ago on Jul 18, I wrote that I was not sure if gold would every go down below $1500. The gold was $1607/oz that day. Without knowing it, gold has jumped to $1719/oz today, in almost like a blink of eyes. While I'm still a bit nervous to get in more for gold at this high level, I have started to put in more money into gold whenever there is a meaningful pull back. Not in big money each time; however slowly but surely I'm accumulating in my gold investment. I have given up the idea to only consider more money in gold when it plunges hundreds of dollars per oz. I don't mean it cannot happen. It very well may. However, I just don't know how far it will go before such a plunge, if any, ever happens. I will still be ready to go in more if a sever correction indeed comes.

As I said many times, there is a long long way to go before this gold bull market is over. How can I be so sure? Just look around the world regarding what all the governments are doing and honestly ask yourself: does your money worth more or much less with each passing day? If a 10 uninterrupted years of track record with year-over-year increases cannot convince you about this super bull market, I don't know what else can make you believe. In an odd way, actually just because there is so much doubtfulness for the ongoing gold bull market, it has made this super bull safely continue. I just saw today the bickering between Peter Schiff, the CEO of the Euro Pacific Capital Inc. and the talking heads at the CNBC Fast Money, which makes me to more firmly believe that this super bull of gold and silver will definitely continue. Schiff is a long time critic of the US government and the Fed. Naturally he is a super gold bug. For all fairness, CNBC Fast Money often invites him to express his opinions and criticism but each time they always laugh at what he says. They seem to believe that they know much better than Schiff. What kind of idiots they really are! Today they scoffed at Schiff again when they heard him saying that gold will continue to appreciate much more and the US dollar will fail miserably. You know whose side I am with and don't regret in 5 or more years if you don't take any action today! Mark my words: regardless how volatile gold and silver may be, the super uptrend for them will surely continue for long long time.

PS: as I'm typing, the gold future has touched $1751/oz.