Wednesday, August 5, 2009

A Banquet for Bottom Feeders

Investor's Daily Edge
Wednesday, August 5, 2009
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A Banquet for Bottom Feeders

By Russell McDougal

Resource exploration stocks are notoriously volatile. Fear and greed play out in this sector like few others. Stocks tend to go irrationally high and stupidly low. And therein lies the opportunity.

So, let’s look at techniques you can utilize to speculate in the resource exploration sector to  make unfathomable profits.

The vast majority of exploration companies are hazardous to your financial health. The key is to select only the finest companies. And in this sector, that means starting with the most talented and experienced management that are working on highly promising projects.

Your company must also be able to weather most any storm that comes its way. If I’m certain that a resource stock has the required long-term staying power I will put it in the “buy and accumulate”category.  That means I take an initial position, and then happily purchase more shares on any subsequent price weakness that has nothing to do with the company’s overall fundamentals. This is how you make volatility your friend.

You see, resource companies frequently sell off en masse. Healthy babies are routinely thrown out with the bath water. Let’s look at a stock called Impact Silver (IPT:Toronto) that is in the portfolio of my Resource Windfall Speculator service:

In this portfolio, we select stocks that relate to specific commodities that are in long term bull markets. Silver certainly qualifies on that count and we hold six total silver stocks in the portfolio right now.


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To tell you the truth, Impact did not appear overpriced at the $1.50 Canadian range in early 2008. However, the global financial crash altered that perception -- even though silver performed just fine last year. In fact, silver was up in 2008 and has been up nearly every year this decade. Impact silver has a 52 week high of $0.88 Canadian and a 52 week low of $0.175. How’s that for volatility?

Impact Silver has remained a buy for all of this time, because the company’s fundamentals were just fine. Their silver production and successful exploration remained on track. While the price fluctuated enormously, the value remained intact.

Again, we identify long-term value and take advantage of short-term price weaknesses when it is illogical. Anyone who had the courage to buy Impact Silver near $0.175 Canadian is pretty happy right now with its $.77 share price. That’s a 340% gain. They’ll be even happier when the company far surpasses its previous highs.

Yes, those who bought IPT near $1.50 still have some catching up to do. But that’s okay. If you want to speculate, you must be able to absorb some losses without sacrificing excessive sleep.

Another stock I personally own, Salazar Resources (SRL:Toronto), has a 52 week low of $.12 Canadian and is now trading near $.80. Stock appreciations over the last eight months of 100 – 200% gains are commonplace.

The primary point is that bottom feeders can make astounding profits. We’re staring at another extreme opportunity in the coming weeks for rescuing babies from bath water.

  • Resource stocks are typically weak in late summer because the most influential players are on vacation.
  • Gold and silver get official spankings via government management with predictable regularity.
  • Resource stocks tend to sell off with the overall stock market, which now looks exceedingly vulnerable.

I’m convinced that $1,200 gold and $20 plus silver will soon be the floors under these precious metals. There will be few screaming bargains when these factors are in place. In the mean time we are probably heading for another bout of overall sector weakness that has next to nothing to do with individual company fundamentals. A banquet for bottom feeders is always a special occasion and we will be loading up in my advisory.

Are you hungry?

Invest Resourcefully,


[Ed. Note: Dr. Russell McDougal has been on an amazing streak lately. 16 of his last 17 recommendations are making money for his members. Don't miss the next pick by Dr. McDougal. Sign up today for his Resource Windfall Speculator service. Click here to learn more... ]

Make your voice heard -- to let us know your thoughts on this article, you can click here and leave your comments for the IDE community as well as the editors.

Market Watch

Don't Believe What You Hear About
A Housing Recovery

By Christian Hill

If you look at recent headlines such as’s “Another Sign of a Housing Thaw” you may be inclined to believe that the housing market has finally found a bottom. Various reports cite increases in sales, slight increases in sales prices, and reduced inventory. These are the three factors needed for any housing recovery to begin. Throw in the first-time homebuyer tax credit, and we may have a winning formula.

But there are some overlooked problems with this belief. The first is that while monthly sales of existing homes have improved, on a seasonally-adjusted basis, we are still worse off than we were last year in all regions but the west. Here’s some data from the National Association of Realtors:

The next problem we face is that inventory levels are still quite high. We are down from the peak of 11 months of backed up inventory, during parts of 2008. But today’s inventory level of 9.4 months is about to get a lot worse. Here’s why: Banks are sitting on their REOs (real estate owned a.k.a foreclosures) and are not re-listing many of these properties. Banks may be doing this for a number of reasons. Foremost is that they do not want to flood the market and drive down prices even further. But how long they will hold on to this “shadow inventory” before slowly releasing them on the market? That is anyone’s guess, but there is no doubt that there is a significant backlog of properties that will eventually hit the market.

The final blow to any hopes of a housing recovery are mounting foreclosures. The Obama administration’s “Making Homes Affordable” program has had abysmal results. Bank of America has modified 4 percent of its eligible loans. Wells Fargo has modified 6 percent. There is mounting evidence that lenders are simply unwilling to modify most loans since most modified loans end up right back in foreclosure after a few months. According to Renae Merle at the Washington Post, “The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms.”

The other two types of distressed borrowers are those that will inevitable become delinquent again or those that can find a way to become current on their loan with a little coaxing. Banks have little incentive or desire to assist these two types of borrowers.

The housing market still has some serious challenges ahead. Sure, we may see a small increase in prices here or there, but long term, the fundamentals are still garbage. I am not saying that you shouldn’t buy a home right now, either as an investment or as a primary residence. There are screaming buys out there right now, and long term, real estate is still a great buy. Just don’t expect to be able to buy a property today and flip it for a huge profit in the next twelve months. You may see a small decline in your property value, but the huge drops seem to be behind us. We will still face a very long recovery period. But as Samuel Clemens said, “Buy land, they’ve stopped making it.”


Christian Hill

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The Market Minute
Financials shine ... The financial sector led the advance yesterday. The XLF was up over 1.5%, Bank of America was up over 2%, JPMorgan Chase almost 1.5%, and Citigroup was up over 2% at one point.

Four of the top five models sold so far under the U.S. “cash for clunkers” program, aimed at boosting the auto industry, are made by foreign automakers, according to Transportation Department data.

Ford Motor Co.’s Focus was the top seller, followed by Toyota Motor Corp.’s Corolla, Honda Motor Co.’s Civic and Toyota’s Prius and Camry, data from the department showed today.

Initial clunkers legislation sponsored by Representative Betty Sutton, an Ohio Democrat, would have barred discounts for new vehicles manufactured overseas and offered higher payments for cars and trucks produced in the U.S. than for those made in Canada and Mexico. The “Buy American” provision was dropped from the final legislation because of opposition from foreign automakers and free-trade advocates who said it would conflict with U.S. obligations to the World Trade Organization.

Meet the Team

MaryEllen Tribby - Publisher
Christian Hill- Managing Editor
Nicole Reynolds - Marketing

Analysts / Editorial Contributors
Michael Masterson
Jon Herring
Andrew M. Gordon
Dr. Russell McDougal D.D.S.
Steve McDonald
Ted Peroulakis

Copyright © 2009 by Fourth Avenue Financial. All rights reserved. The Fourth Avenue Financial unites the stock-picking talents of several analysts and editors. Each of the services is based on individual trading/investment philosophies or vehicles and specific investment approaches.

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