The Daily Reckoning U.S. Edition Home . Archives . Unsubscribe The Daily Reckoning | Wednesday, July 14, 2010
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Urgent Alert - Historic profit potential from just-released research:
Wealth REVELATIONS 20:10
The Lame Will Walk Again...
The Blind Will See Again...
The Sick Will Be Healthy Again...
The Old Will Be Young Again...
The Obese Will Be Thin Again...
Four tiny companies strive to make these miracles a reality - and could make you richer than you ever dreamed. For a chance to make the quickest profits, you must act today.Downgrading the US Credit Rating How China’s first attempt at a ratings agency isn't pulling any punches
On loan from The 5-Minute Forecast...Addison Wiggin
"Lenders should do all they can to meet the needs of creditworthy borrowers," Fed Chairman Ben Bernanke suggested helpfully at a conference in Washington on Monday. "Credit conditions remain very difficult," Mr. Bernanke reported.
Funny how credit gets tight in a post-binge bust.
"Total bank loans have, indeed, grown," GoldMoney's James Turk comments, "but not because banks made new loans. Instead, the increase was a result of pure accounting.
"On April 1, 2010, the accounting rules for banks changed. Credit previously extended in the form of derivatives booked off bank balance sheets now has to be accounted for on a bank's balance sheet. Thus, in accordance with rule FAS 166/67, banks brought about $300 billion of assets and liabilities onto their balance sheets in April. This was credit already extended.
"Contrary to earlier conclusions, bankers are still sitting on their hands. They are not making new loans, when taking into consideration the bookkeeping change. Bankers are still trying to repair their own overleveraged balance sheets," a task that is going to take a lot of time yet.
Speaking of credit, or the lack thereof, the US has been stripped of its AAA credit rating. So have Britain, France and Germany...
This morning, the Dagong Global Credit Rating Co., China's first real attempt at a ratings agency, initiated coverage on the sovereign debt of 50 different countries. "Dagong's sovereign credit ratings are based on the new sovereign credit rating standard created by Dagong," the Dagong report explains in a perfectly logical, if circular, fashion.
Dagong analysts claim to give a greater value to nations with the best "wealth-creating capacity" and biggest foreign reserves. They strive to "not be affected by ideology," insisting that "it is the newly-created social wealth that supports the national funding capacity and constitutes the primary source of debt repayment."
When we were in China last month, we had a chance to fire Chinese-made M-16s and AK-47s. The Chinese are reverse-engineering the weapons and mass-producing them. Heck, if the US and Russia are making money in the global arms trade, why shouldn't China get a piece of the action?
The same logic apparently applies to the global credit markets, too.
Here's how global debt looks when expressed in terms of Dagong's outlook for each of the top 20 countries' currency.
Perhaps we should consider these new ratings to be another subtle shot across the bow from the Far East... The Chinese are not nearly as ignorant as most Westerners would want them to be.
These new Chinese ratings might make sense, but they are not sanctioned by the SEC.
"The single most important factor in the Commission staff's assessment of Nationally Recognized Statistical Rating Organizations (NRSRO) status," reads the SEC's website, "is whether the rating agency is 'nationally recognized' in the United States as an issuer of credible and reliable ratings by the predominant users of securities ratings."
Hmmmn...
"The [SEC] staff also reviews the operational capability and reliability of each rating organization. Included within this assessment are... the rating organization's independence from the companies it rates...the rating organization's rating procedures (to determine whether it has systematic procedures designed to produce credible and accurate ratings)..."
Ha! Take that, you Chinese credit raters. The SEC is the decider!
Only 10 organizations in the world are labeled a Nationally Recognized Statistical Rating Organization (NRSRO)! Any worldly company that wants to both utilize a credit ratings agency and comply with US financial regulations has to use one of these NRSROs...thereby making any alternative ratings agencies mostly irrelevant, regardless of the quality of their ratings.
So there.
Of the 10 sanctioned NRSROs, seven are US companies. Naturally. Two are Japanese, and one is Canadian. But we're pretty sure these last three don't count. Clearly, no other country in the world is capable of accurately assessing credit conditions.
Sorry, Dagong Global...wrong country, wrong era.
"As future bond issuers belly up to the bar with their rating agency seals of approval," PIMCO's Bill Gross wrote earlier this year, "it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front-run all three, benefiting from their timidity and lack of common sense. Take these recent examples, for instance: S&P just this [April] downgraded Spain 'one notch' to AA from AA+, cautioning that they could face another downgrade if they weren't careful. Oooh - so tough! And believe it or not, [up until May of 2010] Moody's and Fitch still have them as AAAs. Here's a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!"
That's the biggest bond manager in the world publicly mocking the ratings establishment. How much longer can the status quo last?The Daily Reckoning Presents Cameco is a "Buy"
There is only one uranium blue chip, and that's Cameco Corp. (NYSE:CCJ), based in Saskatchewan, Canada. It is the second largest uranium miner in the world, after Kazatomprom. Cameco produced about 20 million pounds last year, or 16% of the world's supply. It aims to double production by 2018 from its existing assets - nearly a billion pounds of resource - excluding potential acquisitions.Chris Mayer
Cameco's world-class assets have among the lowest costs in the industry. Ore grades at its McArthur River mine, for instance, are 100 times the world average. That means it can produce more than 18 million pounds per year by mining only 150-200 tonnes of ore per day.
Cameco's MacArthur mine is the world's highest-grade mine - and it isn't even a close contest. Take a look at the next chart, from Forest's piece:
As Forest comments: "Top producer McArthur River grades a towering 17.7%. After this, the world's other top mines barely show up! McArthur is 2,360% richer than number two Rabbit Lake. And a staggering 59,000% higher than the number ten mine, Rossing."
Rabbit Lake, by the way, is also a Cameco mine. Again, other mining sectors show a smoother curve as you move from left to right. But uranium is quirky.
It's also involved in all facets of nuclear power, not just mining. It owns uranium-processing plants and power generators and invests in new enrichment technologies. It also trades uranium, buying it from third parties and reselling it for a profit. These non-mining interests produce about half of Cameco's sales.
You can see the merit of this setup in the chart below. Cameco was the only uranium company to earn a double-digit, much less a positive, return on equity last year. Not bad. As the old money manager Martin Sosnoff once wrote, "If you can run a hotel at 102% occupancy during a recession, how bad can it get when business is better?" The same thinking applies to Cameco.
So why now? What specifically makes Cameco a good buy now?
First, there are lingering clouds over Cameco that make its stock cheap. Among one of the biggest such clouds is its largest new project, Cigar Lake. It flooded in 2006 and again in 2008, halting development. Cigar Lake was to add 9 million pounds of uranium production a year! It is a world-class deposit, one of the best in the world. Yet there is a lot of uncertainty over this mine, which helps tamp down the stock price.
Recently, Cameco finally pumped all the water out and sees production in 2013. This is potentially a big catalyst for Cameco's stock as more good news unfolds about Cigar Lake through the year. All the bad news is baked in the price already. And remember, starting new mines is a universal difficulty in this industry, as we've seen above. That's part of the appeal of uranium - it's not like you can wander out on some moose pasture and start putting it in bags to take home.
Secondly, Cameco recently released lowered guidance for 2010. Wall Street was disappointed in its near-term growth outlook. Classic short- term thinking, as nothing has changed longer term for Cameco. If anything, the outlook is better now, which brings me to item No. 3.
Cameco recently sold its stake in Centerra Gold, which netted Cameco $871 million. Cameco sold it right near the top of the market for gold. But the main thing is that the company now has a war chest of $1.3 billion against debt of only $1 billion. It has great financial strength and the flexibility to make acquisitions and do other potentially good things. I liked the sale, and I look forward to seeing how Cameco puts the money to work in uranium.
Cameco is also well insulated should uranium prices remain soft. That's because Cameco sells a lot of uranium through long-term contracts. Many of these contracts are old and at prices lower than today's. So as these contracts roll off, Cameco's earnings will rise even if uranium goes nowhere.
The trade-off is that Cameco doesn't enjoy as much an immediate windfall if uranium prices spike as a smaller more speculative miner that sells everything on the spot market. But I'll take the safety.
This reminds me of the wise words of Sherlock Feldman, casino manger at the Dunes for many years when it was one of the largest gambling clubs in Las Vegas. Feldman saw a lot of people lose a lot of money to greed. A life so spent must make one philosophical about the nature of greed. He once said of gamblers, "If they wanted less, they'd go home with more." The same is true of investors.
The net asset value (NAV) of Cameco is around $25 per share. The stock price is less than $25 currently. Furthermore, that NAV is depressed because current uranium prices are so low. I'm comfortable having $25 of depressed NAV to cover my downside. When uranium prices go up, so will Cameco's NAV. Every $1 increase in uranium prices adds nearly a $1 to Cameco's NAV. Plus, Cameco often trades at multiples of 1.5 times NAV and higher. This will provide good upside when uranium prices start running again. Keep in mind that in 2007, investors shelled out nearly $60 per share to own Cameco - more than double today's price.
Still, the bottom line: Cameco is a speculation on a higher uranium price. If uranium goes nowhere, Cameco will not be an exciting investment, though we shouldn't lose money at these prices.
Cameco has no net debt and a boatload of cash. In 2010, it should generate around $900 million in cash flows. It is the Superman of the uranium world. No worries here. Cameco also fits with our preference for owning tangible assets - the classic, durable means of wealth creation and preservation. Uranium ought to prove a wonderful inflation hedge if our thesis plays out. This is one to buy and sock away for a few years.
Grandey summed up the appeal of his company in his closing remarks of Cameco's last conference call: "With both an enviable balance sheet and an extraordinary reserve and resource base to build upon, Cameco has a number of pathways to reach our goal of doubling production. You can rest assured that the pathways we pick will be the ones that will add the best long-term value to Cameco."
Cameco's exceptional properties and long-term prospects reside within a very bullish long-term outlook for uranium. The bull case for uranium is right here in this chart:
On the vertical axis are uranium supply costs and on the horizontal axis is demand. The low-cost mines are in the $10-15 a pound range and all in Saskatchewan. Olympic Dam is highlighted because it is the exception. It is a BHP mine in Australia that produces copper and gold as well. These other metals lower the cost of extracting uranium, but it is not a pure uranium mine.
As demand moves higher, you can see how the cost rapidly shoots up. In fact, the World Nuclear Association says that 2010 demand will come at 81,000 pounds. That puts us against the right-hand part of the curve.
It's true that some uranium will come from existing stockpiles and recycled uranium. But the stockpiles are dwindling and recycled uranium is still a tiny piece of the pie. All is to say that the pressure on the uranium price will be high. It must move higher to induce these marginal mines to produce.
In that world, Cameco stands tall. The stock is trading for only 9 times next year's cash flow per share guess of $2.59, which is likely too low. It also trades just under my $25 estimate of net asset value per share. Plus, we own a super strong balance sheet with no net debt and over $1 billion in cash.
Cameco is a buy.
Chris Mayer,
for The Daily Reckoning
Joel's Note: If you like what you see here, why not take Chris' Mayer's Special Situationsresearch service for a trial spin?
Simply put, Chris' research is some of the best in the business. A crafty mix of hard won knowledge from the investment greats, coupled with his own eye for quirky, under-loved gems makes Chris' service a must read for any serious value investor. Get his full portfolio, including a month trial to Mayer's Special Situations and his just- released China Report, for just a buck, right here.Bill Bonner US Economic Growth Still Dependent On
the Government
Wth a Bastille Day reckoning from Paris, France...Bill Bonner
It is a national holiday in France, today. But your Daily Reckoning team is on the job anyway. We neither sleep nor rest nor take time to honor any of the world's bogus holidays. We just reckon.
Bogus holidays?
Well, the storming of the Bastille was hardly cause for celebration. But we'll come back to that. First, today's top financial story:
The Dow rose 146 points yesterday; gold rose $14.
Just like the markets. Keep us guessing. Is this a major rally? Or just a feint to the upside? We don't know. Stocks have been up six days in a row. The shorts have been squeezed...forcing them to buy into a rising market to cover their positions.
And here's something interesting: "Surprise jump in US trade deficit as imports flood in from China."
Is this beginning to seem like the sequel: The Bubble is Back II? Not really. The post-bubble trends are firmly in place. The private sector is de-leveraging. Credit is declining and so is private debt. Only the public sector is still adding debt.
Private sector debt is much greater than public sector debt. So when people begin to pay it down, it has a big effect on everything. Jobs disappear. Prices fall. Businesses go broke.
That's what's supposed to happen in a correction. That is what is happening now. We see no sign that it is letting up...
Nor is there any sign that the other fundamental trend has peaked out. Wealth and power have packed their bags. They're moving to the East. Asian economies, broadly speaking, are growing 2 to 3 times faster than the US and Europe.
We have some doubt that the US economy is growing at all. The figures show modest GDP growth. But the figures don't make a distinction between real growth and hollow, government-goosed activity (such as census taking). One thing is clear, more and more of the economy is being directed, owned and controlled by government. And when the feds are active in an economy, the economy itself loses its vitality. They usually spend money recklessly and invest it foolishly. And why shouldn't they? Neither their money nor their jobs are on the line.
What's more, the figures are constantly being revised and updated as new data comes in. A few years from now it may be clear that the US economy has spent the last 6 to 8 quarters in recession.
But back in Asia, there is no doubt there is a boom going on. Growth averages about 7% throughout the region. Incomes are rising. And with so many people in the region, it is already the biggest consumer of a whole variety of products.
Food, for example. While most of the US suffers from a downturn, the farming sector is doing well. Why? Because it has something to sell that Asia wants to buy.
The raw materials producers are also doing well - Canada, Australia and Brazil.
Which brings us to another way China is asserting its new power. It has determined that Moody's, Fitch and S&P are biased towards the West. Its own rating agency has just announced a new way of looking at the creditworthiness of the world's governments. In it, the US has been taken down a notch. So have Britain, France and most other western nations. The Telegraph reports:Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a revolutionary picture of creditworthiness around the world, giving much greater weight to "wealth creating capacity" and foreign reserves than Fitch, Standard & Poor's, or Moody's.
Yes, Asia's time has come. But does that mean that the West's time has gone?
The US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.
Meanwhile, China rises to AA+ with Germany, the Netherlands and Canada, reflecting its €2.4 trillion (£2 trillion) reserves and a blistering growth rate of 8pc to 10pc a year.
Dominique Strauss-Kahn, chief of the International Monetary Fund, agreed on Monday that the rising East is a transforming global force. "Asia's time has come," he said."
Maybe.
And more thoughts...
Whatever is happening on Wall Street probably doesn't matter very much. We're more worried about the zombie invasion. Here's Ross Douthat in The International Herald Tribune. He is describing the zombification of the USA:
"In case after case, Washington's web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores. We subsidize drug companies, oil companies, agribusinesses disguised as 'family farms' and 'clean energy' firms that aren't energy efficient at all. We give tax breaks to immensely profitable corporations that don't need the money and boondoggles that wouldn't exist without government favoritism. And we do more of it every day..."
Here's a news item from the Portland press:
"A car full of zombies crashed on I-84 near Portland, Oregon."
We're not kidding. We told you the country was being taken over by zombies. Now, we have proof.
When police arrived at the scene, they thought the passengers and driver were dead. Turned out, they were just zombies with minor injuries.
Watch out, dear reader, they shuffle among us.
*** What good did the storming of the Bastille achieve? As far as we can tell it just set in motion a sad story of mob violence, war, and property destruction.
Richard Nixon famously asked Deng Tsaoping what he thought was the impact of the French Revolution. The latter replied that "it is too soon to know."
A good answer. More accurately, we'll never really know. One thing leads to another...you never know which thing leads to something good and which to something bad. You'd have to know God's Own Plan to figure these things out.
When the revolution was over the French had no king. So they welcomed an emperor, Napoleon I. Is that progress, or what?
The Revolution...the Terror...the Directoire...the Empire...the Napoleonic Wars - was the typical Frenchman better off for all the drama and bloodshed? Wouldn't he have done better to fix his roof and plant cabbages? Most likely.
He began with a monarchy - albeit imperfect. Finally, he had a republic - albeit imperfect. In between, he had various sorts of governments, held together by duct tape and illusions. Did any of them plant a single seed or reap a single pound of grain? Did any of them earn a centime or a sou? Did any of them discover penicillin or the telegraph? Did any of them do a single thing that made a net positive improvement in the lives of the French?
Probably not. But people cannot seem to resist politics. The hope of getting something for nothing is too great. Besides, there's the excitement of it...the thrill of engagement...the roar of cannons and the smell of the crowd. There's the feeling of pride and excitement when the ballots are counted or the troops walk by.
Understanding the feds' reaction to the current crisis is impossible without realizing that people are forever setting out to do mischief to others...and usually to themselves.
Regards,
Bill Bonner,
for The Daily Reckoning
Wednesday, 14 July 2010
Posted by Britannia Radio at 20:51