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November 01, 2008

Sell Now and Then What?
by Sol Palha

"I think over again my small adventures, my fears, these small ones that seemed so big. For all the vital things I had to get and to reach. And yet there is only one great thing, the only thing. To live to see the great day that dawns and the light that fills the world." ~ Inuit Song

If you dump everything you own now, perhaps you will be able to sleep better in the short term. You will however be selling at probably the low end of the range and taking a huge loss. You will also be giving up long term value for the short term illusion of peace. Putting this money in the bank to earn 2% a year is not going to provide you with any opportunity to recoup these losses; holding on and taking small bites will definitely offer you the chance to recover this money and more. History has shown that investing in the stock market over the long haul has beaten every other form of investing.

It is quite clear to those who are long term commodities bulls that the world is not finding massive new supplies of oil, or massive new fields of gold, copper, Uranium, etc. One cannot just go out and decide that today they would like to find a new oil field, or build a new nuclear power plant, or open a new coal mine; these things take time. Thus if you sell everything now, basically as an investor you are stating that you believe that the commodities bull is over and that supplies of energy will be endless in the years to come. In essence for short term peace of mind, (can it really be peace of mind when you are forced to bail out of your positions because of fear) you are sacrificing long term value and long term profits.

Margin: one of the main culprits

Well the ones dumping everything are the ones who invested on margin. The main culprits here are hedge funds, large speculators and investors who have lost control of their money and now are giving into fear. The biggest sellers are those that are getting margin calls; investing on margin is a very dangerous game and it is something we are strongly against. If used, it should be used sparingly and with tight stops and with pre determined exit points as you are using money that does not belong to you. Some of the biggest investors in the commodities sector, especially the energy sector were hedge funds and these hedge funds are also some of the biggest sellers; essentially clients are asking for all their money back. In order to give the clients what they want, these firms have to raise cash and that means selling everything and anything in order to meet these redemption calls. Now do you really want to be selling when these massive funds are dumping everything? In terms of fear no one can state that they have not experienced some moments of uncertainty (even we would not be so stupid and arrogant to state that we felt nothing during this hard correction), but if you are not using margins and this money is not something that you need for your daily expenses, then it does not make sense to sell now and offer someone else a bargain of a life time. One thing all the sellers have in common is lack of patience; they want a solution to the problem right now, even at the risk of selling tomorrow in order to feel better today.

Opportunity

This credit crisis has actually been going on for over 12 months now; it just picked up speed when companies were forced to tell the truth and investors responded by panicking. As this credit crisis started a quite sometime ago, on the same token we could be closer to a turn around then most anticipate. Note that there are already signs that the credit markets are easing; 3 month Libor rates have started to drop once again.

If you are not someone who needs the money right away, then the most prudent thing you can do is to take a long term view. Note what Warren Buffet had to say on this subject not too long ago.

"So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy)." "If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities." The reason, he said, is a key maxim in his outlook: "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful." Most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense," Buffett said. Full Story

So here we have it, Mr. Buffet openly stating up to 100% of his personal net worth (non Berkshire net worth) could soon be invested in United States Securities; this is not just any simpleton talking, it just happens to be the world's richest man.

The future

There are 6.5 billion people on this planet and rising; all these individuals need food and basic necessities that cannot be cut back on; some examples are rice, wheat, sugar, cocoa, oil, natural gas, copper, zinc, silver, coal, electricity, and the list goes on. Hence there is simply no way long term demand for commodities is going to dry up. Right now one could state that the entire world is essentially on sale; in fact we have a fire sale going on right now, where everything is being sold at a huge discount to its true intrinsic value. Take TCK for example, it is

• The world's leading zinc miner
• The world's second largest nickel miner
• Through its interest in Elk Valley Coal, the world's second largest producer of seaborne hard coking coal
• The world's largest indium producer; this metal is a rather rare meal
• A large producer of copper, gold, silver, platinum, palladium, cobalt and molybdenum and specialty metals
• It is also a decent sized player in the Tar sands sector

This company right is now selling for going for less than 10 bucks; a few months ago it was trading around 52 dollars. Does anyone think that this company will be selling for this price 3, 6, or 10 years from now? We would ask the same question of many other top companies in the commodities sector.

One does not only have to invest in resource based companies, there are many companies out there that are flush with cash, with low P/E's and whose share prices have been unfairly punished; in the long run these companies are going to be trading significantly higher. It is hard to imagine any of the companies listed trading at current prices in the years to come.

Conclusion

It's not only about fear now, for no one can honestly state that they have not experienced moments when it looked like fear would completely overwhelm them, with the possibility of transforming into the even more sinister emotion Panic. What we are dealing with now is blind panic and panic only stops when it has run its course. Fear can be fought but panic cannot be controlled. It is not easy to look at the long term picture in the midst of all this negativity, but go back in history and try to find out one time the majority was right in the long run and you will find it almost impossible to spot even one event.

Finally this 700 billion plus stimulus plan is going to have huge inflationary effects in the not to distant future; one cannot create so much money and expect nothing to change. To add even more fire to the flames, Bernake has hinted at the possibility of even more interest rate cuts. We were bullish on the dollar when almost everyone else was bearish but this does not mean we are forever bulls; (current upside targets on the dollar are in the 90-92 ranges and a possible spike to the 93-96 ranges); this rally will eventually end and the dollar will start to decline again. The one difference this time is the possibility of all Major currencies falling down in unison, for the entire world is now inflating its money supply at an unbelievable rate. When you couple this effect with normal demand, the implications for commodities are extremely bullish. At this point in time traders should consider buying rather than selling into weakness; take small nibbles instead of big bites.

Traders have to remember that commodities are dug out of the earth or produced as in growing them (agricultural commodities) and not just created out of thin air. The more severe this crunch gets the more mines will scale back their operations (it takes a long time to re open mines that have shut down) and when demand surges again, as it will, it will take time to re open these mines and in the meantime prices will soar. In the gold sector, supplies have been declining for several years in a row and no major new fields have been discovered. The uranium sector has been beaten down so much that many companies will soon start to shut down operations and if the current trend continues many might be put out of business; this is going to take place just when firms should be deploying huge amounts of money into exploration in order to be in a position to meet long term demand. In the oil sector, OPEC will probably over react and cut down supplies a lot more than they should. When one couples this with the fact that worldwide production of oil is falling it is a long term recipe for significantly higher prices and believe it or not, the high of 147 will look like a joke in the years to come. We remember how everyone thought we were nuts when we predicted oil would trade past 45, when it was trading under 30 dollars and then past 90 and then 120. Our conservative high end estimate for oil is still 300 dollars per barrel.

Finally one needs to talk about the "fear factor"

Fear is feeding of fear and then it accelerates and turns into blind panic; individuals who really have no need for the money right now are selling top assets at rock bottom prices because they feel the markets are going to crash to Zero. This same theme has repeated itself for generations and in the end the result has always been the same; the majority have lost, they have never been right and the chaps that looked at disaster as an opportunity are the ones that did well. We are not advocating that one should just run out there and dump all their money into stocks now that they have dropped so far, but starting to nibble at certain sectors would not be a bad idea.

These viewpoints are not our own subjective ones but viewpoints that are gleamed from examining history and other remarkable individuals, who all had one thing in common; they resisted the urge to follow the masses at any cost. As we have stated again and again, times are not easy and it is hard to sit down and calmly examine the situation when you are in the midst of chaos and extreme negativity. If one does nothing to fight fear, it is impossible to overcome. One has to make sure that one does not allow oneself to be constantly bombarded with negative news and negative people; remember misery simply loves and adores company, while peace and happiness are usually solitary players.

Is it easy to do this? No it is really hard, at times you really have to battle the desire to give in for it feels good to have company, but in such moments company can be very dangerous unless it is the right company. The easiest way to do this is to simply ask your self the following questions? Do I need this money to eat and survive now? Will I get a terrible price if I sell now? If the answers are no and yes, then avoid constantly following the news, do your job, and when you have free time, perhaps consider reading some good books or doing something other than looking at the markets. Fear has never ever led to anything good. Go back and examine all your actions and then look at the ones that were based on fear, 9 out of 10 times you will find that those actions led to further problems; the only time fear can be somewhat helpful is when one is physically in danger and needs to act fast.

Whenever the situation goes out of control, experts come out and state things are different this time and the situation is going to get a lot worse and that there is no light at the end of the tunnel. However has anyone paid attention to how they come out and make exactly the opposite comments the moment the markets are putting in new highs and when everyone is happy, they find ways to justify these extreme values by saying things are different this time. One clear recent example is the current housing bust. Whenever the phrase "it is different this time" is used try not to pay attention, for history clearly illustrates that those that reacted when they heard this phrase, were always left holding an empty bag.

Fear is fear and it will always produce the same reaction; left uncontrolled it turns into panic. Panic knows no limits, works with no logic, is completely uncontrollable and only ends due to exhaustion; this has happened before, this is what will happen now and this is what will happen in the future. Humans are wired to react adversely to panic; the only way to defuse this time bomb is to prevent fear from turning into panic. The only way to do that is to knock fear down the moment it raises its head; it's not an easy thing to do, for if it were, everyone would be rich.

"Come to the edge," He said. They said, "We are afraid." "Come to the edge," He said. They came. He pushed them... and they flew. ~ Guillaume Apollinaire, 1880-1918, Italian-born French Poet, Critic

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

Copyright © 2004-2009 Sol Palha, All rights reserved.

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