From Dow Jones, bear with it, Sprott likes Gold towards the end
TORONTO (Dow Jones)--Eric Sprott, manager of the C$100 million Sprott Hedge
Fund, - which holds both long and short stock positions - doesn't see the
economy turning around any time soon, a bet that is so far paying off
handsomely.
Many investors take the view that the U.S. economy could be at or near a
bottom, but Mr. Sprott figures this view is wishful thinking more than
anything else. "I see the opposite of positive evidence," he said, in
reference to a possible economic turnaround soon. Consumer spending has been
one of the few brights spots of the U.S. economy, but since July there have
been signs that "the consumer is starting to crack," as demonstrated by weak
U.S. auto sales in July and a sharp decline in same-store sales last month by
Gap Inc. (GPS), a well-known U.S. clothing retailer, he noted.
As a result, about 60% of the Sprott Hedge Fund is short stocks and about
40% of the fund is represented by long holdings. Shorting stocks involves a
bet that stock prices will fall. Investors are making the opposite bet when
they own, or are long, a stock.
The hedge fund gained 50% in the first seven months of the year.
Mr Sprott's short positions are in the areas of financial services,
technology and base-metals.
In the financial-services sector, the manager's short positions include
Canadian Imperial Bank of Commerce (BCM) and Toronto-Dominion Bank (TD). He is
also short a number of U.S. brokerage firms, including Goldman Sachs Group
Inc. (GS), Morgan Stanley Dean Witter & Co. (MWD) and Charles Schwab Corp.
(SCH).
For Mr. Sprott, the market has just gone through what he describes as a
"financial mania" that was epitomized by the "ridiculously" high valuations
the technology-heavy Nasdaq Stock Market reached about 16 months ago before
starting its sharp descent.
And even though this mania is at its end, "it's a long process to correct
the excesses of a mania," Mr. Sprott said.
Financial-services companies by their very nature are intricately linked to
a financial mania, participating through their different arms as lenders,
investment bankers, venture capitalists, mutual-fund managers and retail
brokerages.
"It's hard to have a financial mania without the major financial
organizations being a party to it," Mr Sprott said.
Sprott Shorts Ballard Power, Celestica In Tech Grp
In the technology sector, Mr. Sprott's short positions include Ballard Power
Systems Inc. (BLDP), a developer of fuel-cell technology, and Celestica Inc.
(CLS), an electronic manufacturing services company.
In the base-metals sector, Mr. Sprott is short Alcan Inc. (AL), an aluminum
producer, and nickel companies Inco Ltd. (NT) and Falconbridge Ltd. (T.FL), as
a result of the global economic slowdown.
One of Mr. Sprott's biggest short positions is Air Canada (ACNAF). The
investment reflects in part the sluggish economy as well as the company's weak
balance sheet. "It creates a strain (on the company) when your business is bad
and your balance sheet is very leveraged," Mr. Sprott said. As well, any
credit downgrades would result in higher borrowing costs for the company,
Sprott said. "It's not a nice position to be in."
Mr. Sprott is long a number of gold stocks, including Meridian Gold Inc.
(MDG), Goldcorp Inc.(GG), Kinross Gold Corp.(KGC), Cambior Inc. (CBJ) and High
River Gold Mines Ltd.(T.HRG).
"When people start worrying about where they are investing," they will
consider owning gold stocks because they aren't a worrisome investment versus
the likes, for example, of Nortel Networks Corp. (NT), the struggling network
equipment vendor.
The gold price is around a 20-year low so "the risk element in gold has got
to be mitigated by the fact that (the price) has been going down for 20
years," Mr. Sprott said. For most producers, their costs are roughly in line
with the current price so if bullion remains low, more mines will close,
ultimately resulting in a higher gold price, he said.
-Ben Dummett, Dow Jones Newswires; 416-306-2024, ben.dummett@dowjones.com. |
