₪ David Pescod's Late Edition December 5, 2007
They say a picture is worth a thousand words, so it’s about time we let a couple of graphs do the talking for us. We had expected this decade to be a great one for resource stocks with commodities booming because of demand for any and all commodities from a suddenly booming Asia keying on China and India, but let’s not forget the huge populations of people from Vietnam to Indonesia to Pakistan that also want what North American’s take for granted...be it bicycles, dishwashers, microwaves, and cars and all of which need a lot of commodities in their different parts.
The recent crash in the asset-backed paper market in the United States has created all sorts of concerns that the American economy which still sucks in a lot of the goods that Asia produces, if it goes into recession, could cause big concerns.
While we have had corrections in some commodity prices, some of which have been dramatic such as uranium (from $135 to $75, but now up past $90) and nickel has almost been halved, prices for most commodities still remain buoyant. That can’t be said for many of the commodity stocks out there. Some have different reasons and the first charts to look at is that of natural gas and from a North American and Canadian perspective, it’s been an absolutely brutal place to be .
Drilling costs are way up, although recently they are starting to drop, the Canadian dollar is working against you big time, wages are way up, gas inventory is high, gas prices are low and now the Alberta Government decides to make a bad situation even worse by increasing royalties.
True Energy Trust
Rider Resources
Enterra Energy Trust
Tusk Energy
The rule of thumb is that 75% of the Alberta Governments royalties come from natural gas production while 15% comes from conventional oil and 15% from the oil sands. That shows you how important natural gas is to the Province. It also tells that most oil and gas companies in Canada are mainly gas...and are hurting big time!
The charts of some of the accompanying gassy companies just show you how ugly it’s been and it doesn’t matter whether you are a big company like True Energy or a little guy like Tusk Energy with well thought-of management.
If you are in the natural gas business right now, you are having a tough time.
Some suggest it’s going to be easily another year before things take care of themselves in this sector assuming that announced huge cuts in gas exploration budgets sooner or later means there will be less supply around and hopefully, by next winter raise prices.
In the meantime, the question remains, how many natural gas companies are still going to be around ... in their current form. The suggestion is many will be forced to merge just for survival as a method to lower costs, but when you are speaking of natural gas stocks, it’s not just this sector getting hurt. Oil had a dramatic run to $99 before its recent correction, but look at most of your oil stocks and they’ve corrected dramatically.
Of interest to us are some of the significant players in the North Sea and the charts have been somewhere between ugly and very disappointing of late. You’d think oil had corrected to $40, not just $88.
And as a sign of the times, while players such as Oilexco, Antrim and Ithaca depend on size of discoveries and the price of oil, a little guy like Gulf Shores involved with three very exciting exploration plays over the next while, some of which could make an absolutely enormous impact on the stock value, are simply totally ignored in this market, where all of a sudden capital preservation is a lot more important than excitement and the big play.
Oilexco Inc.
Antrim Energy
Ithaca Energy
Gulf Shores
The same thing is now affecting the mining sector where most minerals did peak earlier in the year, but are still at historically very lofty levels.
Just one look at the chart of Teck Cominco, which has a piece of just about everything you can touch in mining and natural resources and you’ll notice that it’s flirting with a 52-week low.
Breakwater Resources with several producing mines is telling you the same thing. Selkirk Metals, one of the better explorers and a story we’ve liked for a while, also flirts with a new low despite the fact that their Ruddock Creek property in B.C. is currently spending $10 million taking a ramp underground which puts them that much closer to actually being a producer down the road. And yes, lead/zinc prices are still rather lofty.
These charts tell you one thing that’s going on in the junior mining and junior oil and gas sector these days...with vengeance...and that’s tax-loss selling.
Lots of people are suddenly having a bad year and with a determination to make sure that they don’t want to have a bad year while Revenue Canada has a good year. We’ve never seen the tax-loss selling as we’ve seen this year in any stock that may have been down a bit earlier is suddenly down a lot as the trend continues.
We interview Peter Hodson of Sprott Asset Management and he suggests that those that are going to be mines down the road are sooner or later going to benefit from the knowledge that there is going to be more NovaGold-type stories out there.
Teck Cominco
Breakwater Resources
Selkirk Metals
NovaGold Resources
But this all gets us to one commodity that was so much in vogue over much of the last year and that’s uranium. Traveling from roughly $10 a pound to almost $135 before the recent correction, uranium stocks were one of the stories of the day and mainly traveled long distances.
But the correction over the last while has been nothing less than brutal and once again, tax loss selling has become part of the problem.
Tax-loss selling usually culminates around mid-December and usually (but never count on it) once the tax-loss selling is out of the way, you tend to have a nice bump up in late December and early January - the Santa Claus Rally.
Well at least that’s happened before and one wonders what the future brings for the New Year, but these charts show you that while much of the market hasn’t been hurt that much, some sectors have been clobbered. We’ve seen brokerage houses and banks in the States have their valuations crushed and resource stocks in Canada clobbered, but still, the general market hasn’t been hurt all the much. Some sectors such as agricultural, you have potash companies flirting with new highs and Deere, who produces so much of the machinery for agriculture, also flirting with new highs.
While things may have gotten a little ahead of themselves earlier this year, now this correction feels like another big (make that massive) over-reaction. While we also intend to do a little a little tax-loss selling ourselves (the tax man gets nothing he doesn’t deserve) there appears to be too many bargains out there to simply ignore at this time. We will ignore the natural gas market though because at this time, the charts simply show there is no sign of a bottom yet and the fundamentals for natural gas look terrible for now, but possibly great for next winter.
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