Recommendation: SWC

SWC, or Stillwater Mining Co. is the only palladium and platinum producer in the U.S. with a manufacturing plant in state of Montana. Palladium is used mainly in catalytic converters for motor vehicles and other electronic components.

According to The Motley Fool, "Stillwater has the only platinum and palladium mine in the U.S., and those metals have brought even bigger price moves this year than the headline-making gold market. Palladium in particular is up more than 80%, and platinum has risen around $250 per ounce this year."

The company's gross profit has risen significantly over the past three years and we predict that it will continue to increase. Like our other stocks, the share price depends much on the price of the stock's corresponding commodity. So far this year, the price for palladium has risen higher than both gold and silver.

Stock Price as of 12/22 close: $20.71

Sources:

http://seekingalpha.com/article/241698-employment-up-in-mining-and-energy-anyway?source=qp_article

http://www.fool.com/investing/general/2010/12/21/is-stillwater-mining-the-perfect-stock.aspx

Sell: AONE

On Friday, December 17th, we decided to sell AONE.

Sell: AONE

Price: $9.00

Gain/Loss: -10%

As mentioned in my previous post, we don't think the lithium-ion battery industry will see profit in the near future. To reiterate, batteries are still too expensive. A traditional, gasoline powered, small-sized sedan is significantly cheaper than its electric counterpart. Presently, the car industry cannot support this new technology, it will have to wait at least a few years.

Sources:

http://seekingalpha.com/article/241693-is-lithium-ion-a-dead-end-electric-drive-technology?source=yahoo

Chevy Volt

Today, the Chevy Volt begins shipping to dealers in some states around the country. However, we are still pessimistic about A123 Systems (AONE), the manufacturer behind the batteries of this new electric car. The company has still failed to turn a profit in its history and analyst predict the company will remain unprofitable until the price of batteries decreased by about 50%. Many estimate this will not occur until 2014 or later. We plan to get out of this stock by the end of the year.

AONE Close 12/14: $9.28 (-0.35%)

Sources:

http://www.fool.com/investing/general/2010/12/14/this-stock-is-going-to-zero-and-you-know-it.aspx

http://www.autoblog.com/2010/12/14/chevrolet-volt-begins-shipping-to-dealers/

Gold and Silver Timing

It might be time to get out of GG and SLW soon, which closed yesterday at ~$47/share and ~$39/share, respectively.  During morning trading, they've both dropped an average of 3%.

We bought GG at ~$42/share- a capital appreciation of ~12%, and we bought SLW at ~27/share- a capital appreciation of ~44%.

This run up was expected and now it's time to get out.

AONE Update

AONE has been a huge laggard in our portfolio- it missed earnings estimates yesterday and dropped around 12%.  However, there's a glimmer of hope on the horizon for this electric motor manufacturer: GE plans to purchase 25,000 electric vehicles for it's fleet by 2015, starting with 12,000 2011 Chevy Volts.

AONE is trading at $8.54/share, up 0.35% since the open.

QE2 Update..Exit Strategy?

Related stocks: GG, SLW

QE2 has driven our gold and silver plays through the roof.
Since our respective purchases about three weeks ago, we've seen capital gains of 17% for Goldcorp (GG) and 37% Silver Wheaton (SLW).

Do these companies still have room to run?  Or is it time to get out before the bubble bursts?

As of 11/9/10, gold is trading at $1,420 and silver is trading at $28

China and Oil

Related Stocks: ConocoPhillips (COP)

The price of oil reached a new two-year high Friday, November 5, closing at $86.85 a barrel, up 6.7% for the week. Today, it is up yet again, although only by a slight margin. Analyst predict the price of oil will not slow and will rise above $100 a barrel by next year.

Much of the increase in oil demand stems from China, the world's second largest economy behind the U.S. China has seemed to pull out of the global recession faster than many developed nations and is on track for another year of double digit growth. Much of the reason for the increase in oil demand stems for car sales. Between August and September, car sales rose 19%. China's oil reserves are unable to keep up and will be looking to buy more. Hopefully this demand will fuel an increase in the price of oil. Historically, the stock price of COP has correlated closely with the price of oil.

Source: Wall Street Journal

GG GOLD

Related stocks: GG

As of late, the U.S. dollar has been severely oversold due to the moribund economy. Instead, investors are looking to precious metals including gold.

Steve Halpern of TheStockAdvisors.com stated,

"If I were to buy a gold stock without regard to price, it would be Goldcorp (GG). Recently, it jumped sharply higher due to an excellent record cash flow, a four-fold increase in earnings, and a 100% dividend increase. "

However, he also predicts that the price of gold will retreat to about $1,150. We will see how this affects GG's performance.

Source: http://www.bloggingstocks.com/2010/11/05/goldcorp-gg-a-core-gold-holding/

GG's bid for Andean

This morning, Goldcorp (GG) placed a bid to acquire Andean Resources (ASX:AND, TSX:AND) for $3.4B, which values AND's gold reserves at $1,619/oz.

Depending on how investors see this bullish price (are they grossly overpaying?), GG's price could suffer.

Gold's trading at ~$1,380
GG is up ~3.0% since the open

Source:
Seeking Alpha

Price of Oil

Related Stocks: COP

From bloggingstocks.com (http://www.bloggingstocks.com/2010/11/01/oil-rallies-to-83-and-most-investors-cringe/)

Investors whose stock and related plays hinge on the price of commodities would be wise to pay close attention to one, key commodity, oil, which popped up $1.52 Monday to $82.95 per barrel.

Investors should also note the primary factor analysts' cited in oil's rise: word of better-than-expected manufacturing sector growth in October in China.

Further, the above refrain is something U.S. investors should get used to: stronger growth in emerging markets abroad, higher commodity costs here.

True, while a myriad of domestic factors are capable of pushing oil and other key commodity prices higher, emerging markets, with their stronger-growth economies and expanding workforces, have the capacity to boost commodity consumption, and by extension, commodity prices, in a big way.

Market/Economic Analysis: Among other investments, rising oil prices benefit integrated oil companies, and the currencies of countries who are net oil exporters, including Canada, the United Kingdom, and Russia. However, rising oil prices hurt companies that use a lot of oil, including airlines and delivery companies, and hurt the currencies of countries who are net oil importers, the United States being a prime example. Rising oil prices also weigh on GDP growth in these countries and also increase the cost of tanker-transported goods. The price of oil has traded in $70-80 range for the last six months.

The bullish case for oil? Even though oil has had trouble closing above $85 recently, a stronger Chinese industrial sector combined with a second stage of quantitative easing by the U.S. Federal Reserve designed to boost U.S. GDP growth, would likely send oil higher.

The bearish case? If the global economy experiences a third-wave of the financial crisis in Europe, the U.S. or Asia, that would likely weigh on global GDP growth, and crude's price would decline.

Liquid Gold (Recommendation/Action)

Buy oil companies

ConocoPhillips (COP)

Rationale

1. General move into commodities as currencies are shaky
2. Hubbert's Peak Oil Theory- The rate at which our current technology allows us to extract oil from the ground is soon to be outpaced by our demand for it
3. Oil is priced in dollars, which means a falling dollar increases nominal dollars per barrel

Source

Seeking Alpha

--
Allocated 10 percent of portfolio to ConocoPhillips (COP)

Price

$60/share

Current Allocation
10% GG
10% SLW
20% AONE
20% COP
40% Cash

CFTC and Silver

The CFTC, or the Commodity Futures Trading Commission regulator is putting pressure on the agency to take action of a two year investigation involving controlling silver prices.

According to the Wall Street Journal, "market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices."

Yesterday, silver traded up 28 cents, and today silver rose another 23.1 cents.

More from the WSJ, "Over the past two years, silver prices have bounced around, rising to around $20 just before the May 2008 CFTC report, then dropping through the rest of that year to around $9. In 2009, silver prices climbed back to just under $20.

This year, silver prices have soared 41.6% amid a lower US dollar and rising concerns over inflation.

Despite silver's lofty price, some analysts and other suspecting manipulation believe the metal should be trading at far higher level."

It is not clear what impact the CFTC will have on sliver prices, but as the Journal states above, some analyst expect the price of silver to rise further.

Hopefully, if this happens, it will increase the price of our SLW stock.

Pricing, Expectations, and QE2

The dollar strengthened and commodities fell today as word of a more gradual QE2 asset purchasing program repriced investor expectations.  Gold closed down 1%.  This market reaction hurt GG and SLW today, but I saw a parallel to something I'm learning in class that could possibly reassure our decision to purchase gold and silver companies.

--
A simple concept I'm learning in my financial management class is pricing a stock as the sum of the present value of earnings and the present value of growth opportunities.

In formula form: p= [EPS/r] + PVGO

p= price
EPS= earnings per share
r= discount rate
PVGO= present value of growth opportunities

Basically, EPS/r is a term that assumes a company paying out all its earnings as dividends forever (i.e. none reinvested in the company- no growth), discounted at the appropriate discount rate.  PVGO is a residual term that accounts for any money a company doesn't pay out (in other words, "plowback") and reinvests in itself.  The formula for PVGO is a little complicated, so it's easier to treat it as a residual to analyze investor sentiment.  For example,  if you have the current price of the stock, EPS, and r, you can find PVGO.
One way to think about PVGO is as a premium investors put on the price over the current earnings based on speculation of future growth.
--

Applying this to today's markets, as soon as news of a more gradual and less "dollar doomsday" QE2, the essential PVGO of gold and other inflation-hedges dropped.  This makes sense because investors like us bought these commodity companies and drove their prices up in future anticipation of a falling dollar.

So does this mean that all future expectations are already priced into gold, silver, and the like?  If so, does gold and silver have much more room to run?

I think it's unreasonable to say QE2 has been fully priced in until it happens.  There's not much basis for investors to compare QE2 to (besides a failed QE1) and I believe once it actually happens, GG and SLW will reap the benefits.

Dollar vs. Gold/Oil FIGHT!

Thoughts on the Dollar

As of late, it seems that the value of the dollar has been affecting the US stock market quite significantly. With even a small fluctuation of the dollar, the stock market responded accordingly. This past week's G20 meeting on the discussion of currency wars has not reached a conclusion, so I think this has had an impact on the dollar's power on our markets.

From what I have seen recently, the dollar has been inversely correlated gold and oil. The dollar, being pounded these last couple days/weeks, has in turn greatly increased the price of gold. Oil hit has been trading its highest in a year.

If trends continue this way, I think the dollar will have a substantial influence on these two commodities for the near future.

Easy as A(BC)123 (Action)

Allocated 20% of our portfolio to A123Systems (AONE)

The price has been beaten down since since the IPO and we believe now would be a solid entry point

Price

$10.17/share

Current Allocation

10% GG

10% SLW

20% AONE

60% Cash

Easy as A(BC)123 (Recommendation)

Buy electric battery suppliers

A123Systems (AONE)

Rationale

1. As the population seeks less dependence on oil, electrics vehicles will start becoming mainstream

2. A123Systems provides lithium-ion battery solutions for electric cars, including GM's Chevy Volt which will be released in November 2010 as a 2011 model. They also supply batteries for the Saturn Vue plug-in hybrid and the Think City electric

3. In the future, we believe there is some potential for electric vehicles and A123Systems can meet the needs for electric car manufacturers

Sources

1. Wall Street Journal

2. Seeking Alpha

The Silver Lining (Action)

Allocated 10 percent of portfolio to Silver Wheaton Corp (SLW)

Price

$27/share

Current Allocation
10% GG
10% SLW
80% Cash 

The Silver Lining (Recommendation)

Buy silver

Silver Wheaton Corp. (SLW)

Rationale

1. Prices are correlated with gold with a little more volatility for upside potential

2. Indecisive G20 summit pummels dollar to 15-year lows against the yen, causing further moves into precious metals
3. UPDATE (10/25)-  "The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in sparking inflation." - Bloomberg.com

Sources

1. Barrons (October 18)

2. Seeking Alpha
3. Bloomberg

A Golden Opportunity (Action)

Allocated 10 percent of portfolio to Goldcorp (GG)
Gold was temporarily depressed yesterday due to the rise in the dollar from China's 25 basis point interest hike, creating a good entry point

Price
$42/share

Current Allocation
10% GG
90% Cash

A Golden Opportunity (Recommendation)

Buy gold miners
Agnico-Eagle (AEM)
Barrick (ABX)
Goldcorp (GG)
Great Basin Gold (GBG)

Rationale
1. Falling dollar makes gold a more attractive safe haven
2. Hedge against inflation which will be caused by future quantitative easing
3. Considerable spread between average cost of mining across all mines (~$580 per ounce) and current futures price (~$1330/ounce)
4. Depressed value of US gold holdings as a percentage of the money supply (~25% of every dollar is backed by gold, below the 40 year average)
5. Depressed ratio of gold price to the S&P 500 index (below the 100 year average)

Sources
1. Bloomberg Businessweek (October 18-October 24)
2. Barrons (October 11)