Raw Greed Gold Update

Gold is currently trading at $607.70 and it appears that the metal will likely maintain my predicted price target of above $600 by the years end. Gold is behaving oddly at the moment. The metal has risen without any geo-political events or globally unsettling news. Oil prices are down and the US dollar has closed up in recent days. Oil dropping and the US dollar rising are both traditional drags on gold prices. So what’s going on with the price of gold? One plausible reason for the rise in the price of gold could be the influence of Hedge Funds using the metal as a hedge against an overbought market.

On June 12th, 2006, I wrote the following article about building a long-term position in gold and the effect of Hedge Funds on the metal:

I believe it is only a matter of time before the slew of Hedge Funds (which now number over 12,000 and control over $1 trillion in funds) pile money into the metal. I remember reading a quote from Doug Casey that the majority of Hedge Funds are likely run by 20 and 30 something’s that have never really experienced a bear market. I believe these Hedge Fund managers won’t know what to do if the market collapses and gold will provide the only reasonably safe way to invest in a bear market.

On September 19th, 2006, I wrote this article about purchasing Tanzanian Royalty Exploration Corp. after shares met my target buy price at under $5:

After writing this article, I have followed through with my strategy in accumulating shares of Tanzanian Royalty Exploration Corporation (TRE).

On September 12th, 2006, I purchased 2000 shares of TRE at $5.09. On September 15th, 2006, I purchased 4000 shares of TRE at $4.45. I currently own 10,000 shares of TRE purchased at an average price of $5.74.

I am looking at purchasing shares of Yamana Gold, Inc. (AUY) at under $9. TRE and AUY are currently my top two gold mining stock picks.

I am considering purchasing shares of Northgate Minerals Corporation (NXG) at under $3 and Coeur d’Alene Mines Corporation (CDE) at under $4.40.

On October 4th, 2006, I wrote this article about purchasing Yamana Gold Inc. after shares met my target buy price at under $9:

Today I purchased 2000 shares of Yamana Gold, Inc. (AUY) at $7.91. Gold is currently trading at $559. Gold managed to hold out at $570 levels in the last dip below $600. Gold has been very volatile in recent days going up and down often within a $20 range. I believe there is massive shorting involved with hedge funds that is prompting gold to rapidly fall. Individual investors have been sung a very pretty picture from precious metals analysts and bullish gold fans. I believe that most individual gold investors, including myself, believe that there are still uncertain times ahead that will cause gold to rebound and rise toward new highs.

I expect gold to rebound before the end of 2006 firmly above $600 again. I am continuing to buy shares of my top two picks AUY and Tanzanian Royalty Exploration Corp. (TRE) on dips.

I expect to see increased volatility in the daily prices of gold and a possible drop to $580 before headed firmly above $600 by the years end. If we see rising tensions over the Middle East conflicts or the nuclear threat by North Korea, I see gold headed closer to $800 by years end. My short-term target sell price for AUY is $10.50 in 1-3 months. My short-term target sell price for TRE is $8 in 1-3 months.

*Disclaimer: The author currently owns 1000 shares of AUY purchased at $7.91 and 7500 shares of TRE purchased at an average price of $5.74.

Raw Greed’s One Year Anniversary

This is a bit late, but on September 21st, 2006, Raw Greed celebrated its one year anniversary. Since September 21st, 2005, Raw Greed has published 306 articles, mostly comprising fundamental stock analysis and recommendations. Raw Greed has continued to keep its focus on a small number of sectors and stocks. Over the course of the year, Raw Greed has undergone a number feature introductions including a portfolio tracker, a predictions tracker and news function to keep track of all the interesting articles that I’ve been reading.

There is something unique about reading Raw Greed. Since Raw Greed is focused primarily on fundamental analysis, instead of technical analysis, you get a personal interpretation of the information I’m reading. I tend to see that the majority of stock blogs are more focused on technical trading and are geared toward a short-term mentality. I believe there is something that is difficult to learn from technical analysis and that is, business instinct. Without any business instinct, things could turn disastrous for a successful technical trader faced with a boisterous market suddenly impacted by a downturn such as the .com crash.

My business instinct was developed through experiences outside of stock trading. This instinct helps to gauge the markets direction and economic risk. When picking stocks, no one can be correct all of the time, but it’s important for you to be correct most of the time. Solid business instinct will help contribute to improving your stock picking ability. I recommend Raw Greed readers to only follow bloggers, analysts and financial journalists that have demonstrated success. Raw Greed is both a collection of articles that I’ve written and a track record of my stock picking performance. I follow articles written by people like Doug Casey from Kitco.com about gold or Robert Kiyosaki’s Yahoo Finance articles on general economic trends and investment ideas. These are well respected and established businessmen with solid track records that I hope to emulate in some ways. There is too much information available for analysis, so I believe it is important to gather yourself a team of people and resources to develop your instinct. I recommend David Jackson’s Seeking Alpha as a great place to start online in finding blog authors that match your investment style. Over the course of the next year, I will continue refining my stock picking ability and I plan to add new features to Raw Greed.

A New Raw Greed Watchlist

I’ve decided to construct a watchlist of companies and their stocks, whose prices I believe have been pushed down too agressively from speculation on short-term business prospects or heavy shorting. The stocks on this list are also those whom I believe have a high chance of recovery. I will cover one company at a time and will post a detailed analysis with price targets if I purchase any shares in the company.

1) Valassis Communications, Inc. (VCI) provides various marketing products and services to manufacturers, direct marketers, retailers, franchisees, and other advertisers. I first came across Valassis from this Motley Fool article and I’ve had VCI on my watchlist ever since. Valassis is being pressured though a law suit to honor an aquisition of ADVO, Inc. (AD). Valassis is currently arguing that ADVO has misrepresented the value of their company and Valassis is currently attempting to nullify the transaction. It’s unlikely that there will be any clear direction from the law suit in the short-term. I believe this will put a tremendous amount of speculation and downward price pressure on the stock. I like VCI at under $11 and believe that would put a decent long-term risk discount on the ADVO acquisition going through.

Taken from the Motley Fool article:

…Valassis operates in a duopoly, and the business has extremely high returns on capital and throws off extremely healthy free cash flows. In fiscal 2005, sales increased 8%, and the company earned $158 million in operating income and $95 million in net income. The balance sheet is also healthy, with $100 million in net debt. Although the first half of 2006 has been pressured by aggressive pricing by News America, Valassis’ $850 million market cap and 11 price-to-earnings ratio are both extremely low for a company of this quality. Investors can expect anywhere from an 8%-11% free cash flow yield from investing in Valassis, with the possibility of further growth.

Of course, as with all cheap stocks, there’s a catch. Valassis recently agreed to buy Advo (NYSE: AD - News), a direct marketer, at a hefty premium. After agreeing to the deal, Valassis moved to terminate the agreement based on allegations that Advo used faulty accounting. If the courts decide in Valassis’ favor, then the company’s stock should see a nice bump upward. If not, then Valassis will be forced to pay an expensive price for a company it doesn’t want, which would erode shareholder value.

Let The Good Times Roll

There seems to be a sense of euphoria in the U.S. stock market with the Dow constantly in the spotlight setting new highs. Highly visible companies like Google, Inc. (GOOG) have hit new all-time highs and show no signs of slowing down in the short-term.

Investors should be reminded that the Dow Jones Index is comprised of a mere 30 companies. The Dow is not the best tool to judge whether or not it is the right time for investors to jump in the market. The Dow is a great tool to judge Wall Streets view of macro corporate economic conditions in the States. In the medium-term if the Dow continues to reach new highs, the economic profit of these large companies should trickle down to the small to medium sized companies in the food chain.

This is where I view the problem. I still sense that we are faced with unsure times. The global worries over an Avian flu may have passed, but they have been replaced with a looming Nuclear threat by North Korea. Global Terrorism also continues to pose persistent threats to global economic stability. With the legislative elections coming up in the States, I would advise investors against making significant new investments into market. With a portion of the U.S. political foundation on unstable ground, I view making new investments as something of a gamble. If the foundation of your house was suddenly on unstable ground, would you continue to make new investments into home improvement or would you wait until the foundation was firmly reset? I think many homeowners would elect to pause new investments into their homes. There will be plenty of time for investors to catch-up post elections if the markets continue to rally.

From a speculative point of view, I am starting to feel like the market is being overly enthusiastic. I believe the market is starting to exhibit overbought conditions. I can share my own strategy for the short-term. I am planning to sell nearly my entire existing portfolio, except 1/2 of my gold positions, if both the Dow breaks 12,200 and the NASDAQ breaks 2,400 in the next month. I view these two numbers as key psychological benchmarks.

If the market meets my criteria I will sell as planned. I will continue to hold some shares of Yamana Gold Inc. (AUY) and Tanzanian Royalty Exploration Corp. (TRE) as a hedge against a declining market. If the market doesn’t meet my criteria for a major portfolio sale then I will stay long on my positions. Although we may see the same tipsy-turby activity the market has exhibited for much of this year in the short-term, I believe that market conditions will stabilize in the medium-term.

I believe a number of things can keep this market rising in the medium to long-term. One of the largest reasons I see is a declining housing market. When folks cycle out of investing income into homes they tend to invest it into the stock market to look for better returns. During the .com cycle, when the market was at its highest, housing market prices were relatively flat and home rental prices in many urban areas were on the rise to spectacular highs. Once the .com crash occurred, housing market prices started rising and home rental prices started declining. This indicated a shift in investor sentiment in where to place available capital.

I expect that an influx of capital flowing out of the housing market and into the stock market will support continued growth in the medium-term. In the short-term the direction of the market seems unclear. We experienced a bullish run in the beginning of 2006, only to lead into a spring and summer of disappointing declines that erased several months of gains for many investors. Now that we have established a new high in the Dow, I suspect that many eager investors are again forgetting the declines we recently experienced. I don’t see global conditions suddenly improving, so I don’t see any concrete reason for the rally to extend itself from the short to medium-term. For the time being for the benefit of all investors I say, “let the good times roll”.

Semiconductor Stocks To Benefit From Application Cycle Refresh

I recently read this article by William Trent of the The Stock Market Beat that mentions Intel (INTC) and a number of other prominent semiconductor stocks that I follow. I’ve read previous semiconductor articles by Mr. Trent and the theme of the articles revolve around overcapacity and overproduction leading to an inventory glut and an inevitable slowdown in the semiconductor industry.

Much of the analysis that Mr. Trent presents is valid, but I can’t help but mention that I believe he is only seeing half of the picture.

I once worked for the CIO of GMAM and I fondly remember him repeating his views on technology:

“Technology is a tool and nothing more. Technology is an enabler. Technology in and of itself is not a business. Technology cannot succeed without needed applications.”

The required business formula seems to be Technology + Applications = Probable Success.

When reading Mr. Trent’s articles, the statistical information is entirely correct and in the short-term it does appear that there will be an inventory glut. What I believe Mr. Trent has not covered in depth is the reason behind the expansion from companies like Intel, United Microelectronics Corporation (UMC) or Taiwan Semiconductor Manufacturing Company Limited (TSM). I believe you can’t look at a semiconductor company as an investment without asking yourself:

What is it that the companies are manufacturing?
Why are they manufacturing it?

Answering these questions will validate or invalidate expansion and capacity planning strategies from semiconductor firms. We can look at what lead up to the most recent inventory glut in the semiconductor industry and extrapolate which applications are aging. Standard definition DVD, standard definition TV’s, 2G mobile phones, portable audio players and Microsoft Corporation’s (MSFT) Windows XP associated computer hardware lead the inventory glut in consumer applications. In the business world we saw networking, security, Windows 2000 and Windows XP server and workstation platforms as the leading applications. New semiconductor processes and technologies were created for an aging consumer and business application cycle. These aging applications are experiencing ongoing declining profit margins and demand.

Currently we are on the verge of a new application cycle that will undoubtedly refresh both profit margins and demand. Anyone who has a difficult time understanding why there is increased demand from semiconductor manufacturers needs only to look at the short-term developments in the consumer electronics industry and the computer industry. There are dozens of potential new applications that could spur technology demand, but I see two that are prominent standouts, high definition DVD standards and Windows Vista.

In 2006 we have seen the introduction of high definition DVD standards and low cost high definition display technologies. We should all be reminded that standard definition DVD was the most successful consumer electronics application of all time. Standard definition DVD’s rapid widespread adoption created technology demand from manufacturers. While it may take a while for high definition standards to emerge, it is undoubted that one of the standards will succeed since all new movies will be released and filmed in a high definition format. If the adoption rate of standard definition DVD was any indication, the shift to high definition DVD will represent one of the most important application cycle shifts of all time.

High definition DVD will have incredible utility just like its predecessor. It will spur demand for related display and audio technologies. The demand will trickle right down to the microprocessors that will power many of the new electronics we will see.

Toward the end of 2006 and in the beginning of 2007, we have the planned introduction of Windows Vista. The new OS contains the most stringent hardware requirements since the introduction of Windows 98. Windows Vista contains a number of productivity enhancing technologies including native OS acceleration from the use of multicore CPU’s. In layman’s terms it means the Windows experience and the applications that run on Windows Vista will be sped up from running a computer with more than one CPU core. For example, Intel’s Core 2 Duo contains 2 cores and the new Core 2 Quad contains 4 cores. None of the previous Windows OS’s contained this type of support.

If we take a look at enthusiast websites like HardOCP that have posted a preliminary performance preview of Intel’s Core 2 Quad processor we can already see tangible benefits from running the CPU on the aging Windows XP platform. Multicore processors will be ubiquitous, since there will no longer be any availability of single core processors in due time. The marriage of an OS that natively supports multicore processors with applications that also take benefit of multicore processors represents a staggering cost-benefit relationship that I believe most consumers and businesses will find hard to ignore.

If you want to experience firsthand why you will need to upgrade in the short-term, simply download the free public beta of Windows Vista RC1 here and download a 1080p Windows HD video here My more than capable Windows XP computer slowed down to a crawl with the combination above.

Once you understand that the application cycle is about to refresh, I believe you will gain some insight into why companies like Intel, Taiwan Semiconductor and United Microelectronics are expanding production in face of a short-term inventory glut. It may take a few quarters for new applications to emerge and for standards to take a foothold. In the meantime I see an opportunity to buy many well managed semiconductor stocks that are still depressed. I believe investors will be richly rewarded in the next year for buying now while the majority is looking elsewhere.

Disclaimer: The author owns 1000 shares of INTC purchased at $21.35 and 10,000 shares of UMC purchased at an average price of $3.17.

Purchasing Yamana Gold, Inc.

Today I purchased 2000 shares of Yamana Gold, Inc. (AUY) at $7.91. Gold is currently trading at $559. Gold managed to hold out at $570 levels in the last dip below $600. Gold has been very volatile in recent days going up and down often within a $20 range. I believe there is massive shorting involved with hedge funds that is prompting gold to rapidly fall. Individual investors have been sung a very pretty picture from precious metals analysts and bullish gold fans. I believe that most individual gold investors, including myself, believe that there are still uncertain times ahead that will cause gold to rebound and rise toward new highs.

I expect gold to rebound before the end of 2006 firmly above $600 again. I am continuing to buy shares of my top two picks AUY and Tanzanian Royalty Exploration Corp. (TRE) on dips.

Raw Greed update

I’ve updated the Raw Greed site by adding a Yahoo Finance stock ticker to the sidebar. The ticker includes all of the stocks currently held in my portfolio and will update with current prices with a 15 minute delay. The stocks in the ticker may not reflect the stocks in the portfolio page of Raw Greed. I only update the portfolio page and portfolio value when I sell a stock.