The Glory of Ignorance

We ought to be able to go about our lives blissfully ignorant about many things. For example, I was blissfully ignorant about serious home design problems which in Vancouver led to what we called our "condo rot" problems.

I would look at a development and never see the design issues that scream you have to be moron to put this design feature in homes being built in a rain shadow. You would think that the people trained and educated in home design would hear the screams, but they did not and we had serious water seepage design built into many of our new homes in the 90s. We had thousand of home owners that had rot in their building envelope due to water seepage. My new home had rot in 3 years. I was not bless with being able to remain ignorant about key features of home design to prevent water seepage. We had thousands of home owners hit with assessments of $30-60k to fix rot in their relatively new homes. I was fortunate as my assessment was only about $5k and the rot was limited to balconies, not in the building envelope. I was very lucky, the rot had spread to one inch from the building envelope and that $5k bill almost became $20-25k. And with blissful ignorance, we had homeowners in our complex rallying other owners to vote to delay to fix the problem.

You ought to be able to trust the so called experts and remain ignorant. But in Vancouver, being normal cost homeowners millions of dollars in the 1990s and Vancouver was sprinkle with new homes covered in tarps for years.

The same thing ought to be said of understanding investments. You ought to be able to trust a financial adviser, or trust the so called experts. If an investment has a AAA rating you ought to be able to trust that the investment has a high level of safety, as defined by the rating criteria.

A year and a half ago I had never heard of a credit bubble, economic bubble, stagflation, asset inflation, Austrian economics, monetarist, Keynesian, Ponzi, credit swaps, discount window and well today, "Term Auction Facilities." I read this article, but I didn't quite understand it. I would like to remain ignorant about what it is saying, but powerful people have been grossly incompetent at all of our peril and the way you best protect yourself from what they have done is to study it and keep on top of what they are doing.

Powerful people have been doing things to change the "rules" for the past twenty years, things that have gradually built up enormous fundamental problems in the economy. I guess it was about 13 months ago that I was first steered towards looking a fundamental problems in the economy and started assessing how they gave the appearance of getting around the disaster they were creating in the past but were instead increasing the fundamental problems. I started to assess what these problems would mean to me once the problems started to surface.

These are things we ought to remain ignorant about, but unfortunately, we are seeing the consequence of being normal being played out throughout the world. Yukon has $1200/person of tax payers money "frozen." They might get back their 30-day investment over the next 10 years, at par, if they are lucky. Small towns in northern Norway have lost half their municipal savings. A few Australian municipalities are now suing from losing 70% of their municipal funds to AAA rated mortgage bonds. Countless municipalities and counties across the US are finding their liquid, safe, short-term investments are not.

We ought to be able to trust financial advisers and analysts, but their behaviour is more in line with the snake oil swindlers of the past. This article, "Analysts in fantasyland" points out the degree to which they get it wrong.

My conclusions that I came up with around last February was that banking stocks would be a disaster, and I have been encouraging my friends to sell them.

I also concluded that pension funds would be hard hit and most likely our pensions as we believe them to exist do not. By my assessment, a realistic assessment not built on 30 years forwarding of fantasy beliefs, I only pay for about 40% of what my pension promises me. I suspect I shall see even less than what I currently pay for as people who are collecting are collecting 2.5 times what they paid for and I am 19 years down the pyramid. Most people live in this glory of ignorance and so we continue with this ponzi pyramid scheme of pensions.

I know nothing of US law, but interesting, in my assessment, our pension systems are in gross violation of Canadian pyramid laws.

What is further interesting is that I come up with that we are currently only paying for 40% of the promise, yet the "experts" say that those currently collecting will get about 1.25 times what they paid and they say my age group will break even and that those in their 20s will get about 0.8 of what they've paid in. That 1.25 figure leaves me absolutely dumbstruck as to how they came up with it. It is based on what is being paid out now and this figure can be calculated and it is beyond me how they came up with such nonsense.

I did not foresee the degree to which local governments are being hit. Every hit they take means we pay the taxes twice.

We ought to be able to remain ignorant about things that ought to not concern us.

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Petri Dish Planet

How much have you factored population growth into your economic beliefs?

In first year biology one of the items of study was contrasting world population to bacteria population in a petri dish.

The lesson went something like, this is a graph of the world population:



This is a graph of bacteria in a petri dish:



The lesson ended by showing how the graph ended. I could not find such a graph, but I found one of E. coli grown in a glucose solution:



The graph I remember of the petri dish did not have much of a stationary phase, but peaked and went straight to the death phase.

The lesson has always impressed upon me that the Earth is finite in its resources. Human population is still growing, however, we have evidence that our current consumption levels are exceeding our renewable resources. The petri dish was a closed system whereas the Earth is replenished with energy from the sun.

But that doesn't mean that resources are being replenished as fast as we are using them. Take water for instance. My recent readings on water include that ships traveling the Great Lakes have had to reduce loads by 10% to prevent scraping on the bottom of the lake. Some northern lake lost 60% of its water in one year.

My travels to the US and my personal visits to the Mt Shasta region and Hoover Dam dating back to the 70s and recently also to the Grand Canyon gave me a personal view of water issues. I have memories of a commercial for Mt Shasta pop and I remember the strong association of the white caps of Mt Shasta with clean, cold, refreshment.

These are two images I found on the web, both summer pictures of Mt Shasta. There used to be a glacier on Mt Shasta and that contribution to the water supply is pretty much gone now.





I took pictures of the enormously declining levels of the water reserves, but they seem to have lost. The water supply from Mt. Shasta is important to California.

Lake Mead is also important to California and much of the agriculture. I visited Hoover Dam in 79 and again this year. I don't know how well the picture shows it, but the water level is disturbingly down.





In that second picture my memory is that the water level was close to the top of the dam in 79.

Information I've seen on Florida indicates that the height of continental Florida is going down because the underground water reserve is declining so drastically. The water reserve was restored due to the swamp land and everglades. Swamp lands have been drained and the everglades have been shrinking. The ability to restore that underground water supply has been cut by more than half.

Everything that we have and know about our economic data is based on a planet that had not yet shown us its limits, however, that is changing. Our food supply has declined since the year 2000. Water and food are pretty damn important. Yes we have ways to make it go further, less resource intensive food choices as in grains compared to meats.

And what of our air quality? Carbon dioxide levels in the world are increasing through a warming period. Historically a warming period, as in after an ice age, has more plant growth that binds the carbon dioxide and it declines. We are living a warming stage that has carbon dioxide levels increasing. We've cut our trees and dramatically increased the release of carbon dioxide by the burning of fossil fuels.

Look at the data and you have to ask, just how good is our economic growth in comparison with the growth in human population? I think the data is telling us that things will be changing and in the process so might our beliefs in economic growth.

Population information.
Bacterial growth.
Bacterial growth data.

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BHP - RIO -- Merging Bubbles

I play CAPS and I am losing on my BHP call and barely holding on my RIO call. I believe both these companies to be highly bubbled values and BHP is courting RIO.

BHP has a market cap of about $190 billion and I believe BHP has been artificially sending its share price higher with its share buy back program. I simply see no value for long term shareholders, as I have previously written.

I think share buy back programs are gross violations of shareholder interests as ultimately they tend to line the pocket of the executives with stock options at the detriment of the company and shareholders. A share buyback creates a temporary increase in demand which increases price. Mish has a very good example of a share buy back that fell apart. I can't see the BHP buyback being much different.

Ouch, isn't this going to be good, look at some of the largest shareholders:

Company Citicorp Nominees Pty Ltd	Shares 440,460,280	% 13.12
HSBC Australia Nominees Pty Ltd	377,638,519	11.25
J P Morgan Nominees Australia Limited	372,983,700	11.11
UBS Nominees Pty Ltd	20,861,621	0.62
HSBC Custody Nominees (Australia) Limited	18,369,730	0.55
ARGO Investments Limited	6,422,411	0.19

Aren't those companies related to companies already in trouble because of subprime?

So, BHP has been making record profits, but when you look at their liabilities, they have increased from $17 to $28.5 billion. There is no question that equity has increased nicely, from $12.8 to $29.7 billion, but price to book is over 7x. Additionally, P/E is around 17-18. Say earning cut in half, then the P/E is about 35, and earnings cutting in half is highly realistic.

The problem is that many commodity prices have gone down and with weakening demand, and they are likely to decline further.

Take a look at BHP's earnings over the past six years:

Year	Total Income (billions)
2002	$1.25
2003	$1.58
2004	$2.72
2005	$6.32
2006	$9.75
2007	$13.16

BHP's business segments (and relative share of 2007 profit) are petroleum (16.4%), aluminium (9.9%), base metals (31.5%), diamonds and specialty products (1%), stainless steel (20.1%), iron ore (14.6%), manganese (1.4%), metal-lurgical coal (6.8%), energy coal (1.4%), and eliminations (-3%).

Take a look at the 5 year spot price for aluminium, some base metals and nickel, of which 60% of segment profits are dependent.







For Aluminium the profit before taxes was 31%, $1.8 billion out of $5.9 billion. The year ended in June and spot price graph shows a full year of strong price when the US dollar was on average about 15% stronger. A rough estimate of where the 2008 price will be with both spot price and currency declines is about 25% less. That comes off revenue and costs stay relatively the same, so expecting to see revenue decline to about $4.5 billion for 2008 for aluminium is highly realistic. Well, $4 billion was costs, so the aluminium segment declining to $0.5 billion in earnings isn't unrealistic, or $1.3 billion shaved off earnings.

There are a few base metals, but they all have strong prices so an estimate can be made just by looking at copper. The revenue was $12.6 billion and profit was $5.8 billion, or 43% of revenue. Copper had a 2-3 month period for 2007 with a strong price decline in the winter/spring so average copper price for 2007 looks to be around $3.20ish. Copper is currently 10% less and with the G7 economies all slowing down it is not likely to have the same kind of price support. So copper revenue down 20% for 2008 is not unrealistic. That would shave $2.8 billion off earnings.

Steel is nickel and nickel price is indeed scary. BHP caught the entire unsustainable nickel price spike in 2007. Whoo-hoo, no wonder it had a race to the bank 310% EBIT increase over the previous year. It looks like the average 2007 price was about $17-18/lb. Nickel is under $12/lb and there is about a 15% currency decline to consider. Expecting to see 2008 revenues will be down in the range of 40% is not unrealistic. That would be $2.8 billion off revenue and would take profit from $4 billion to $1.2 billion.

Looking at just 60% of the market segments of BHP and considering commodity and currency declines there is a feasible estimate of $7 billion decline in operating profit, or about 37% gone. For this year the energy earnings look sustainable, and could be up, but I would expect energy to decline as the gross over supply of housing used a lot of energy and that part of the demand is already declining as manufactures that supplied the housing boom are finding their inventories increasing and are cutting production.

For the merger with RIO they need $70 billion, $40 billion to restructure Rio's debt and another $30 billion for a share buy back. Their existing long term debt is about $9.3 billion, so they are looking to increase debt about 9-fold. They had $13 billion in earnings for 2007 and Rio had $7 billion. Wouldn't it be reasonable to expect debt servicing costs on $80 billion to be about $8 billion? With the kind of unsustainable record earnings of the past 5 years wouldn't you expect zero debt on the books?

This is the wrong time to increase debt. With $80 billion in debt, and say earnings go down 25% overall, would result in increased costs by about $7 billion and decrease income by $5 billion, and combined $20 billion in earnings would decline to $8 billion. Scraping the share buyback would reduced the debt burden by $3 billion so earnings would only decline to $11 billion.

But, overall, I would anticipate more like a 50% decline in earnings by the time the next year or two play out without increased debt costs.

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Political Idiotism on Taxation, Again

This topic is a little stale in terms of current news, Government proposes $60B in tax cuts, with further GST drop, but I never got around to writing about it when it was current and it is so negligent and stupid.

There is a booming economy. The economy will not always be booming. These proposed cuts will NOT be sustainable with a down turn in the economy. It is one thing for an individual to be so ignorant to stretch their resources to the limit in good times and then rightfully deal with the consequences of such imprudent behaviour. It is unacceptable from government and we have a high level of debt because of this kind of negligent behaviour in the past. It is time be responsible and say no to a short term gain for long term pain.

Our collective greater good would be best served by debt reduction and working to ensure we have maneuverability for an economic slow down. The only reasonable thing to do in the whole proposal is to increase the personal tax exemption. That is a tax neutral action that is offset with increased tax revenue due to wage increases. More importantly it is the only thing that reverses some of the gross inequities to the working poor.

I can assure you that the working poor are unlikely to see their income increase by $700 this year and if we have any sense of humanity we should be questioning why anyone who IS working and CAN'T afford to PAY RENT, BUY FOOD and BASIC NECESSITIES is taxed at all at the slave labour minimum wage rates? Indeed, every cent these people get goes directly into the economy because they are trying to live on a deficit level of income despite genius greater than Einstein in budgeting. You simply can not get water out of a stone and they ran out of places to cut spending YEARS ago.

Give me a tax cut and guess where I'm going to spend -- NOT in Canada. I am taking my discretionary income, and going on vacation in another country. Why should tax cuts continue to subsidize this kind of behaviour of the "haves" when we having increasing numbers of working poor lining up at food banks? Giving me a tax break will do zero to stimulate the economy and will increase my ability to take Canadian dollars outside of the country and this is true for where the majority of the proposed tax cuts would go. As a nation we have enormous debt, we should ensure debt is paid back at a faster rate in boom times. Together we will be stronger in an economic down turn.

Better yet, it is high time we took a serious look at where the tax breaks need to be. We have seniors who make up 20% of the population controlling something like 60% of the wealth and we given them an age exemption on top of pensions that they never paid for except for but for a pittance towards it . A pension is something that is supposed to be paid for by those receiving it. At the very least it is high time we got rid of the age exemption and replaced it with a means exemption for the working poor and put some fairness and humanity into the tax system.

How can any nation think they are great when there is such theft of dignity for the working poor?

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Bad Feeling Good Times

I've been reading some of Jim Jubak's writings and I appreciate his pieces for their deeper understand and broader look at how the world has been changing.

His piece, Why these good times feel so bad, gave me a lot to think about.

In particular what got my attention was the "The churn in employment,"

My Dad, to take an extreme example but one shared by many in his generation, worked for the same employer all his life, from his start at 17 as a sweeper on the factory floor to his retirement at 62 as a maintenance electrician. For him, except for his service in World War II, the churn didn't exist. It was something that happened to other guys. Until the last few years of his working life, when the company began to talk about shutting down the plant where he worked, as far as I can remember, he never worried about losing his job and having to find another one.

Contrast his experience with the churn experienced by the generation of workers born between 1957 and 1964. Unlike my Dad, born in 1917, these workers held an average of 10.5 jobs between the ages of 18 and 40, according to a study by the Bureau of Labor Statistics. In those 22 years of work, 21% of workers in the study, which ran through 2004, held 15 or more jobs. Only 15% held fewer than four jobs in that period.

Being a part of the born between 1957 and 1964 I can relate to the "job churn." On the surface the new reads that people change careers more often today and there is no insight into the unrest and lack of satisfaction in people's lives that are leading to these changes.

When I look back the truth is I'd have done better economically for myself if I'd stayed at my job as a waitress at White Spot that I got when I was 15 in 1977. Minimum wage for a 15-year-old was $2.60/hour and my rate of union pay was $3.92 and I got tips on top of it, making the wage about $6-7/hour, 30 years ago.

What 15-year-olds today can expect? In BC they get $6/hour for their first 500 hours of work, and then they go to $8/hour. With just 2% inflation $6/hour 20 years ago would be $10.87 today. If you look at what young people spend their money on, like university tuition, well, I remember paying $18/credit hour in 1980 and today it is $151.70, so 2% increase on $6/hour to 1980 would be $6.50 and to increase that buying so that young people have the same buying power to pay for post secondary education would give a wage of $54.73/hour.

I just saw Linda Blair's head in the "Exorcist" just twist around 3 times at the idea that my buying power as a 15-year-old waitress to improve my life's prospects was in the range of what, what an reasonably well paid engineer gets paid today.

When I worked in the restaurant industry tipping was not automatic and there was not the strong social expectation for tipping that exists today. My tips worked out to about 5% of total sales. I'd say a good 1/3rd of customers did not leave tips and it was rare to get a tip over 10%. I was doing about 20% better than my co-workers on tips. I was very good and if you were a regular customer of mine and I knew what you liked, well, I had your coffee poured and your order written before your seat hit the chair. I got tips out of customers known to never leave tips.

I don't know the base rate of pay at White Spot today, but a quick check of the menu and prices shows that the $2 hamburger platter now costs $10. So, I would suspect social pressure has increased tipping so that it is more like 10% of the sales and with 500% increase in prices, that would make tips come to $20-30/hour, and most certainly restaurant works are not claiming and paying taxes on 100% of their income like those of us with 100% of our income going through a payroll.

Waiting tables, politician and corporate executive or high level management are the few occupations that come to my mind that have exceeded reported inflation in terms of income growth over the past 30 years. A hamburger platter increased from $2 to $10 over 30 years is an average price increase of 5.5% per year. Just looking at the goods I sold, to be able to afford them as well as I could as a teenage worker I'd need to earn $30-35/hour. Had I stayed with my White Spot job I'd be making about $30-40/hour with tips and because of not paying full tax, my buying power would likely be that of a worker making $35-50/hour.

What did I do instead? I went a "better" job with a "future" in banking, which immediately paid less, but the promise was that there was supposed to be "opportunity." So much for opportunity when I just so happened to get into banking right before ATMs were invented and as the economy slipped into a recession. I lost work and I found it difficult finding new work. I won a job competition in which about 60 applications were made for a low entry level position and the pay was less than I had been making.

In two of my banking jobs I had alcoholic bosses. My view is that many of the limited jobs that were available were because the working conditions were disgusting and despite an exceptionally tight economy, they had enormous job turnover because of the unsavory working conditions.

The one small credit union I worked in with that abusive alcoholic boss had an annual turn over of more than 100% of the staff and I survived 18 months in the place, training new employees on average every three months, before I'd had enough run ins with with the alcoholic pig. And then I ended up a job with another alcoholic boss. During this period of what I see as enormous turmoil in the labour market both of these alcoholic men lost their jobs within a year of my moving on and to my knowledge neither returned to the workforce. One was about 60, but the other was only in his 30s and last I heard he was in his 50s and had not worked again. I perceive that many alcoholics were successfully integrated into the economy prior to the 1980s, but when the economy got tight, many were displaced, but not before they left an enormously sour taste in those that were employed below them.

I'd say the 80s brought in an era where good workers were overlook through no fault of their own and it was the end of the era of dead weight workers thriving. The news featured layoffs daily, and less experienced workers were pit against a glut of more experienced workers for not enough jobs to go around. The news featured the woes of the $50k per year 50-year-old workers being replaced with younger workers willing to work for $30k and the media bite was that "older workers are being discriminated against," when the truth was that wages for the work they had been performing had imploded. They'd have been working had they been willing to work for the same pay as younger workers.

What I know about my salary working in the banking industry, and having a window on everyone else's pay cheque, is that my wage relative to many occupations was low, with the exception of the retail industry. I was making about $7/hour in 1984 and union jobs paid about double. Some union jobs, like being a checkout clerk at Safeway, paid $17/hour.

I believe the extreme inequities in pay is what ultimately broke the union. Minimum wage was $5/hour at the time and you'd have had a line a mile long of workers, including me, willing to work for $10/hour.

And then, when I look at my mother passing away and the bank foreclosing on her home and eating all capital in her estate the inequity screams. The mortgage was $26,000, and the total payments came to around $300/month. Seriously, if I'd dropped out of high school and worked full-time with an income of $1000-1200/month and the ultra low tax environment of the day, I could have afforded the payments, and with a protected rising income due to tips, it would have simply gotten easier each year, and I had an extra bedroom I could have rented. Indeed, I could have afforded to make extra payments.

I just did a search on two bedroom apartment in Kitsilano, 30 years or older. The cheapest that came up is $449,000 for 717 sq ft. Assume I had that 25% down, the mortgage would be $337k and I'd need a qualifying income of $101,000. With 5% down I'd need a qualifying income of $129,000. Just where does one find a job with that kind of pay today? Beginning teachers start at about $42k, and that's with taking 6 years out of their working lives and taking on student loan debt that averages $40-50k.

I had an excellent grasp of math and budgeting as a teenager. Indeed, I was supporting myself at 17 and my first "major" life purchase wasn't a stereo or any of the things you associate with youth, but it was a washing machine. I'd calculated that it was costing me $10/week for taxi and washing machines at the laundromat and I could buy a washing machine for about $400. In less than a year it would be paid for with saving from having to take a taxi and paying the high prices charged to clean clothes.

When I go back an look at the "Churn in Employment," well, no wonder people people in my age group have been changing jobs. The rate of decline in buying power has been enormous, at least where I live.

And I went to university after having series of unsatisfactory jobs in the banking industry. I came out to triple the price of housing and no jobs. I had a friend who had a 2 year technical program that had made $36k in 78. Three years ago I applied for a job with greater qualifications and that was about the pay they wanted to start at. In 78' my friend's wage exceeded was about 150% of my mom's mortgage amount. Today that wage would be about 10% of the mortgage.

I feel like my generation just missed the boat. It is no wonder I see so many professionally educated in this age group in Vancouver no longer making ends meet.

But, you have to ask, will there ever be a boat for the younger generation?

How many violated "truths" can be counted here?

1) Waitressing is a dead end job. Just what is dead end? Seems to me having economic stability gives a heck of a lot more prospects then doing the "right" thing and going to university and giving up six year of income and finding absolutely zero prospects of even coming close to the same standard of living that being high school drop out would have given.

2) You always do better by getting an education. Sure, and today they come out with $40-50k of student loans and job prospects that leave them in a student loan debt ration comparable to the mortgage debt ratio of years prior. Our university educated come out with a rock to tread that is so big, they are truly lucky if they don't drown, and if you actually open your eyes, you'll see that a great many of them are in fact economically drowning. And here's the biggest joke going, the baby boom expect them to pay their pensions and health care. I can't wait to see that one play out.

Seriously, it is time the gross inequities in the distribution of wealth start to show a little equity. The only thing that can come out of this is a perilous resentment towards age, and if nothing is done to correct it will indeed be well earned, as will the consequences.

One thing I'd have to say that I am truly tired of hearing is how irresponsible younger groups are for not getting their act together and living with in their means. I'd like to see how well the judge and jury mouth pieces that never had to navigate the economic disaster facing youth would have done.

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Is Zinc Deleveraging?

An article, Shanghai Exchange More Than Doubles Zinc Price Limits, describes how the margins for zinc contract have been increased and how price controls have been relaxed, if my understanding of the article is correct.

To enter a contract you needed 5% down, but that changed on November 19th to 9% down and it is increasing to 14% on November 22. That is almost three times the margin requirement and three times the amount of money down.

The price control limited the change in any single day to 6% and that has been raised to 13%.

The changes to margin are enormous.

Frank Veneroso has maintained that metal prices increased beyond reasonable levels partly due to hedge funds buying metals without ever planning to take possession of metal. With a 5% margin requirement, they could tie up 20 times the deposit on any commodity trade. Increasing the margin dropped the leverage to 11 times and the final increase drops the leverage to 7 times. Essentially traders now require about 3 times the money to enter a contract. If hedge funds are indeed responsible for the huge increases in price, that leveraging has got to fall apart pretty quickly with such enormous increases to the margin.

Zinc exports from China increased by 47% during the first 10 months of this year, which really doesn't say much unless you have an idea of how much of the world zinc market they produce and how much they export. Data from the US Geological survey suggests that China produced about 25% of the world production, about 3 times what the US produces. This certainly suggests China is a big enough producers of zinc to be dramatically influencing the price down with such huge increases in exports.

The price declines will result in enormous downward pressure on zinc stocks I've previously followed.

When I looked at Zinifex in July the P/E was around 8.6. The metal values per ton of their Rosebury mine that they were mining was about $610/ton, but the reserves for future mining were a higher grade at about $800/ton. Having a higher grade coming up, and not an outrageous P/E to start gave Zinifex room for downward pressure from prices. The downward pressure on zinc prices have been enormous, however, at today's prices that higher grade reserve still has metal values of over $650/ton. The Century mine also had higher grade in reserves to be mined. Costs are in Australian dollars. The higher grades to be mined are protective, however, zinc prices have come down enough to be cautious with this one now.

I didn't care much for Tamberlane, Breakwater or Acadian. Tamberlane only had one deposit out of the 34 that had very nice revenue potential and that would only last 1-2 years and the other deposits were questionable. Breakwater's best mine had metal values of about $410/ton and those are now below $300/ton. The metal values in El Toqui are down to about $230/ton. El Mochito's values are down to about $275/ton and Myra Falls about $320/ton. Myra Falls is showing $1.10 per pound cash costs last quarter. With zinc below that the mine doesn't look very good at all. Toqui has $0.76 cash costs per payable zinc sold. The costs appear to have gone up enormously, from $0.39 per pound payable in 2005. There has been share dilution to bring the fully diluted count from about 395 million to 461 million. Acadian estimates 8 million pounds of zinc and 3.5 million pounds of lead. The costs are estimated to be $12 million. They estimated $13 million of revenue, but the price declines of just the past days brings that down to $12.3 million. At best that might give just under a penny per share for full year production. It might even run at a loss.

Hudbay minerals looked to be valued at about 2-3x the valuation of Blue Note when I looked at them together. Today Hudbay's earning look to me like they are heading to the 50c/share for a full year range, and that won't show up on the next quarter, but Q1 2008 would have earnings in the 10-13c/share range based on today's metal prices and exchange rates. Q4 already has some better metal prices rounded into the quarter. I saw some serious reasons to see earnings declines when I reported on this stock and they have shown up and further declines will likely happen.

Blue Note's metal values are down to about $315/ton. They have have not met 2007 production goals, and there has been more dilution. Production costs are supposed to be in the $66 million range. The gross revenue potential is still in the $190-200 million per year, but that up to 4c/share earning potential in a quarter is mostly likely gone. The numbers still look like it has the potential for 1-2c eps for their first full quarter of production, but the first full quarter of production is not likely until 2008 due to problems getting the zinc circuit functioning.

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Education Hit

As an educator reading about how school funds are being hit by SIV debt in supposedly "safe" investment pools saddens me.

As an educator I would not advise anyone to go into the profession today and I would encourage people to encourage their children to go into other professions that will enable them to have some kind of standard of living rather than an existence. My experience with education has been in Vancouver, a place hit with the highest cost of living in Canada and for teachers, the wages are not the lowest, however, the workload is 17% higher than Ontario and the wage is about 17% less than Ontario, effectively about 30-35% less per hour worked, and Ontario teachers are hardly well off.

For Canada, Vancouver has probably been hardest hit in education in terms of what is going to spread every where as government budgets get tighter. When you factor in the true cost of living, Vancouver teachers are the lowest paid in Canada. The US already grossly undervalues their children and teachers by the level of funding, more so than Canada. To me, education is the most important investment a country makes in their collective future, not just the children's future.

So, you end up with extreme education systems, like in Britain where public education is so poorly funded they have had a teaching shortage for 25 years. In Britain if you want to be a teacher you will not pay tuition at university, yet even with these incentives Britain has not been able to reverse their teaching shortage, and the consequence to their children in public education and the country's future is enormous. They have the highest teen pregnancy rate, the highest drug use, and the lowest literacy rates out of all "industrialized" countries in the world. The social problems I saw there left me in constant shock. Only 77% of their population completes school to what is a grade 10 level of education in Canada.

If you were starting a family in Britain you'd be immediately asked if you were saving for your unborn child's education. Your child would hardly have a chance of success in public education and public attitude is very much that only children of parents who pay for education deserve an education.

In Vancouver I know far too many teachers that do not make ends meet. I know far too many teachers that after 10 years in the profession have barely made a dent in their student loans, never mind managing to accumulate any kind of savings. The only teachers that actually have a standard of living and aren't merely surviving are the ones that managed to buy a home before the housing bubble, and when university education was reasonably funded. The division of teacher wealth in Canada as a profession has the greatest extremes in Vancouver. There are teachers coming to retirement age with not just one home, but two homes, yet those entering the profession will hardly be able to get their student loans under control, never mind achieving any kind of economic security.

Go into teaching in Greater Vancouver and if you get your own classroom straight out of doing your 6 years of university the starting salary is $42,840, and in your 11th year you will finally make the top salary of $67,362. Just paying the interest on your $40,000 student loan will cost about $4,000 per year (prime plus 5%). Chances are you will not get your own classroom for the first two years and your wage will average about $20-25k per year. So, go into education and at around age 35 you can expect to make about $67k per year. There is nothing that justifies the years it takes to get the top of the pay grid, however, if the job was a 40 hour per week job the pay might be justified. However, the job is about 60-80 hours per week for a beginning teacher and about 50 hours per week for an experienced teacher, at least for teachers of academics. Summers off are earned overtime. The workload increases have been manageable for experienced teachers, but they have utterly buried beginning teachers.

The average price for a house in Vancouver is a low of $446k in Maple Ridge, which is more than an hour drive in rush hour to Vancouver, to a high of $1,456k in West Vancouver. Burnaby, which is central to Greater Vancouver has an average house price of $711k. Even an apartment in Burnaby has an average price of $334k. In Vancouver one needs about $80k for a down payment on an apartment.

Governments are being squeezed more and more and education is not recognized as the future investment to enable people to look after themselves and perhaps be the single largest investment in the future to reduce the social demands on government. No, society cuts education to the point that teachers are overworked and can not make ends meet. The thing about teachers is when they feel empowered by giving extra hours to children and they get to watch children blossom, they do so. When the workload gets to the point that there aren't enough hours to meet their student's needs, or they are so overworked they don't have time to do the fun things they wanted to do with students, well teachers are human and they don't give free hours without feelings of accomplishment and appreciation. When it become hopeless, and they aren't making ends meet, well, they leave the profession. Historically in Canada about 40% have been leaving the profession in the first five years, and I suspect that rate will increase.

Britain broke the that critical point of a workload that gives some reward to teachers in that you know you are making a difference in children's lives. Britain's public education system is so grossly underfunded, the workload is so high and the outcomes are utterly hopeless and the result is that they can not keep teachers. I taught in Britain and my students that were leaving school that year did not know what a percent is, how to do multiplication, essentially their math literacy was at about a grade 2 level, and the way Britain divides students, well these were slightly below average students in the school, but a third of the students in that school had even less ability. So tell me, what kind of future does a country have when this is the state of their education system the abilities of their future adults?

There is a point when individuals must chose a profession based on the ability to look after themselves and as much as I believe in education, I no longer believe that teachers going into it today will be able to look after themselves. It is no longer a case that you could do better elsewhere, but the rewards of education make up for it, and you can still make a living. The dumping of excessive workload on teachers steals the rewards of teaching and leaves hopelessness in its place. Children need stability to develop to their full potential. When there is a revolving door of educators there is no stability in education for children and children become unmanageable faster than you would expect. Places that teachers still manage a standard of living, rather than an existence, are likely to disappear due to increasing economic pressure on the governments that fund education.

But back to the article I linked, these kinds of losses in education aren't just about money, they are about children's future and indeed our collective future. I can survive my pension being hit, but can we survive the hit on our collective future?

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Jones Soda Imploded

This "earnings" was a six cent loss. That implosion I mentioned was coming certainly looks like it is here.

It truly never ceases to amaze me how earnings can be such garbage for a company, yet the share price goes up...

So, Jones Soda was down after the last earnings report and then it went back up and now it looks like it is finally on it descent. I thought it was a $3-4 stock before it made decisions that destroyed earning potential and margins. Now I wonder if it will survive.

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The Pension Bet

An article I saw today was about the Yukon government investing $36.5 million in bonds that are now frozen and they might see some of this money returned over the next 10 years.

I am distressed over the Canadian government's "solution" to the short fall in the Canada Pension Plan. They have set up a system where taxpayers are paying more into the system right now than what is being paid out, and our CPP payroll deductions are indexed to be a percentage of the average wage in Canada.

This part of the plan does not distress me. What I'm betting on is the second part of this plan is going to be a disaster for Canadians. They are investing the extra money into the markets instead of paying down our debt, or at least that's my belief from what I've read on it and I believe it is about 5 years of pension money. They are thinking they will do better on the markets then paying back debt and do better for Canadians.

If you went to sleep for 20 years and saw what are markets looked like by comparison to when you went to sleep you'd be in an utter panic mode to sell everything and preserve the wealth, yet the almighty Canadian government has started taking our hard earned pension dollars putting them into that over valued mess. I don't see those dollars going anywhere but the toilet.

I'm just wondering how much asset backed bonds Canadians own. I was distressed the first time I read the plan, and that newspaper article just makes me wonder when we are going to be told how our government lost our tax pension dollars.

It is such a sad bet.

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Currency Contrast of Commodity Prices

I am Canadian and as such when I look at commodity prices I convert to Canadian dollars. Earlier in the year the conversion meant adding as much as 19% onto the US quoted price yet today it means take 7% off.

The change in currency valuation is enormous for the base metal industry. If you look at the mining industry from a world perspective, there are some mines in the US, and for those mines wages have effectively declined as the US dollar has lost value in comparison to other currencies. The US has gone from a high of 1.1875 on Feb. 7 of this year to a low of 0.9323 this past week. At its height earlier in the year the US dollar was “worth” 27% more relative to the Canadian dollar. A $30/hour US wage on Feb 7th was $35.62 Canadian and at the low, this week, it is $27.97 Canadian. Canadian wages have done the opposite. A $30/hour Canadian wage at the height of the US dollar was $25.26 US and now it is $32.18 US.

For US based mining companies wages are fairly fixed relative to the US quoted commodity price. Their might be union contracts that give them an increase, but when you do your back of the napkin calculation on a company using commodity prices you do not need to correct for costs due to currency changes for mines located in the US. That cannot be said for mines located in the rest of the world.

Given that the US dollar has lost ground with almost all other currencies, when the “costs” are converted to US dollars the increases will be staggering, as the wage conversion calculation above shows. I suspect many investors are not going to be prepared for what this does to the value of their investments. The full effect of these increased costs are not going to show up in the third quarter financial reports, although some will. For the third quarter the US dollar averaged around 1.05. As of this week it has declined a further 12%. Only a portion of those wage changes will show up in the next series of quarterly reports. Expect to see costs up in that 12% range for 4th quarter results being reported next January to March.

The margins, or earnings, on base metal stocks are affected by both the costs, which are in the currency of the country and the commodity prices, which are quoted in US dollars. The workers may not have gotten wages, but once the costs are converted to US dollars, they are simply up dramatically relative to the US dollar in most countries. This is not good for investors, especially investors in commodity stocks with high P/Es. In general, I suspect that chances are if a base metal stock has a P/E over about 6-12 right now, depending on other strengths/weakness of the company, it is going to correct downwards in the next year, indeed, if the LME warehouse stock levels continue to rise this estimate may be conservative because of metal price declines due to increasing supply.

The one year copper spot price shows three almost equal peaks in the spot price of about $3.70 US, in April, July and October. In Canadian dollars those “peaks” are about $4.25, $3.85 and $3.60. Today in Canadian the US price of $3.40 is about $3.16 Canadian. In Canadian dollars the price of copper was about 35% higher at its peak. In an earlier blog I looked at the Bingham Canyon mine. About 2/3rds of the revenue when straight to earnings for the period I looked at it. Because this mine is located in the US it is not going to see enormous wage increases, although it will probably see large energy costs increasing. However, this mine will still have exceptionally healthy earnings, although the margin may decline a little. This mine has lots of room that if it saw a 35% hair cut on revenues it is still highly profitable, with probably 40-50% of revenue making it to earnings. Contrast that to a mine with say 20% of revenue with strong prices going to earnings. At 35% hair cut in commodity prices means that the mine is now losing money.

I dislike nickel immensely, and here’s why. Nickel prices peaked in April at around $24/lb US. In Canadian that would be around $27.50, and there is a lot of nickel being mined in Canada. On Friday nickel closed at $14.35 US, which is now about $13.40 Canadian. Nickel peaked at a price over 100% higher. The good thing about nickel is the peak was a short-term spike and that utterly unsustainable price only got averaged into earnings for a very short period. The very, very bad thing about nickel is that a number of nickel stocks have priced in an earnings expectation based on a much higher nickel price than is realistic. The current price is already a strong nickel price and a wise investor would be evaluating their investment at $10-12/lb nickel. I believe to have priced a nickel stock with a high P/E with the outrageous nickel price of $21.65/lb, or $25 Canadian, as investors in FNX mining did in the first quarter will prove to be economic suicide.

In my May 30th post on FNX I pointed out many problems with investing in this company, and in the shorter term the price has gone higher than the roughly $35/share it was at then. But, short-term hype and speculation is not true valuation and this is the type of investment susceptible a wake-up-one-morning to 40-50% haircut. Going back to first quarter, earnings were $30 million (extrapolate to $120 million full year expectation) with an average price of $21.65 and an exchange rate of 1.17. Guidance was that earnings are supposed to decline by $9 million per $1 decline in nickel price, so expect $66 million decline from the contraction of nickel price. A 10% change in exchange will kill another $12.7 million in earnings, so expect another $32 million decline from exchange, or $98 million. That leaves about $22 million for full year earnings, or $5.5 million per quarter. Factoring in the roughly 70% increase in production expected, that would give about $9 million per quarter, or earnings of $36 million per year. Assuming share count has not increase, which is full year earnings of about $0.42/share, outrageously low for a $37 commodity stock. The earnings have gone 36c the first quarter, 40c the second quarter and 15c this past quarter, yet this quarter had record output. Earnings were 24c/share in Q3 the year before. Output increased by 50%, yet instead of a 50% increase in earnings to 36c, earning were 15c, an expectation decline of 58%. The average exchange rate was 1.04 for quarter 3. Now it is 0.93. That 15c/quarter extrapolated to a full year is 60c, but factor in that further currency decline and expect to see next quarter earnings of 10-12c.

Anyone doing a peer valuation of their nickel stock relative to FNX is seriously misleading himself or herself.
I expected the US dollar to decline relative to the Canadian dollar, but never in my wildest dreams would I have predicted 0.9323 this fast. I suspect there is not an analyst report out there that has factored in the drastic loss of revenues, or alternative drastic cost increases, due to the strong changes in valuation of the US dollar.

I don’t have time to look at the degree of change in other commodity prices right now, but my prediction is 100% US companies will perform better relative to companies with operations in other countries because they will only be dealing with how commodity prices affect their bottom line where as other companies will have the huge challenges of how the drastic decline in the US dollar affects either costs or revenues, depending on what currency they do their reporting in.

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Chasing Bison

Never dreamed I'd see kids chasing bison down the street, but that's what I saw today.

I wish I'd had my camera ready, but I did get a picture of these two walking out of my front yard about five minutes ago.



You can see the top of my car parked next to the house in this one.



I have moved to the North West Territories and it has kept me from posting. My internet access is so bad, at dial-up speed, I am finding it challenging to do stock research. I am looking for a better internet solution.

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Gold – What’s in a Currency?

Whether a currency is weak or strong seriously affects buying power. Being Canadian, I have traveled the US when it took $1.50-1.60 to buy one US dollar. It keeps the cost of imports expensive. It helps export businesses and it helps tourism as people from countries with strong currencies see tremendous value in their vacations.

Gold is not a currency, but it does act like a form of money, and it preserves wealth in countries experiencing currency devaluation. It can work the opposite for countries whose currency is gaining strength.

We think we have cost of living issue, have you checked out Zimbabwe? According to this May article, Zimbabwe inflation in May, the cost of living double last April/May. It is predicted to be as much as 100,000% over this year, Zimbabwe inflation up more. The official exchange rate is very different than the black market rate where when converted to US dollars teachers make $100/month at the official rate and $6/month at the black market rate, Zimbabwe teachers on strike. Clearly demanding pay in grams of gold would protect buying power. Check out the video on life in Zimbabwe, Zimbabwe living in hyper-inflation. Currently, foreign currency is king.

Zimbabwe is experiencing hyperinflation. Check out their stock market and the graph goes straight up. Check out the early warnings, as this 2001 article shows, Zimbabwe 2001 decsions and one starts to see that the burden of debt and the inability to attract foreign dollars as investors did not see that the interest rate offered would protect their investment from currency devaluation. Life has gotten very bad, indeed, Zimbawe lifestyle lost to hyper-inflation.

Canada’s weakened dollar through the 80s and 90s was due to debt. Few Canadians appreciate the debt of gratitude Canadians owe former Prime Minister Brian Mulroney and finance minister Michael Wilson. They took over a Trudeau government that had program spending exceed tax revenues by $39 billion per year, never mind the cost of debt servicing. By the time Mulroney left office program spending match revenue. Canada still had a deficit in that tax revenue still did not cover debt servicing, but the changes they made during their tenure was outstanding.

Anyone who says other has a poor understanding of calculus, which tells us that if a graph is concave down, the rate of increase is coming under control. The graph for Canada debt was concave down for the entire time this team worked together. The graph of increasing debt under Trudeau is concave up, straight up. Many older Canadians look back at the Trudeau years as the glory years, but he left a burden of unsustainable program spending and debt that many Canadians blame the Prime Minster’s that were left to deal with the problem. No kidding the times feel very good indeed when fair share of taxes are not paid and the burden of paying for yesterday's lifestyle is passed on to future generations.

To that end, Mulroney and Wilson harped on and on about our debt problem and they set the stage for Canada to control debt and eventually move to surplus budgets, $13.8 billion for 2006-2007, Canada surplus budget, Canada budget highlights.

The US has increased debt, and they have increased it to levels that I believe are worse than Canada ever faced. And US currency is devaluing because of it and US congress is asking to increase the level of debt a few times per year. You can see that US debt was under control with Clinton, but out of control with Regan, Bush and Bush, graph of US debt. Last month the US Senate Finance Committee approved increasing the limit on debt to $9.8 trillion. Canada’s debt is $587 billion. With roughly 1/10th the population it means that the US level of debt per person at the federal level is about 1.7 times as high, and unlike Canada which currently has surplus budgets, there is no evidence that US government spending is coming under control, yet another increase to US debt.

Gold has protected wealth for Americans as government has continued out of control. With lowering the Federal Reserve rate last month from 5.25% to 4.75% the US government has chosen to devalue the US currency. The US dollar lost about 6% buying power in September alone in contrast with Canadian currency.

Gold has strongly outperformed many investments for US investors because of currency devaluation, but has not been nearly the performer for Canadian investors.



Over five years gold is up 41% for Canadian investors, or about 7.1% per year annualized. For US investors gold is up 126% over 5 years, or 17.7% per year annualized. Over a shorter term, say 6 months, gold has not been a good investment for Canadians.



Gold is down 6.1% for Canadians and up 8.3% for Americans. Gold is offering some protection of wealth from currency devaluation for Americans. If I were American I would consider owning some gold bullion as part of a diversified investment strategy. The Canadian dollar has had the fundamentals to strengthen the currency through debt management for a long time and it is showing up in a stronger Canadian dollar, from about $1.60 to by a US dollar five years ago to par today.



Surely, if the US government reduces the Federal Reserve rate, the US currency will devalue more and gold will increase in price in US dollars. It may or may not increase in price in Canadian dollars. If the Canadian dollar gets stronger relative to the US dollar, it is likely gold will decline in Canadian dollars.

If Americans panic about preserving wealth from a declining currency and do it through buying gold, gold will likely skyrocket and even currencies gaining strength relative to the US dollar would see gold increase. Should this happen gold will also be a very good investment for Canadians.

Gold behaves like a master currency against all currencies, gaining when a currency declines, and losing when a currency gains. It is subject to the same market forces that lead to selling-off and under valuation and speculation leading to over valuation, which makes the contrast to currencies relative to how gold is valued in the market as a whole. But it is ultimately a master currency. Gold stocks are not bullion and have very different fundamentals that need to be looked at one at a time. A gold stock with costs in foreign currencies will see costs going up due to currency devaluation and will not necessarily see a leverage of earnings that investors expect. Some gold stocks have very strong leverage of earnings expectation built into their price, completely ignoring the explosive cost increases due to currency devaluation.

Currently gold stocks tend to sell off all of their gold, trading it for the very fiat currency their philosophy claims to abhor.

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Don't Buy Stuff you Can't Afford

If you haven't seen this Saturday Night Live skit, well, it will amuse you.

Don't Buy Stuff You Can't Afford

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The Abundance of Minerals

In “Earth for Sale” I did a very rough calculation to determine the values of metals in the Earth’s crust for copper and uranium. The point of the post was that there are such enormous amounts of minerals in the ground, giving value to that which is in the ground at strong prices is imprudent, as that was the only “fundamental” behind the vertical ascent of uranium stocks.

This post will look closer at relative abundance of metals and how they are currently valued. I used the abundance values from Jefferson Lab and calculated the percent of the Earth’s crust each mineral would make up. I then calculated the volume of 1 km of the Earth’s crust taking the difference in volume of the Earth and a sphere 1km smaller. I used a density of 2.7g/cm^3 and 30% land area. For each metal I multiplied by the percent abundance and divided by either 454g for pounds or 31.1g for troy ounces and multiplied by the metal price.

Mineral	Abundance	% of Crust	Spot Price 09/26/07	"Value"
Aluminum	82300 ppm	8.2%	$1.09/lb	$8*10^19
Copper	60 ppm	0.006%	$3.64/lb	$2*10^17
Gold	4 ppb	0.0000004%	$728/oz	$4*10^16
Lead	14 ppm	0.0014%	$1.60/lb	$2*10^16
Molybdenum	1.2 ppm	0.00012%	$32.25 /lb	$3.5*10^16
Nickel	84 ppm	0.0084%	$14.61 /lb	$1*10^18
Palladium	15 ppb	0.0000015%	$342/oz	$7*10^16
Platinum	5 ppb	0.0000005%	$1349/oz	$9*10^16
Rhodium	1 ppb	0.0000001%	$6225/oz	$8*10^16
Silver	75 ppb	0.0000075%	$12.53/oz	$1.3*10^16
Zinc	70 ppm	0.007%	$1.36/lb	$9*10^16
Iridium	1 ppb	0.0000001%	$450/oz	$6*10^15
Uranium	2.7 ppm	0.00027%	$85/lb	$2*10^17

The “value” of metals in the Earth’s crust is grossly out of line with reality. The “value” of aluminum in the 1st km of the Earth’s crust is “worth” 80 quintillions (80 million trillions) – about 200,000 times the $415 trillion in derivative contracts that existed at the end of 2006. The lesson here is you are going to get in trouble with investments if you value metal equities based on what is in the ground. Not all minerals in the ground can be mined, but if you assumed only 1% of each mineral, or even 1/10th of 1% is recoverable, the numbers are still enormous. The metals of your commodity investment are only worth those prices if they make it to market and get sold at those prices.

Each mineral on the list is subject to supply and demand based on the mineral. Take a look going back 15 years at the price of Aluminum, which is the metal with the highest “value” in the Earth’s crust, and you see that the current price is about double the 15 year low.



Aluminum has not done the same degree of outrageous price increases and spikes as other metals. I would suggest the reason is that there is so much aluminum, the market can respond far faster to under and over supply situations. At 8.2% of the earth’s crust, aluminum is a macro element. The price of aluminum temporarily spiked to about 3 times the 15-year-low. It is currently about double the price of 15 years ago. The current price is still on the strong side in comparison to historical prices, but if you think about it from just an inflation perspective, many things have doubled in the past 15 years.

Iridium, which is the least followed and known metal on the list, also has the smallest relative valuation. It has limited applications. It is the most corrosive resistant metal known. It is also tied with Rhodium in terms of how rare it is on Earth, yet Rhodium has about 14 times the price, and relative valuation in the Earth’s crust. The following graph shows that Rhodium was not always so dearly valued; it is up about 16x what it was just a few years ago.



One has to ask if new applications and demand for rhodium really justify the increase. Rhodium tends to be mined with platinum group metals. Has world demand for rhodium increased that significantly relative to platinum? How sustainable is the demand at that price? I don’t know the answers, but I would be researching them if my investments were dependent on Rhodium price.

Nickel, uranium and copper are the next strongest valued metals. Nickel and uranium have had tremendous hype, hysteria, and speculation, very much like the tech boom of the late 90s. There is absolutely no shortage of these elements in the Earth’s crust, none what-so-ever.

Uranium consumption is about 150 million pounds per year. Say it increases 7-fold, to 1 billion pounds per year, and only 1/10th of 1% could be mined, well, that would mean the Earth has about a 2 thousand year supply. A price boom on uranium in the 70s resulted in about 50 years of uranium reserves being found. The current market is under 100,000 tons per year, which is very small compared to other metals. At the current rate that uranium is being used, current world resources would last 70 years. (http://www.uic.com.au/nip75.htm)

The shortage of uranium has nothing to do with its availability to in the ground, but rather the special licensing and controls that uranium mining is subject to do due to its inherently dangerous nature. Building uranium mines takes an extra 2-5 years longer than other mines because of the extra controls and safety concerns. Uranium spiked to about 13x its lows and as little as 2-3 years ago mining companies were bidding to supply uranium in the $10-15/lb range. Those who cash in on uranium will be those who enter long-term uranium contacts at higher prices, and those who are already in the process of building mines. The price of uranium will probably remain stronger for longer not because uranium deposits are unknown, but because the mines are not built and they take longer to build. When you consider the price was $10-15 just two to three years ago, even $40-50/lb is a very strong price.

Nickel is 1.4 times more abundant than copper and 30 times more abundant than Uranium in the Earth’s crust. The 15-year price chart for nickel shows it had a price around $3/lb, for years.



BHP’s financial results shows they made a good profit on nickel in 2006 at price around $7/lb and they more than tripled their earnings from nickel with nickel averaging around $20/lb. Nickel price is up because there was a supply squeeze, and it is unlikely that the price drop is finished when companies were able to make good profits at $7/lb. Nickel is highly abundant, and world demand is relatively small, about 1.5 million tonnes per year. Apparently some nickel supply is now coming from ore being imported into China and producing nickel at $8/lb. This new source of supply appears to be increasing rapidly.

Copper has a high value, but it has a much higher demand, about 16-18 million tonnes per year. This is about 10-12 times the demand of nickel. Relatively speaking, nickel has about 15x the abundance when contrasted to the relative size of world demand. Nickel completely lacks scarcity yet the price spiked to 8x that 10-year average price from about 93 to 03.

Copper price has spiked, but not as much as nickel in relative terms.



Clearly there is a price dip from 1998 to 2003. It is a time when companies were choosing to sell off valuable holding because of carrying costs and many new companies have made a fortune off what were previously cast-offs, some strictly on speculation, but quite a few by building mines. Copper price spiked to about 6x the weakest price in its history. Copper had a much stronger downward price trend that the other metals. Copper prices are strong and susceptible to downward price corrects. There are many strong “bears” about the copper market and there will be a downward price correction at some point, there always is, but the relative abundance to nickel and uranium when the size of the world market is considered makes me think that nickel and uranium are susceptible to stronger price corrections, but the uranium price corrections will lag due to the differences in building mines.

What has bigger implications for the price of copper is how many deposits like the recently discovered Noront drill results. Drill results on a press release today identify 68 meters averaging 5.9% nickel, 3.1% copper, 2.87 g/t platinum, 9.78 g/t palladium, 0.61 g/t gold and 8.5 g/t silver. In prior posts I talk about declining grade and how it is increasing costs so prices have a much higher cost support. I do not know how big this deposit will be, but if it were big, it would be profitable at very, very low copper prices. It does make me wonder if the declining grade being mined that seems apparent in report after report that I read is because mining efforts have focused on what resources that were known and real new exploration that would find high quality grades has been limited. This discovery should make investors in low quality grades very uncomfortable.

The value of gold surprised me. For something “scarce” the metal values in the ground are awfully high, $40 quadrillion dollars, or forty thousand trillions. Are there not these big market fears around the over $400 trillion in derivatives and somehow gold is supposed to prevent this by limiting the money supply? I pulled up a web page (http://www.gold.org/value/stats/statistics/gold_demand/index.html) that states that global demand for gold reached a record $14.5 billion last quarter. That’s about 1/300 millionth of the value of the metal in the ground. If 1/10th of one percent is recoverable, then that is $40 trillion available, or the supply can be expanded about 10-fold. At the current rate of mining the out of the ground gold supply is increasing by about 1.6% per year. Current the rate of mining seems small compared to the amount of gold that can potentially be mined. Infomine shows 1880 companies in their database involved with gold. I would think that strong gold prices would increase the mining and exploration activity of these companies and eventually increase output.

In order for price to go up you need to have more people/corporations wanting to hold gold as an investment. Currently more people seem to want to own the gold stocks as opposed to the bullion and the gold stock bugs seem utterly confused that the price of gold does not go up as they expect. It seems to me that until such time as there is a shift and the so called believers in gold actually own gold and/or the gold companies stop selling their gold there will be continued restraint on gold prices. Truly, the theory that banks are weak because they lack a gold standard because they’ve sold their gold equally applies to gold stocks as they sell off their hard assets for fiat currency.

Looking further, I find that at the end of 2005 there was around 155,000 tonnes of gold being stored in either jewelery or bars, or roughly $3.6 trillion dollars worth of gold, and they mining about $60 billion worth of gold each year. The value of gold per person from that 155,000 ton stockpile is about $500 and keeping prices constant, it is increasing by about $10/year per person from new mining. Certainly if people lose faith in paper money there is not a lot of already mined gold to go around, but there are many other hard assets that people can chose as investments that can also protect wealth. Gold does not appear to have the same degree of asset price inflation as other investments. Certainly if your country’s currency is declining, or at risk of declining relative to other currencies gold is probably a good currency hedge.



The above graph shows that if you are American and bought gold six months ago the US dollar value of your investment is up over 10%. However, if you are Canadian, the value of your investment relative to the Canadian dollar is down 4.5%.

As investors I think it is a good idea to be aware of how much actual metals exist and to use this kind of knowledge in assessing real value as opposed to apparent value in the assumption that metals in the ground today will be worth the same forever or even be stronger forever.

Looking at this makes me wonder more about iridium. It seems that the most corrosive resistant element would have market growth potential and it does not seem to have the same speculative pricing built into it.

In any event, I did quite a bit of traveling in the summer and now I am in the process of moving so I have not had the same kind of time to look at investments. So, I am still around, but not as able to be actively posting. I will probably work on shorter and less time consuming posts in the future.

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Par!

US/Canadian... 1.0006

I am in shock...

What a joke, everyone put on their born yesterday hats. The US government reported consumer prices fell in August by 0.1%. Energy prices fell 3.2%. I guess no one noticed that crude oil is over $80 month...

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2% inflation in one day

In one day or so the exchange rate for a dollar US went from $1.03 to $1.01 Canadian.

Today the US had 2% inflation on imports from Canada, or Canadian exporter to the US just saw their revenue drop by 2%. Either way, it is going to be ugly.

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1000% in 15 trading days - It happens

Could have, would have, should have...

I could not help but notice, after the fact, that a stock that has been on my watch list since last December quite possibly made some kind of stock market record here.

Between August 20th and August 27th one could have bought Noront Resources for under 40c/share on the Canadian venture exchange. On September 13th it reached a high of $4.05 and closed at $3.94. About 80 million shares were traded during the 1st 4 days of the week -- they have about 90 million shares and another 33 million warrants and stock options. So, very close to the entire float being traded.

September 14th it was halted, and it remains halted. Rumor is that there will be news on Monday and trading will resume on Tuesday.

You can check them out at http://www.norontresources.com/home.htm

Personally, I wouldn't touch it at this point, but it is going to be interesting to watch.

The news that got so much attention... drill results of 36 meters averaging 1.84% nickel and 1.53% copper, and not that deep, starting at 56 meters down. Certainly, if this proves to be a large deposit it would be very profitable, but it would take 5-10 years to actually build a mine, so there has been way too much speculation here.

But it will be interesting to watch.

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Heros - Give Something Back

One of the most important and significant organizations I've ever known is the Non-Smokers' Rights Association/Smoking and Health Action Foundation. The first is their advocacy part of the organization and the latter is their tax deductible charitable part. I came across a request for a donation that I had put aside and it prompted me to do something about it today.

I did anti-tobacco work for years and I believe I very much followed the type of model the leader of NSRA, Gar Mahood, follows. The tobacco epidemic is unlike a health epidemic caused by pestilence, the tobacco epidemic is caused by corporations that have no consideration or conscious as to the degree of violence they inflict on smokers dying from cancer that rages through their body, and the implications to those who lose their loved ones this way. Truly when I look at what cancer is, I can't think of a more violent way to die than the slow torture of your body slowly being eaten up. The tobacco industry wipes out on average 17 years of life from each smoker, with 1 in 4 dying 25 or more years prematurely. And non-smokers get killed from it too.

When you apply a disease model of epidemiology to tobacco it becomes clear that the infectious agent is the tobacco industry. Cancer treatment programs and smoking cessation programs are methods of treating the disease, but they do not prevent the spread of the disease in the first place. Attacking the business model of the tobacco industry is the most effect use of cancer prevention dollars.

It is very much like how when cholera is in drinking water turning off the water source prevents further spread of the disease, but you still need to treat those who are sick, the cessation and cancer treatment programs. If you don't turn off the water, you don't stop the spread of the disease. Actually smoking causes more heart disease than cancer.

So, tobacco is a business and restricting where tobacco can be sold, whom it can be sold to, where it can be consumed, price, advertising, corporate accountability and justice for the carnage and victim, etc. cuts off the supply of new smokers. Unfortunately, this disease has gotten into a lot of pipes and it just takes longer to flush them and some fools keep turning the taps back on.

If you come visit where I live, here in British Columbia, we have the strongest work place legislation in the world, controlled by our Workers' Compensation Board, which has strong ability to enforce compared to by-laws. So, you can go any where and there is no smoking in any indoor public place, even bars. We have a high price and a legal age of 19. We used to have the strongest advertising restrictions, but there was some fool that was supposed to be on the health side that opened that tap despite numerous warnings that it was a very bad idea.

I did this work locally, Garfield Mahood does this work globally and endlessly. His research foundation was so important to give out the latest information on how the disease was spreading (what the tobacco industry was up to) and showing the model that works, well, here's a quote:

"You are, almost single-handedly, responsible for saving more lives from the chains of lethal addiction (and so death itself) than most physicians could even aspire to.

Dr. Ron Stewart, professor of medicine and former Nova Scotia health minister

This was in response to Gar being awarded Canada's highest honor by investing as him an Officer of the Order of Canada. Belated congratulations Gar, I can't think of anyone more deserving.

My latest mail from NSRA has a book, "What Do The Smoke Folk Have In Common With Organized Crime?" The book is designed for senior high school and university students who want to be informed about how the tobacco industry works to they can make a difference in their community and it is impressive. The dedication reads:

This report is dedicated to the more than one million Canadian mothers, fathers, aunts, uncles, brothers and sisters whose premature deaths were contributed to or caused by tobacco industry deception and to the activist young people who are committed to holding the tobacco industry to account for these deaths.

We applaud this special group of young Canadians who are determined to change the industry's behaviour and who are prepared to dive into and absorb this lengthy report because they want to understand Big Tobacco's predatory marketing and shut off the industry's supply of new recruits."

Seriously, this is the type of resource that you want to see a few copies in your local high schools and even libraries.

By donating to the NSRA not only do you help to prevent kids from starting, but each child that doesn't start will over their lifetime have an extra $100,000 to spend on other things that smokers end up spending on cigarettes. That's a lot of money freed up for other businesses. There is no free market competition with smoking, if they smoke they will buy cigarette over food even if they are starving, or their children are starving.

The other thing is that tobacco control always needs strong advocates fighting to ensure tobacco control programs are funded. What I read in my mail is that tobacco control funding has been cut in half, from about $3 per person to about $1.50 per person. Seriously, $3/person is already a serious pittance and to cut that in half is outrageous, and it looks like it is being cut even further.

So, I've sent a $500 cheque and I dedicate it to my mom who died at 32, my dad who died at 63, my uncle Danny who died at 48, my cousin Joseph who died in a house fire at age 10, my dear friend Fred who died of a blood cancer (the most common cancer from second-hand smoke), my grandpa who died at 62. The research on every single type of death they collectively died from says they are smoking related. Happy belated birthday mom who would have been 64 yesterday and to Fred, I came across your picture today and I miss you so bad, so much like a father to me.

You to can send a donation to this worthy organization at the Non-Smokers Rights Association, 720 Spadina Avenue, #221, Toronto, Ontario, M5S 2T9, www.nsra-adnf.ca.

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Canadian/US at Par?

I couldn't help but notice I'm getting US coins back in my change. That was not happening even 3 months ago... US, $1.0375 Canadian. Wow, the US dollar has come down fast and hard.

US importers are going to be hurting badly, as will Canadian exporter. I wouldn't want to be owning those kinds of investments through their next earnings reports, or even now...

All of a sudden US exports got a whole lot cheaper and more competitive, so Canadian importers should be looking good.

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Jones Soda - Lawsuit Joke

Lawyers have launched a lawsuit against Jones Soda for an "allegation contained in the Seattle Post-Intelligencer that certain officers and directors of Jones Soda disposed of 'nearly all their shares of the company stock' in what was called 'a highly unusual move" by securities experts "during a wave of positive publicity that kept the stock high.'"

So now dumb is following stupid...

I first looked at Jones Soda in December when it was trading at about $12 and with a quick look I concluded it was an extremely over priced $4 stock. I rated it as under perform in CAPS at Motley Fool.

I watched in amazement at the ascent of this stock and I sometimes use what I see in the stock market as an example of the negligent math skills of adults when I am trying to open student's eyes up as to the importance of math skills. Jones Soda is a company I have mentioned to students, indeed, I have used it as an exemplary example of bad investing with students playing a stock market game.

By April my bewilderment that the stock price had actually doubled lead to me studying the stock to see if I had missed something. So I looked closer and I wrote about my assessment of the stock in "Jones Soda, Breaking down the growth."

The only thing that is unusual about the officers and directors selling shares where they did is that they did not sell them earlier. I saw hype and speculation from investors, not the company.

This is incredibly frivolous and the US really needs to start assigning costs to garbage lawsuits like this. Investors ought to have done their homework on the stock, which would have shown absolutely no fundamental reason to buy, even at today's price.

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Bottled Water

The bottled water industry simply put is one of the most amazing the marketing geniuses. In North America we have the highest water standards in the world yet it has developed into a $15 billion dollar industry. And there is no evidence that bottled water is somehow safer, indeed, some have been found to contain harmful things.

Something that I had not thought about was the environmental impact of all those extra plastic bottles, which was pointed out in "Should You Drink Bottled Water."

Indeed, plastic is made from monomers, some of which are very harmful and there are many additives in plastic to give it required properties, all of which can seep into your food and water. Container you use over and over have less because that which can seep out seeps out much faster when the container is new.

Truly amazing, a $15 billion dollar industry that was practically non-existent 20 years ago.

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Jones Soda Co - Are We Keeping Up?

I first reported on what a disaster Jones Soda (JSDA) was going to be for investors back in April, where I showed where the growth in earnings had come and I concluded those items would "murder" earnings in the future.

Jones Soda has since had two quarterly earnings reports so it is time to take another look, in particular, the last earnings release.

I can hardly get past the highlights:

• 1,722,795 total cases compared to 961,000 cases one year ago
• Revenue increased 29.8% to $13.0 million compared to $10.0 million a year ago.
• Gross margin decreased to 34.2% versus 38.0% last year
• Diluted earnings per share were $0.00 compared to $0.10 a year ago.

The first two points ought to send anyone still vested utterly running from this stock. They have a 79% increase in the number of case equivalents sold but only a 30% increase in revenue. That is an utter implosion of earning potential. To their credit, the third point shows that they managed to only lose 3.8% of their gross margin and on the surface this appears very good as this kind of implosion of earnings could put them into irrecoverable loss position.

As an investor you'd expect a 79% increase in sales to result in a 79% increase in earnings, but the 4th point shows that earning are now non-existent and not the 18c per share as a back of the napkin calculation would lead you to expect. Jones Soda has growth here, but so far entirely at the expense of profitability.

So, looking a little deeper... They had earnings of $40.7 thousand compared to earnings of $2.3 million, or another way of expressing that was that earnings were about 5600% higher a year earlier, or alternatively, this quarter's earnings are 1.8% of the earnings one year ago, 98.2% of the "earnings" disappeared... That is known as an implosion of earnings...

But, that's just on the surface. Above I mentioned how a 79% increase in output with only a 30% increase in revenue could put them in an irrecoverable loss position. One has to ask whether they are in fact in an irrecoverable loss position. Over a year earlier the operating expenses increased to 38.4% of the revenue, from 31.1%, and that is enormous, an increase from $3.1 million to $5.0 million, or an increase of $1.9 million, fully 14.5% of the revenue. The cost of goods increase by $2.3 million, for total increase in costs of $4.2 million, yet the revenue was only up by $3 million. In addition, the licensing revenue was also down by $0.1 million, so "total revenue" was actually only up by $2.9 million.

Having an extra $4.2 million in costs and only an extra $2.9 million in total revenue is very bad. And looking at page 5 of the financial reports what has happened leaps off the page. Looking at the operations only, the earnings before taxes for the three months ending June 30, 2006 were $836 thousand, or about 3.5c per share. After paying taxes as investors ought to expect them to be paid, without that monkey business accounting that grossly overstates earnings and allows executives to have cash-out-the-options liquidity events, the eps ought to have been around 2c, not the misleading-about-operations 10c.

For the quarter ending June 30th of this year they have a $504k loss on operations, or about 2c/share. It wasn't much better the March 31st quarter as that one shows a $428k loss, so the loss on their operations has increased by 18% between quarters, yet at the end of the magic of accounting both quarters actually showed positive earnings, $40.7k and $58.3k. Make no mistake here, Jones Soda's operations are currently being run in a loss position. What is giving the appearance of making ends meet is interest income and deferred taxes.

Interest income was $441k in the March 31 quarter and $416k in the June 30th quarter. This interest income is the largest contributor to giving the appearance of making ends meet and will decline as the capital is spent on expanding the operation and covering the deficit in earnings. The other item that enables the company to look like it isn't in a loss position on operations is income tax benefits. For the March 31 quarter $45k of the "earnings" is positive taxes. For the June 30th quarter there is $128k of positive taxes. So, $416k in interest and $128k in positive taxes enables Jones Soda to show $40k of earnings instead of $504k of losses in the most recent quarter.

So, they have these enormous "growth" plans, a network of 15,000 retail outlet to market their soda through, but where do the earnings come from? Growth at the expense of a profit margin isn't a good thing and the financial reports do not explain how this will be turned around.

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