March, 2008

This morning as I read the Globe & Mail over breakfast, I could not help but be drawn into a column by writer Harry Koza.

Mr. Koza did a splendid job of really laying bare the truth that lurks in the shadowy world of sub prime mortgages. He notes that $50 billion worth of mortgages come due in August and homeowners will have to re-new these mortgages as traditional principle/interest mortgages. No low teaser rates, no interest only schemes. Providing these mortgages can be rolled over successfully all will be OK. But if a chunk of this $50 billion ends up in default then expect more market turmoil. Read more »

Canada has long been assumed to be a treasure trove of natural resources, including Natural Gas. This assumption came under challenge this week in a report issued by the Conference Board of Canada. Economist and report author Louis Thibault noted ” conventional gas supplies are declining and producers are turning to higher cost sources including coal bed methane and deep pockets of gas in tight formations. We are getting to a point that reserves are not there anymore…”

To me, this is all the hint I need. Nat Gas stocks have been in the basement for many months now and I would say it is time to again start looking at the sector.

Watch this blog space in weeks to come for some specific recommends. Read more »

In a recent blog I argued that the world is embarking on a nuclear renaissance in light of growing demand for power and in the face of energy supply issues.

In the event that you did not find the notion of a nuclear revival to be credible, consider this:

On July 18th, the National Petroleum Council delivered its report ( Facing the Hard Truths about Energy) to the US Secretary of Energy. Up until now this Council has always taken the optimistic route saying that new fields would be discovered and more advanced exploration technology would save the day. This years’ report marked a notable shift from past thinking. Even the title of the report suggests a shift in thinking. The report talks about how after 2015 oil output from non-OPEC nations will start to decline - something that until now was never spoken about in Washington circles. And buried deep in the report was perhaps the most shocking of all statements. Read more »

The CDO (collateralized debt obligation) blow-out at Bear Stearns recently continues to simmer on the back burner with the media doing a fine job of trying to keep the heat from being turned up.

But, here is what is interesting or should I say here is what is scary.

Following this blow-out, Merrill Lynch stepped up to the plate to take some of these smelly, putrid CDO’s off Bear Stearns’ plate. Merrill was subsequently stunned when they tried to put some air freshener on these CDO’s and re-peddle them back to the market. The market was only willing to pay Merrill a fraction of what Merrill thought they were worth. And herein lies a problem of tectonic-like magnitude. Read more »

In a recent report, I wrote of how China was experiencing severe problems as a result of having its currency pegged to a basket of foreign currencies largely dominated by the US Dollar.

This week I find myself in San Francisco at the Hard Assets Conference. After a quirky breakfast at Lori’s Diner - a 1950’s styled eatery, I brought myself back to reality with a short walk uphill (is everything uphill in this town?) to Borders bookstore where I bought the Financial Times Weekend Edition.

A chart buried on page 18 caught my caffeine-heightened attention and I have re-produced this chart for you above. Arab Gulf nations like Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, and Oman have all pegged their currency to the US Dollar. And rightly so, given the oil trade that these nations conduct in US Dollars. Problem is, if I peg my currency to yours, I have to follow your Money Supply policies. If you ramp your money supply up in an unbridled fashion, then I must do likewise. Read more »

The smell of money was in the air....the drill bit was turning. Beneath the drilling platform lay immense petroleum riches waiting to be tapped. But suddenly the world turned upside down. From out out of nowhere came the roar of jetboats. The distinct crackle of gunfire ripped through the air. The jetboats pulled alongside the drilling platform. Savage looking rebels with a thirst for blood wasted little time in making their intentions clear....

The latest best selling fiction thriller you ask? No, not quite. But a series of events not unlike these did unfold about 7 years ago offshore from the South American nation of Guyana. At the centre of events was a Canadian firm CGX Energy (TSX:OYL). At the heart of the matter was a dispute with neighboring Suriname over who owned the oil rights offshore. CGX was caught right in the middle and was forced to halt exploration efforts. For 7 years this feud simmered and for 7 years CGX continued to support Guyana. In fact, CGX paid nearly $9 million in legal fees to support the Guyanese Government's arguments that these offshore rights did belong to them. Finally a couple months ago, a U.N. tribunal made its binding ruling. The offshore oil rights do in fact belong to Guyana and CGX is the rightful license-holder of this offshore property. Read more »

Since August we have been overwhelmed with nothing but bad news from the sub-prime mortgage front and from the global liquidity arena. The news and events since August have been almost enough to make people admit defeat. And that is precisely the discussion I had with a gentleman from Wachovia Securities whilst in Cancun recently at the FAMMS Conference.

The terminology we bantered about was the phrase “liquidity trap”. A liquidity trap tends to occur in an economy when financial intermediaries are not willing to lend to each other. Consumers scale back their spending even though interest rates remain favorable. Financial markets tend to then suffer (just ask the Japanese who endured a decade long liquidity trap). And a liquidity trap is precisley what we may be facing now.

Banks are sitting with off-balance sheet assets (the true extent of the SIV's still is unclear) and the economy is waiting for the “other shoe to drop” as it were. Consumers are starting to scale back in the face of a weakening housing market and the financial markets are up one day and down the next as uncertainty prevails. A recent report on BBC even suggested that 34% of sub-prime mortgages are going into default in the USA. Read more »

There once was a banker who enjoyed tremendous success lending to clients around the globe. But gradually over time, the forces of globalization grew so powerful that his clients no longer needed to borrow from him for they were enjoying unprecedented wealth of their own.

If you are waiting for Snow White and some dwarves to come around the corner next, forget it. This is no fairly tale. This is real.

The banker I speak of is the International Monetary Fund (IMF). Once a powerful global lender to developing nations, the IMF now has only $20 Billion in outstanding loans ( 1/4 of what it had 7 years ago)and half of this outstanding amount is to one country - Turkey. Read more »

I recently had the good fortune to make a trip to S.E. Arizona. My journey took me from Tuscon in an easterly direction towards Wilcox. This part of Arizona is a geologists dream thanks to its location on the slopes of the Eastern Dragoon Mountains and it consists of granites and schists that have been overlain by younger limestone sediments.

This sequence of rocks has then been intruded by porphyry action. Hydrothermal fluids circulating under immense heat and pressure under the ground eventually brought Copper mineralization up into contact with the limestone areas. Also over time, the entire area has been faulted and folded and tilted to an angle of about 34 degrees.

Right beside I-10 and some 15 miles from Wilcox, I discovered a small company, currently trading on the Pink Sheets, that is mere months away from Copper production and cash flow. Read more »

These markets are amazing. Everywhere I look I see people cowering in fear under the covers because the talking heads on CNBC and CNN have again reminded them that the end of world is nigh at hand and that the US is fast tracking its way into Recession.

Well, the smart money is having none of the "R" word. In fact smart money right now is having a shopping spree like it has not seen in a good couple years. And what a spree it is. Investors are fleeing the resource sector like rats running from a sinking ship.

Every bull market takes with it as few passengers as possible. What we are seeing right now, is nothing more than a whistle stop for the train. Weak kneed investors are tripping over each other to get off the train and the smart money is laughing all the way to the bank. As people run away scared, one of the things the smart money is loading up on is resource opportunities in Africa. Read more »