May 16, 2011

A Contrarian Setup With Penson PNSN

Last week Penson Worldwide (PNSN) a major international clearing firm and the second largest clearing firm in the U.S. came out about $42 million that might bring a write-down. A board member who had a relationship to the $42 million resigned. Immediately following this news the stock crashed from $5.00 to $2.73 a share in two days.

Although the $42 million seems significant it is only a measly 0.49 percent of their $8.7 billion in average daily customer balances. Penson also has more than $5.8 billion in cash and equivalents. They even had a pretty good recent quarter. In their last quarter revenue was up. I don't see this development seriously damaging their long-term business. In-fact with a market cap now of around $100 million I see this as an attractive valuation.

Although this is an opportunity there are things to keep in mind. Over recent years their revenue growth has declined slightly and they aren't consistently profitable. Overall, I think this is a more speculative play but I think there is a good setup for a small position here off what appears to be some capitulation and technical strength.

The price action looks like the beginning of a bullish engulf. Buy volume needs to stay steady for this to continue. I like an entry point on price strength above Fridays close. If the stock doesn't follow through here, however, I only want to watch and see how the technicals develop.

full disclosure: no position currently

April 13, 2011

Macroeconomic Stock Plays

I have been writing a lot about macro trends from monetary metals like gold and silver, oil to rare earth element stocks. Outside of the precious metals I haven't included that many individual stock picks. So, today I'm going to look at a couple of stocks.

Rare Element Resources (REE) mines for rare earth elements and gold. REE has a market cap of only $568 million at yesterdays close of $13.17 a share. Their Bear Lodge property looks to have a substantial amount of rare earths. I think this major is a good addition or alternative to other majors like Molycorp (MCP).

If you are interested in rare earths here is some information from the US Government Accountability Office on rare earths in the defense supply chain. One interesting tidbit from the report is that once a company gets the capital to begin a mine it can take from 7 to 15 years to get a property fully online due to regulatory procedures.

This next stock is currently my favorite setup at the moment. It is a natural gas company called Union Drilling (UDRL). While there is roughly $200 million in net tangible asset value and only a $237 million market cap I'm more interested in the chart play. The $10.40-$10.50 area has become a resistance level and as it stands today it is still consolidating around these levels. This is bullish consolidation currently and I see UDRL heading higher if it can print $10.61.

I expect a significant move higher either today or the next couple trading days.

A Final Thought
I believe that a top down approach continues to be one of the best strategies in this current environment. I want to continue to look at the oil and gas drillers, commodities and the precious metal miners. The writing has and should continue to be on the wall in regard to these areas outperforming.

March 4, 2011

There's Still Time To Buy Commodities

I want to talk a little about the macro situation in this article. More importantly I want to share my thoughts on crude oil at the moment. I also have a silver stock that looks interesting.

I won't go deep into the thesis behind the bullish case for commodities because I talked about that before. I still think it is important to be allocated in hard and soft commodities at this time. There is going to continue to be "dollar" inflation and this should allow certain assets like stocks and especially commodities to continue higher. It's essentially a Cantillion Effect. The rise in prices we have seen across the board really can't be totally explained otherwise.

Commodities Gains

Crude Oil At The Moment
Oil looks particularly bullish fundamentally and technically still. In the big scheme of things it won't be good at all if oil takes off like it did in the 70s or 2008. Some of you probably know the story from the late 70s but if you don't there was a severe oil crisis. There was also very significant inflation that was only struck down by Paul Volcker getting interest rates up to a whopping 19%. This saved the dollar but it also brought a recession.

Oil has gotten particularly volatile lately. Part of this is uncertainty about supply following the revolutions. There was a news story about what might happen if Libya and Algeria shut down supply.

Technically, there has been some congestion following the big spike day. It looks like bullish consolidation. It's starting to be confirmed as there was just a pop out of it. If we continue hitting new highs I think there may be some more explosive momentum. There definitely is more upside.

3 month chart of crude oil

As far as holding oil for any time period the best instrument is the futures themselves (CL). The US Oil Fund ETF ticker (USO) is a terrible way to play oil. It's because of the way the contracts roll. The ETF must buy oil futures contracts and sell them before expiry. As a result there is decay in the ETF. The natural gas ETF (UNG) is a good example of the dynamics of these ETFs. Natural gas has been pretty flat but the ETF has performed even worse because it bought the expensive monthly contracts and had to sell them cheaper right before expiration.

I think United States 12 Month Oil (USL) holds longer contracts than USO. USL has outperformed USO over long time frames.

Teucrium WTI Crude Oil Fund (CRUD) is also another alternative as it tries to buy contracts on three different maturities to offset decay.

Silver Mining Stocks
Here are some ideas in the mining sector. As silver continues hitting new highs I like this Canadian junior miner Aurcana Corporation (AUNFF) here. It's a smaller company and in the penny stock range. Some other larger market cap names that are worth a look include Hecla Mining (HL), Silver Standard Resources (SSRI) and Pan American Silver (PAAS).

January 19, 2011

Why U.S. Stocks Will Rise in 2011

I think it is highly likely that the U.S. stock market will continue to put up significant gains in 2011. The reason is nothing complex. In-fact, it is just a simple phenomenon that has been going on since the 2009 lows in equities and continues to lift asset prices at this moment. It is quantitative easing and the Federal Reserves commitment to attain significant dollar inflation. Anything else one hears to the contrary is just chicanery.

But before we delve into this and the future let us look at a similar economic situation and how stocks performed in those years. In the depression immediately following the crash in 1929 banks were failing, assets were deflating and commercial credit was collapsing.

But what happened to stocks all through the 1930s despite high double digit unemployment? Stocks went up!

The big catalyst that allowed for the rise in stocks was that we went off the gold standard in 1933. This depreciated the dollar significantly and you can even see it in the CPI below.

click to enlarge

The same thing is going on now with the dollar and equities as it did in the 1930s. Bernanke has even admitted publicly that the goal of QE is to raise stock prices.

Final Thoughts
The macro picture hasn't changed much this past year and likely won't for some time. The FED will continue to try and prop up the debt bubble by rolling cheap money. Stagflation remains one of the best case scenarios. Money will run to the best assets while the bad assets continue to deflate. So, I see major commodities like oil and agriculture continuing to do well while real-estate remains flat. And of course metals like gold and silver will do well. This is all nothing new of course but I think it is going to be the status quo for many, many months to come.

December 24, 2010

Silver Analysis

Even after this run-up I see some very bullish signals setting up in the price action recently.

Fundamentally, the bullish case also remains as Ben Bernanke and the FED has pledged to keep rates low for some time and also because they have embarked on QE 2. I think it is very likely we will see QE 3,4,5 etc. eventually. Especially considering Japan is still back at a zero interest rate policy and doing even more QE here now 20 years later. There's also a lot of stories going around on JP Morgan's possible short covering going on and just how big some of these traders positions are. Whether or not there is a massive short squeeze taking place or about to take place I'm not sure but it certainly would just add to the bullish case.

Silver Chart Analysis

There was a much larger consolidation from May through August that came before the big run we've experienced recently. This recent one is a lot smaller and tighter. Old resistance has been retested successfully where the arrow points. There was major resistance at those levels. Another bullish thing is there has been a flurry of hammer and small doji candles here around trend support. In the past months there would be hammers off trend support right before big runs.

Some potentially bearish technical things about the chart are that trend support was broken. Silver was trending very well for months but that cracked. After such a run though trend support widens so this isn't a hugely bearish signal. It is more of a neutral one at this point.

In final, if silver can push up a bit from here and hit 29.57 I see significant upside. If it fails to follow through I'll switch and be short biased.