Wednesday, December 31, 2008

The ultimate buy. PART ONE


I will paint a picture for you now. One of a perfect storm to profits. One of this buying opportunity you are hopefully smacking your forehead with impatience to read.

The first is of hedge funds, banks, retail investors and all alike trading on margin. Some of these leveraged out 35:1 on their assets. Some of these trading in these debt vehicles in the tens of billions or more.

Well the party ended. Only so much weight could be added to the cable before it snapped - and a thin lifeline it was in the long term to begin with. Now we have the credit crisis on our hands (credit crisis being a bogus term, since it will inevitably force people and businesses to save and use their capital wisely, which will hopefully re-establish a solid foundation for what is right now basically a "fake" economy).

Part of this little party was a surge in commodity prices. As of right now they have fallen in value quite drastically but this is because of sheer psychology. If anything their valuations should be just as high as they have been.

So here is the perfect storm for you. High commodity prices caused a huge spike in commodity explorations, i.e. commodity exploration companies and also projects by the big guys. This temporary plummet in prices has caused many of these projects to become completely unviable. 60% of current exploration companies are on the verge of completely shutting their doors, as the cost-to-produce for their projects is over 20% above current market prices.

Short-term reaction.

However once they have closed and unwound all of the work put in, the process to continue will take time. More time for far less exploration (i.e. new sources of resouces) to worm its way through the market.

Even better, the credit market is dried up. Even if they wanted to, most of these companies can't get financing to keep their operations going (since they aren't actually producing anyting yet and therefore do not have any cash-flow). Double slap to the face.

Even the big guys have shed projects like a snow-suit in high summer. The end product is far less future product coming to market. FAR less. Massive shriveling of supply is the end result.

So the first leg of your buying opportunity is to notice which companies have high debt-to-equity and more importantly debt-to-cashflow ratios. The higher the ratio, the worse the possibilities. Interest rates are going to be very very high in 2010 and a lot of these companies will either go bankrupt or sell off for cents on the dollar to competitors who were smarter with their money. STAY AWAY.

Companies with lots of cash, though? They will benefit hugely. Increase market share at 50% off. If you own that company, YOU increase market share 50% on sale. Sweet deal for us!

Part TWO will lay out the next leg of the opportunity.

No comments:

Post a Comment