Friday, July 24, 2009

Update on Uranium One

As of the market close on the TSX today, Uranium One has broken above all of the short term moving averages. Another note is that the 20-day and 50-day EMA's are sitting at the golden cross position.

UUU Just recently announced record production for the history of the company and I think this should translate into some fairly sweet earnings come the Q2 announcement. I am expecting a Euphoric bounce on the announcement which will most likely take the stock to fairly overvalued levels.

This is the point at which I plan on closing out the position. I do like UUU long-term but I am still bearish on the overall markets in the medium term and I think that it will be available at a much deeper discount to NAV in the future.

Why am I bearish? Well, there is this:

Also the fact that, despite the dismal, horrific, terrifying on-par slide of the 500 companies listed on the S&P 500, the market is still rallying because of these "earnings surprises". I'm not particularly surprised, nor is their ANY WAY I'm buying it.

Mattel 2nd quarter sales sink but results beat estimates on Cost Cutting - emphasis added

Starbucks shares jump after anylists praise cost-cutting - 3rd quarter beats

Yum brands profit tops estimates but revenues slump

Ford posts profit after restructuring; Shares Jump

- and an excerpt: Ford Motor posted a $2.3 billion quarterly net profit, mainly due to gains from a $10 billion debt-reduction plan, and said it was on track to at least break even in 2011, sending its shares up 10 percent. (emphasis added).

I'm sure you, my highly intelligent readers, got the point at the first post. But you know what it's like to get on a role... :)

Anyway, there is a pretty freaking huge point the market is missing here - remember that markets over the long term are excellent indicators of underlying fundamentals but in the short term are extremely moody (see The Psychology of Trading Part I and Part II I wrote way back). These earnings are not based on sales growth They are not based on any growth whatsoever. Actually over 90% of companies reporting earnings reported a decrease in revenue.

All this means is that most businesses are cutting costs left and right (i.e. firing tons of people and hugely decreasing production to meet crashing demand) and that they've had some excess inventory they were able to liquidate.

And yet the price of stocks continues to rise. See, normally stock prices go up on revenue and earnings growth. This indicates that the fundamentals of the company are improving - they are gaining market share or creating new market share, there is healthy demand for their product or service, their management is doing a good job maintaining margins in a rising production environment, etc etc etc.

Hmm.... a touch different from the business climate of '009, isn't it...

Being a contrarian can pay of huge huge huge sometimes. Remember the top of the dot-com bubble? Even halfway up it? Imagine if you'd went short on Yahoo and even halfway up the mighty mountain of hype? Imagine if you'd bought long-term put options? When everybody runs one way it's often a good time to check out what they're leaving behind.

And that's all for now.

Happy investing folks.


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