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    - Interim Update 7th May 2008

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Administrative Note

Ever since TSI became a subscription-based web site (way back in October of 2000) we've offered a 1-month free trial subscription. The idea, of course, was to give people the opportunity to check out the TSI service before parting with any money.

This shouldn't directly affect any our current subscribers, but we wanted to let you know that we have decided to suspend our trial subscription offer. We may reinstate it in the future, but for at least the next few months we will not be offering any new free trial subscriptions. Current trial subscribers will, however, be able to complete their one-month free trials.

Two main factors contributed to the above-mentioned decision. First, we think the markets are entering a critical multi-month time window and we want to ensure that only paying subscribers have access to our analysis during this period. Second, eliminating the free trial will reduce our administration work (we hate administration work).

Most people won't pay for a subscription "site unseen", so in place of the free trial subscription we are going to provide excerpts from TSI commentaries at http://www.speculative-investor.com/new/freesamples.html. These free samples will be brief and will usually not include any time-sensitive information or specific investing/trading suggestions. Their only purpose will be to give people who are unfamiliar with the TSI service a taste of the sort of stuff we do.

Commodities

Uranium

At the beginning of this year most experts on uranium supply/demand predicted strengthening of the uranium price during 2008, but it hasn't worked out that way as the spot uranium price has fallen from around $90/pound in early January to its current level of $63. On the positive side of the ledger, the long-term contract price -- perhaps a better indication of the true supply/demand situation -- has remained at $90/pound.

The contract price may well be a better representation of the true supply/demand picture, but the decline in the spot price has certainly had an adverse effect on sentiment within the uranium sector of the stock market. Also, most listed uranium miners fall into the category of "speculative junior", so the general disinterest in junior resource stocks has also taken a substantial toll on the uranium sector. In fact, the decline in the spot uranium price, combined with the market-wide lack of interest in small/speculative resource stocks, has overridden positive seasonal influences -- uranium stocks have tended to be strong during the first few months of the year -- and led to uranium being one of the worst-performing sectors of the stock market since the beginning of the year.

When it comes to the junior gold/silver stocks we have our reasons for believing that price lows are already in place or will be put in place within the next few weeks, but when it comes to the junior uranium stocks we don't have any specific timeframe in mind for a turnaround. Some of these stocks, including the three we follow at TSI (EFR.TO, KRI.TO and UUU.TO), are very oversold and very under-valued. A trend reversal could therefore occur in the very near future -- perhaps concurrently with an upward reversal in the gold sector given that the junior 'uraniums' and the junior 'golds' have a lot of shareholders in common -- but right now we can't identify a likely catalyst for such a turnaround. An upturn in the spot uranium price will potentially be the catalyst, but we have no way of predicting when the spot price will begin to move back into line with the long-term contract price.

A sign that things were turning for the better within the uranium sector would be an upside breakout by Cameco (NYSE: CCJ), the world's largest uranium miner. With reference to the following chart, CCJ has resistance at US$38.50-$40.00. A solid break above this resistance would suggest that the world's most important uranium mining stock was on its way back to at least $50, which would be a plus for the entire sector.



At current prices our favourite junior uranium stock is Energy Fuels (TSX: EFR), a chart of which is displayed below. EFR isn't as under-valued as Khan Resources (TSX: KRI) on a market-cap-per-resource-pound basis, but unlike KRI it has near-term production capability and very little political risk.



Meat

This article deals with the factors that have put considerable downward pressure on the price of meat (chicken, pork and beef) over the past year and should lead to much higher prices within the next 12 months. We recently added the Livestock ETN (NYSE: COW) to the TSI Stocks List with the aim of profiting from the expected rise in cattle and hog prices, and will look for an opportunity to add Tyson Foods (NYSE: TSN) as a way of profiting from the expected rise in the price of chicken.

The Stock Market

Moving Average (MA) Crossovers

In the 6th February 2008 Interim Update we wrote:

"A move by the 50-day moving average from above to below the 200-day MA is often called a "bearish crossover", and a move by the 50-day moving average from below to above the 200-day MA is often referred to as a "bullish crossover"; however, in a lot of cases "bearish crossovers" aren't bearish and "bullish crossovers" aren't bullish. The reason is that downward corrections in bull markets often end shortly after a bearish crossover has occurred while upward corrections in bear markets often end shortly after a bullish crossover has occurred. As a result, people who blindly sell following bearish crossovers and buy following bullish crossovers will often find themselves in the position where they have sold near the bottom or bought near the top."

The upshot is that the meaning of a 50day/200day MA crossover depends on whether a bull or bear market is in progress; or, to put it another way, before you can come to a reasonable conclusion as to whether a MA crossover is bullish or bearish you first need to form an opinion as to whether the market in question is in bull or bear mode. The MA crossover doesn't, in and of itself, tell you anything about the intermediate-term trend.

The reason we are now dredging-up our long-standing opinion on the significance -- or lack thereof -- of MA crossovers is that it is relevant to the present situation. Here's why.

First, the following chart illustrates the performance of the Dow Transportation Average (TRAN) during the 2000-2003 bear market. Included on the chart are the 50-day MA (the blue line) and the 200-day MA (the red line), as well as green arrows indicating the three occasions on which there were 'bullish' MA crossovers. Notice that these supposedly bullish crossovers occurred near the PEAKS of multi-month rebounds, meaning that anyone who bought the TRAN following these 'bullish' crossovers was stopped out very quickly or lost a lot of money.


We won't illustrate it via a chart, but it was a totally different story during the 2003-2007 bull market in that during this later period the bullish MA crossovers were genuinely bullish and the 'bearish' crossovers occurred near the BOTTOMS of multi-month corrections. That is, during the course of the bull market anyone who short-sold following a 'bearish' crossover was stopped out very quickly or lost a lot of money.

One reason why this is relevant to the present situation is that the TRAN's 50-day and 200-day moving averages recently completed a 'bullish' crossover. Refer to the following chart for details.


Now, regardless of whether or not the TRAN commenced a bear market last July the rebound from the January low was always likely to continue until the 50-day MA crossed above the 200-day MA. In isolation this so-called bullish crossover therefore tells us nothing about the market's longer-term trend. The price action is consistent with the view that the cyclical bull market resumed in January AND it is consistent with the view that a cyclical bear market commenced last July. It's what happens next that determines whether the bull-market or the bear-market hypothesis is correct. If the bear-market hypothesis (our view) is correct then the TRAN should now be close to an intermediate-term peak, but if the bull-market hypothesis is correct then there won't be anything more serious than a routine pullback anytime soon.

Although the TRAN's price action, in isolation, could reasonably be interpreted either way, one aspect that skews the odds in favour of the longer-term bearish outlook is the simple fact that last September's bearish MA crossover did not mark a low. As noted above, 'bearish' crossovers during bull markets typically occur near correction lows.

Another reason why our MA crossover analysis is relevant at this time has to do with the following chart of Mitsubishi Financial Group (MTU), Japan's largest bank. The chart shows that MTU's 50-day MA is just about to move above its 200-day MA, which suggests that MTU is either poised to move much higher over the coming several months or is close to resuming its intermediate-term decline. Obviously, there's all the difference in the world between these alternatives.


In MTU's case we are on the bullish side of the fence, for two reasons. First, we think that MTU, along with the overall Japanese stock market, commenced a long-term bull market in 2003, the initial leg of which ended in May of 2006. Second, at no time since the beginning, in May of 2006, of its lengthy downward correction has MTU's 50-day MA come close to crossing above its 200-day MA...until now. In other words, in this case the MA crossover appears to be confirming a change of character within the market.

MTU's 2003 and 2005 bullish crossovers -- marked by the green arrows on the above chart -- were followed by gains of 65% and 90%, respectively, over the ensuing 8 months. If there's a similar outcome this time round then MTU will trade at $17-$20 by early next year.

We suggest that traders with a 6-12 month timeframe take a position in MTU following a pullback to the low-$10 area.

Current Market Situation

On an intermediate-term basis the biggest obstacle facing the stock market will, we think, prove to be the resumption of the debt crisis and the resultant additional large capital-destroying write-offs within the banking sector. With regard to the short-term, however, most market participants appear to be operating under the assumption that the worst of the credit-related news is in the past, or, if not, is fully discounted in current stock prices. In the short-term the biggest obstacle facing the stock market isn't the likelihood of more credit-related issues within the banking sector, it's the relentless advance of the oil price.

When the oil market is strong and the broad stock market is weak, the large-cap oil stocks tend to be flat at best. Putting it another way, the oil sector of the stock market generally doesn't benefit from oil-price strength unless the broad stock market is firm or stable. This interesting tendency of the oil sector goes a long way towards explaining the following chart, which shows that the AMEX Oil Index (XOI) is at roughly the same level now as it was in July of 2007 -- when oil was at $75/barrel.

The XOI usually peaks many months after oil has peaked, so the fact that oil has just made a new high bodes well for the XOI. When oil's intermediate-term trend reverses from up to down, the normal pattern is for the XOI to fall during the initial phase of oil's intermediate-term decline and to then rally to new highs.


The US stock market made a marginal new multi-month high on Tuesday and then pulled back sharply on Wednesday. If this pullback continues for a few more days it will probably have the effect of extending the overall rebound from the January-March 'double bottom' because it will re-energise the bears and dishearten the bulls. Increased negativity at this time would be a plus because the upward trend should continue until bullish sentiment dominates.  

Gold and the Dollar

Gold Stocks

Current Market Situation

To get an idea of how cheap the gold sector has become, refer to the following charts of the GDX/gold and NEM/gold ratios. These charts show that relative to gold bullion GDX is now almost as cheap as it was in May of 2005 and NEM is almost as cheap as it was at the secular bear market bottom of November-2000.


Despite the relative cheapness of most gold stocks we wouldn't immediately 'jump in with both feet' because there's a significant chance of a final sharp decline prior to the start of the next multi-month advance. Furthermore, the coming fortnight is the most likely timeframe for such a decline. We therefore think it makes sense to 'keep some powder dry' in anticipation of an even better buying opportunity in the near future.

As noted in the latest Weekly Update, we will turn short-term bullish on the gold sector following a drop by the HUI to the 350s OR following an upward reversal in the HUI's MACD, whichever happens first.

IF there is a final plunge over the next two weeks then we will probably add some January-2009 GDX and NEM call options to the TSI Stocks List to increase our leverage to the ensuing sector-wide rebound. However, if a rally begins without a preceding plunge to the mid-300s then we will probably focus solely on the junior and mid-tier mining stocks.

The lack of M&A

A question we've been asked a few times of late goes something like this: if there is so much value within the ranks of junior gold stocks then why aren't the larger companies taking advantage of the situation by going on acquisition sprees?

One reason there isn't much M&A (merger and acquisition) activity right now, despite the low stock prices, is that company CEOs are subject to the same sentiment swings as the investing public. What usually occurs, therefore, is that M&A activity follows price; that is, the frequency and aggressiveness of takeovers tends to increase as stock prices rise and decrease as stock prices fall. Recall, for example, the huge volume of deals that were done in the tech sector at around the time of the NASDAQ's bubble peak, and the almost total absence of M&A activity after the average NASDAQ stock had fallen by more than 80% from its peak.

The point is: near stock market tops the future invariably looks bright to most people (including those who run companies) and buying feels comfortable/natural even though stocks are obviously expensive, whereas near stock market bottoms the future looks uncertain or bleak and buying seems less justifiable even though stocks are obviously cheap.

Another reason that applies primarily to grossly under-valued junior gold stocks is that it would currently be impossible to entice the major shareholders of many of these small companies to sell at anywhere near a normal takeover premium. Most managers of large or mid-tier gold producers would not want to offer more than 30-40% above the current market price for a junior mining company because if they did they'd be accused of over-paying, but many of the juniors we follow would still be very under-valued if their prices were to DOUBLE from current levels. While the average small shareholder may well leap at the chance to exit at 30% above today's prices, the well-heeled investors that speak for large chunks of stock will, in general, want to be paid prices that reflect full value. The thing is, takeover bids that reflect full value will not be feasible until after stock prices have already made big upward moves.

What we expect to happen is that prices will double, and then double again, and THEN there'll be a rash of takeovers.

Currency Market Update

From the 28th April Weekly Update:

"In our opinion, the Dollar Index is 5-6 weeks into a rebound that will last 3-6 months. One way for speculators to 'play' this potential outcome would be to average into FXE Sep-2008 $150 put options (FXE is an ETF that tracks the euro), preferably on days when the euro is bouncing. A protective 'stop' could be placed just above the recent high, the idea being to exit if the euro closes at a new high.

The major currency with the most downside potential over the coming months is the Australian Dollar...so speculators could also consider averaging into FXA Sep-2008 $90 put options (FXA tracks the A$). Note, though, that FXA puts are quite illiquid. Note also that the A$ has not yet signaled a peak, which means that a final surge could still be in store and that there is no obvious chart-based level at which to place a 'stop'. In other words, a bet against the A$ is more risky than a bet against the euro, but if offers greater profit potential."

The A$ has still not signaled a peak relative to the US$, making it the only major currency not to have done so. However, we see no reason to expect the A$ to buck the new currency-market trend and therefore continue to believe that FXA puts are a worthwhile speculation.

With reference to the following daily chart, a close below 0.92 by the June A$ futures contract would be preliminary evidence that a peak was in place, so it would be reasonable to take an initial position in September-2008 FXA $90 put options now with the aim of 'doubling up' following a daily close below 0.92.


Update on Stock Selections

(Note: To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question)

Brief comments on our natural gas stocks (Fairborne Energy and the 'gassy' trusts), Patriot Coal (NYSE: PCX), and Gold-Ore Resources (TSXV: GOZ) were emailed to subscribers on 6th May. The email (Stock Selection Update #50) has been archived at: http://www.speculative-investor.com/new/stockemail.asp.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.futuresource.com/

 
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