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- Interim Update 31st October 2018
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Monetary inflation
around the world
Around the world, the trend
towards slower monetary inflation is continuing. Here's a brief update on
what's happening in a few different regions/countries.
The G2 (US
plus euro-zone) monetary inflation rate has essentially flat-lined near
5.4% since March-2018. It has now spent a year below the boom-bust
threshold of 6%, which creates a high risk that a global recession will
begin in 2019. However, as long as economic confidence hasn't been
irreparably damaged there will be a chance that a policy reversal by the
Fed will extend the credit-fueled boom and postpone the start of the
recession to 2020.
In September, Australia's year-over-year TMS (True Money Supply)
growth rate dropped to only 0.7%. Therefore, Australia's money supply is
effectively the same now as it was a year ago and the country remains at
risk of experiencing monetary deflation.
Australia's economy and
real estate market sailed through a brief period of monetary deflation in
2010, but in 2010 there was huge foreign demand for Australia-based assets
due to the commodity boom. Also, property valuations in the major cities
and debt levels were significantly lower back then.
The monetary
situation implies a high risk that Australia's property investment bubble
has commenced a slow-motion collapse and that the economy will be in
recession within 12 months.
The UK's monetary inflation rate (using Retail M4 as the aggregate)
remains close to the bottom of its 20-year range. This will put downward
pressure on property prices and economic growth statistics over the coming
year.
China's government appears to be serious about reducing the amount of
credit-fueled speculation, because the YOY growth rate of China's M1 money
supply remains near its lows of the past two decades.
Other Vanadium
Opportunities
With the price of vanadium
having gone parabolic, the shares of vanadium miners and explorers should
be approached with caution. Even though the shares may still be very cheap
assuming a vanadium price of less than half the current level, as is the
case with Prophecy Development Corp. (PCY.TO) -- the one vanadium stock
we've followed at TSI, sentiment will turn sour when the inevitable
vanadium-price decline happens. However, a new wave of speculation
eventually will wash over the vanadium-mining sector if the next decline
in the vanadium price starts to look like a correction within an on-going
bull market. In preparation for that possibility and also the possibility
that the current parabolic price rise will continue for a while, we
recently checked the valuations and prospects of several vanadium stocks.
In one respect, what we found was surprising. We expected to find
parabolic price moves in most vanadium-mining stocks to match the huge
run-up in the commodity price, but what we discovered was that many
exploration-stage vanadium mining stocks were not helped by the recent
vanadium price surge. This could mean that the bullish vanadium story is
still under the radar.
Based on what we've uncovered to date, two
vanadium stocks that interest us (in addition to PCY.TO) are Technology
Metals (ASX: TMT) and Cellcube Energy (CSE: CUBE).
Technology
Metals has 70M shares on issue (97M fully diluted) and is developing the
Gabanintha Vanadium Project, which is located 40 kms from Meekatharra in
the Murchison region of Western Australia. The project has a total
resource of 120M tonnes with a high average grade of 0.8% Vanadium
Pentoxide (V2O5), for 2.1B pounds of V2O5.
According to a PFS
completed in June-2018:
a) The total resource includes a Probable
reserve of 16.7M tonnes grading 0.96% V2O5 (353M pounds).
b) At a
cost of A$380M the project could be developed into a mine with average
annual production of 29M pounds of V2O5 over a 13-year life.
c) At
a vanadium price of US$13/pound, the post-tax NPV(10%) and IRR are
estimated to be A$850M and 43%, respectively.
We estimate that at
the current vanadium price of around US$30/pound the Gabanintha project's
post-tax IRR would be in excess of 100%.
TMT's current market cap
of A$35M compares very favourably with the A$850M NPV mentioned above.
Furthermore, the project is being moved forward at a serious pace, with
the goal of completing the FS in the June quarter of 2019 and achieving
production in 2021.
More information about TMT and the vanadium
market can be found in the
company's latest presentation.
The company recently raised A$6M
at A$0.50/share. It could make sense to take an initial position at or
below this price with the aim of buying more if the Gabanintha story
continues to unfold in a positive way.
TMT has been added to the
TSI Small Stocks Watch List.
Cellcube Energy has 165M shares on issue and develops energy storage
systems using vanadium redox flow batteries (VRFBs). However, the
company's VRFB business is not the reason for our interest, as we don't
have the knowledge to determine which companies are the most likely
winners in the race to profitably manufacture and market VRFBs. The reason
for our interest is that CUBE owns the Bisoni Mackay and Bisoni Rio
vanadium project in Nevada, and at the end of November this project will
be spun-out in a new listed company called V23 Resource Corp. Shareholders
at the record date for the spin-out (30th November) will receive one share
of V23 for every two shares of CUBE, with Cellcube retaining 20% of V23.
We estimate that V23's initial share count will be 103M.
CUBE's
Bisoni project is contiguous to the Gibellini project of Prophecy
Development (PCY.TO). Also, based on the latest resource estimates of both
companies it is similar in size to Gibellini, but with a higher average
grade. Specifically, Bisoni contains about 166M pounds of V2O5 at an
average grade of around 0.40% while Gibellini contains about 183M pounds
at an average grade of less than 0.30%. In Gibellini's favour, however, is
that it is more advanced. It already has economic studies and is closer to
production.
Going by PCY's market valuation, V23 as a separate
company could be worth as much as the current CUBE-V23 combination.
We have added CUBE to the TSI Small Stocks Watch List and will replace
it with V23 Resource Corp. after the spinout.
The recent vanadium price action has the look of an upside blow-off,
but during the course of a major bull market in a commodity there often
will be multiple upside blow-offs. Obviously, only the last one creates a
long-term top and is followed by a bear market. The earlier ones are
followed by bull-market corrections. In real time we can never be sure
about the type of top we are dealing with, but in favour of a continuing
bull market in vanadium is the fact that the price rise to date has been
driven almost entirely by increasing demand from the steel industry (86%
of global vanadium supply was used in steel alloys in 2017 and demand has
increased this year due to new regulations in China requiring greater
rebar strength). VRFB-related demand is mostly still in the future and
therefore not reflected in the current price.
The Stock Market
The October Monthly
Close
In the 22nd October Weekly Update, we wrote:
"...there will be clear bear-market warnings in the price action while
the market is still near its high in terms of both price and time...
...One of the warnings ... involves the SPX relative to its 12-month
MA. The warning is based on the fact that at no time over the past 20
years did the SPX end a month below its 12-month MA unless it had
commenced an intermediate-term correction or a bear market. Therefore, if
the SPX ends this month or next month below its 12-month MA it will be a
clear warning that we are dealing with an intermediate-term (3-12 month)
correction at a minimum."
And:
"Another warning
involves the SPX/euro ratio relative to its 20-month MA. This ratio
remains above its 20-month MA on a monthly closing basis during ALL
bull-market corrections and achieves a monthly close below this MA during
the first few months of a bear market. It then remains below this MA until
after a new bull market has begun."
The first of the following
monthly charts shows that despite the strong rebound of the past 2 days,
the SPX ended October below its 12-month MA. This is more evidence that we
are dealing with an intermediate-term correction or worse.
The
second chart shows that the SPX/euro ratio is not close to signaling a
bear market.
Taking into account our favourite leading indicators
and the information included on the monthly charts presented below, at
this stage the evidence indicates that the recent decline is more likely
to be the first leg of an intermediate-term correction than the start of a
bear market.
Current Market Situation
In the latest Weekly
Update, we wrote:
"Fundamentals, sentiment and price action
suggest that the overall decline from this year's peak (August for the
NDX, September for the SPX and October for the Dow) is not close to being
over, at least in terms of time. However, there are multiple reasons to
believe that if a multi-week bottom wasn't put in place on Friday it will
be put in place via a downward spike this week."
A downward
spike on Monday 29th October probably created the multi-week low mentioned
above. The market is now rebounding prior to what we expect will be
another leg down.
For the SPX, the 200-day MA (currently in the
2760s) is the most plausible target for a rebound peak, although the
rebound could extend as far as 2850 without calling into question the idea
that we are dealing with a downturn of at least intermediate-term
significance. Note, however, that the overall rebound could involve a test
of this week's low during the first half of November. For example, there
could be a pullback over the next few days, as traders worry about the
outcome of the US elections that will take place next Tuesday, leading to
a test of the 29th October low during the first half of next week and then
a rally to the 200-day MA or higher.
For the NDX, a rebound to the vicinity of the 200-day MA has happened
already. This suggests that the NDX could trade as high as 7300 before the
overall rebound has run its course.
Our short-term trading plan is to buy SPY December put options if the
SPX tests its 200-day MA within the next few days. Also, we will consider
buying SPY December call options if the SPX returns to near its 29th
October low within the coming week or so.
Gold and the Dollar
Gold and Silver
There were downside breakouts in the gold and silver markets on
Wednesday 31st October. As illustrated by the first of the following daily
charts, the US$ gold price broke below its 20-day MA and lateral support
at $1220. As illustrated by the second chart, the US$ silver price broke
below trend-line support and solidified an earlier break below its 50-day
MA.
Financial markets aren't so simple that you can tell what will
happen in the future by looking at a chart showing what happened in the
past. However, past price action affects the probabilities of future
outcomes. In the current situations for the gold and silver markets
Wednesday's price action doesn't guarantee anything, but it means that the
counter-trend rebounds from the August-September lows are probably over.
Gold (and silver) could benefit to a greater extent from the next leg
down in the stock market. They benefited only slightly from the first leg
down, but that's because the first leg down did little to change the
general perception of what the future holds in store. The vast majority
believes that it was just a short-term interruption to the bullish trend.
This is why gold's true fundamentals, which are mostly indicators of
economic and financial-system confidence, have remained decisively
bearish.
As we keep saying, to get something more than a
counter-trend rebound the fundamental backdrop will have to become
gold-bullish.
Gold and silver could also benefit from uncertainty
(fear of the unknown) between now and next Tuesday's US elections. If they
do and there is no substantial improvement in the true fundamentals (as
indicated by our GTFM), it would create a good opportunity to hedge long
positions in gold, silver and the associated mining stocks.
Gold Stocks
The Gold Miners ETF (GDX) closed below
lateral support near $19.00 on Wednesday 31st October. However, it managed
to hold above its 50-day MA.
Investors in gold-mining stocks should be prepared for GDX, GDXJ, the
HUI and the XAU to decline to new lows for the year within the coming
month or so and should take advantage of near-term strength (if there is
any) to do some hedging. That being said, due to the extent that the
sector became stretched to the downside during August-September (as noted
on the above chart, GDX's daily RSI dropped to its second-lowest level in
10 years), we doubt that the gold-mining ETFs and indices will do worse
than marginally undercut their September lows.
It's not hard for us
to imagine that the financial-market landscape could turn very bullish for
gold-mining stocks by early next year, but there's far more to be lost
than gained by trying to anticipate such a turn. The GTFM in combination
with the price action will indicate the turn in real time.
The Currency Market
The Dollar Index (DX) has moved above
its August high, but the breakout is marginal. We view this as part of a
test of the August high, but if that's the case then a reversal must
happen immediately.
Updates on Stock Selections
Notes: 1) 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. 2) The Small Stock Watch List is
located at http://www.speculative-investor.com/new/smallstockwatch.html
Changes
to the
TSI Small Stocks Watch List (SSWL)
As noted
above, Technology Metals (ASX: TMT) and Cellcube Energy (CSE: CUBE) have
been added to the SSWL. Also, we have deleted two stocks that haven't
worked to date and could continue to struggle due to the inability to
obtain sufficient financing to advance their projects. The deletions are
Bankers Cobalt (BANC.V) and Crops Inc. (COPS.V).
BANC has numerous
early-stage cobalt-copper prospects in the DRC and Namibia. Some of these
prospects could have substantial value, but the company's initial drilling
programs did not make a major discovery and it is now running short of
cash (drilling is an expensive business). This means that it is having to
do small financings to keep the lights on and doesn't have the money to do
what it must do to generate shareholder value: drill a lot more holes.
COPS is developing the Bayovar 12 phosphate project in northern Peru.
This project is probably worth orders of magnitude more than the company's
measly C$3M current market cap, but moving the project forward could
require massive dilution of the stock. This company will be worth
revisiting if it manages to bring on board a financially-strong equity
partner.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
https://stockcharts.com/
http://bigcharts.marketwatch.com/