With commodity prices showing continued strength, share prices of a number of mining companies have been buoyant. Apart from its macro-economic perspective, the Acamar Journal provides on-going information about five Canadian companies that are involved in the resources industry. Here is a quick update on them (current share price is the closing price for April 6, 2006):
Desert Sun Mining Corp.:
Up 303% from first write-up in Jan 2005.
Current share price $7.57, up from $1.88. Has just been acquired by Yamana Gold
Inc.
Initial write-up (Jan 2005) Update (Sept 2005)
Great Panther Resources Inc.:
Up 272% from first write-up in Oct 2005.
Current share price $2.23, up from $0.60.
Initial write-up (Oct 2005) Update (Mar 2006)
Andean American:
Up 88% from first write-up in Feb 2005.
Current share price $1.45, up from $0.77.
Initial write-up (Feb 2005) Update (Sept 2005)
Crosshair Exploration:
Up 37% from first write-up in Feb 2006.
Current share price $1.57, up from $1.15.
Initial write-up (Feb 2006)
Consolidated Spire Ventures:
Up 80% from first write-up in Jan 2006.
Current share price $0.54, up from $0.30.
Initial write-up (Jan 2006)
I will continue to update the progress made by these and other companies of potential interest to investors.
A friend of mine in Dubai related a story of a distraught secretary who came to him seeking immediate assistance. Apparently she was desperately trying to locate the telephone number for a particular person at JP Morgan, at her boss's urgent instruction, and in a state of panic at her inability to locate this person.
After trying to calm her down, my friend asked who it was that she was looking to get hold off. "Morgan Stanley at JP Morgan" was her harried reply!
I had better luck than her with Morgan Stanley as Shirish Saraf, Executive Director of the $ 1 billion Dubai-based private equity fund Abraaj Capital invited me to a meeting with Stephen Roach, Chief Economist at Morgan Stanley. Stephen was on a fact-finding mission across Asia and the Middle East and was presenting his analysis of the global economy.
As you may know, I tend to quote Stephen Roach in the Acamar Journal periodically, as I find him to be one of the lone voices out there warning about structural imbalances and their potential impact on global economic progress (see his written comments at the end of this section).
At the end of his presentation I asked him to assign probabilities to the three potential scenarios for the global economy: Armageddon, a 1 or 2 year cyclical decline or things going along as they are now.
He put a 10% probability on the Armageddon (a term he has used in his writings) scenario, a 50% on the decline scenario and a 40% on a steady state outcome. He then pondered and said that the steady state should probably be 25% and the decline at 65%. Thus, 10% Armageddon, 65% decline and 25% steady state.
I told Stephen that I had read enough of his writings to know that he was far more bearish than that and that he was "soft-selling" us by understating the potential severity of the decline, which would unlikely to be a normal business cycle adjustment. He smiled and managed to evade the question, whereupon my colleague asked him why he was in Dubai telling us this in the first place!
He enjoyed that question a lot more and laughed heartily, saying that he was a member of the truth squad.
However, Roach has been quoted as saying that there is a 90% chance that the US will suffer economic Armageddon. This was at a private meeting with fund managers, and the Boston Herald obtained a copy of his presentation, and quoted him. While he says he was misquoted, here is a link that may be worth reviewing: Economic Armageddon
Here are Stephen's published comments about his trip:
My travel schedule is planned months in advance. It was only by happenstance that I found myself in both Beijing and Dubai this past week -- two of the more recent flashpoints in a US-led pushback against globalization. What I found in both cities unsettled me -- disappointment and frustration over America's attitude toward two of its major providers of foreign capital. The United States has been having a good deal of trouble with its overseas image in recent years. The feedback from Beijing and Dubai is that this image is going rapidly from bad to worse -- something a saving-short US economy can ill afford.
China is deeply troubled over the outright hostility from an increasingly xenophobic US Congress. The senior officials I spoke with this week in Beijing protested on two counts -- China's fragility and America's penchant for scapegoating (see my 21 March dispatch, "Inside the China Debate"). On the first count, the Chinese don't believe that US politicians appreciate the potential risks that still lurk in this transitional economy. Instead, they are pressuring China as if it were operating from a position of much greater strength. China remains very much a tale of two economies -- a booming coastal region and a lagging interior. Most in Washington view China from the lenses of Beijing and Shanghai, and conclude that these two thriving metropolises personify the emergence of a powerful and mighty nation. What they don't realize is that only 100 km away from either city lurks a China that has changed very little in the past thousand years. Yes, 560 million Chinese now live in urban centers around the country, although probably less than half these city dwellers have seen meaningful improvement in their standard of living over the past 30 years. Meanwhile, the rural population of some 745 million Chinese still tries to get by on $1-2 per day.
At the same time, despite 25 years of 9.5% real GDP growth, serious vulnerabilities continue to plague the macro structure of the Chinese economy. The financial system has only just begun the long march toward liberalization and development. Growth continues to draw the bulk of its support from external demand (i.e., exports) and autonomous internal demand (fixed asset investment). Self-sustaining growth from the Chinese consumer is deficient, reflecting a pervasive sense of job and income insecurity that stems from ongoing reform-induced headcount reductions. Far from letting the invisible hand of market-based capitalism drive price-setting, the visible hand of administrative fiat still plays a major role in the determination of prices of goods and services in the real economy, as well as interest rates, the currency, and the prices of many other assets in the financial economy. All this speaks of a Chinese strain of market-based socialism that is still far too fragile to stand on its own.
China also feels that it is being victimized for America's structural problems. Premier Wen Jiabao was crystal clear on that point when he ended the recent China Development Forum by stating, "It is unfair to make China a scapegoat for structural problems facing the US economy." There's no dark secret what he was referring to -- China's important role as a provider of goods and financial capital to a saving-short US economy. As long as America has a serious saving problem -- and, of course, the US net national saving rate plunged into negative territory for the first time in history in late 2005 -- trade deficits are a given in order to attract the foreign capital to fill the void. If the Schumer-Graham bill closes down US trade with China through the imposition of steep tariffs, a saving-short US economy will simply have to divert a significant portion of its multilateral trade deficit elsewhere. Undoubtedly, that means a higher-cost producer would have to take China's place as a low-cost provider of capital to the US -- imposing the functional equivalent of a tax hike on the American consumer.
When I pointed this out to Senators Graham, Coburn, and Schumer in Beijing, Senator Schumer said, "I understand the structural point, but China still has to give." The editorialist in me says, if Washington -- or for that matter, beleaguered US manufacturers -- really wants China to give, then it needs to make that argument from a position of a macro strength and boost America's national saving rate. Until, or unless, that happens, US-led China bashing is nothing short of political hypocrisy. In the meantime, Washington could well be about to compound one of America's most serious structural problems -- at considerable expense both to the US and Chinese economies. These are the "lose-lose" outcomes of globalization that can only end in tears.
In Dubai, I was met by a similar sense of consternation. Fresh from the wounds of the rejected Dubai Ports World transaction, several major private equity investors in the UAE were blunt in expressing their sudden loss of appetite for US assets. As one seasoned investor in US companies and properties put it to me, "As practitioners, as investors, we have become very shy of the US -- we just turned down a recent deal for that very reason." Another added, "For us, foreign direct investment into the US has become far less palatable due to recent developments. The bulk of our dedicated offshore money is now going elsewhere." The comment that unnerved me the most took this exasperation to an even deeper level. One investor asked, "What can we do to push back, to send a signal?"
I certainly don't want to make too much out of an unscientific survey of a few private equity investors in Dubai. But up until recently, this was one of the Middle East's most pro-American investment communities. The individuals I met with this week are seasoned participants of many a cross-border transaction into the US. For them, the political shock wave from Washington has come from out of the blue, and they now see little reason to go back to the same well -- especially given the wide menu of less contentious alternatives available elsewhere in the world. In the broad scheme of things, Dubai is a small player in the world of international finance. But to the extent that the Dubai backlash is emblematic of similar distaste from other Middle East investors -- hardly idle conjecture, in my view -- the repercussion cannot be minimized. Net foreign direct investment into the United States hit $128 billion in 2005 -- an increase of $22 billion from the inflows of 2004. If that trend now starts to reverse course, America's already daunting current-account financing problem will only get worse.
From Beijing to Dubai, there is a growing undercurrent of economic anti-Americanism. The irony of it all is truly extraordinary: The US has the greatest external deficit in the history of the world, and is now sending increasingly negative signals to two of its most generous providers of foreign capital -- China and the Middle East. The United States has been extraordinarily lucky to finance its massive current account deficit on extremely attractive terms. If its lenders now start to push back, those terms could change quickly -- with adverse consequences for the dollar, real long-term US interest rates, and overly indebted American consumers. The slope is getting slipperier, and Washington could care less.
If this scenario of declining dollar comes to pass, along with rising interest rates that would hurt the consumer spending of heavily indebted consumers, then precious metals (gold and silver) would benefit significantly due to investment demand for a safe haven.
If the global economy evades the downturn scenario, then both precious metals and base metals (copper, zinc, nickel, uranium, oil and gas) will do well as China and India's massive infrastructure development programs continue to create rising demand for these commodities.
So, regardless of your view of the global economy, some exposure to commodities is an important part of a balanced portfolio.
The ACAMAR Journal is an independent publication intended to provide factual and timely research on general economic trends, opinions about trends in specific industry sectors, references to other publications and reports that may be of interest to investors, information about specific companies, and information on general trading strategies. Acamar Asia Consultants Inc. ("Acamar Asia") is not a registered investment dealer or adviser, and is a subsidiary of Acamar Advisors Inc.
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