Peter Grandich, creator and producer of The Grandich Letter for a quarter century, allied himself with AGORACOM in October, bringing his well-known and oft-quoted commentaries to a far wider audience than his subscriber base and financial media such as The Wall Street Journal, Marketwatch, CNN, GlobeInvestor, Financial Post and BNN. Breaking away briefly from his recent blogging, the veteran Wall Street watcher and investment adviser tells The Energy Report readers what he likes looking forwardï¿½oil (between $35 and $40) and gold (at up to $1,000). Also high on his list: uranium and Canadian banks.
The Energy Report: Judging from opinions youï¿½ve expressed in recent newsletters and blogs, you clearly believe we will be testing the November lows during the first quarter this year. What is some of the logic behind why you think that will happen?
Peter Grandich: My belief has been that if and when the U.S. stock market bottoms, along with the economy it will be an L-shaped bottom, not the V that so many on Wall Street keep talking about. The problems that brought us here persist. In fact, theyï¿½ve gotten worse over time, which gives me even more reason to believe that weï¿½re going to bottom eventually but not go far off that bottom once we do. The logical viewpoint for us to take at this point is to look for a market to make at least a double bottom, if you donï¿½t believe itï¿½s a V bottom. Obviously, if itï¿½s a V, you only have one time youï¿½re at that low.
The November lows are, I suspectï¿½as Iï¿½ve said recentlyï¿½are not a question of if but when. A strong bounce is likely to come off that because the remaining bulls who arenï¿½t totally bloodied would look and hope for that to be an opportunity to get more long if theyï¿½re not already 100% long.
The view weï¿½ll have to take after that is watch the bounce, see what kind of type of volume and breadth it has. The problem with rallies weï¿½ve had all through this decline is that neither their volume nor breadth has been half as strong as in the declines; that is always an earmark that the bear market is continuing and that rally is a countertrend. So thatï¿½s another thing to look for when and if we catch those lows.
TER: You mentioned that maybe we should be looking for a double bottom. If we go back and re-test the November lows, is that our double bottom? Or would you expect to go through the November low?
PG: I still suspect weï¿½re going to go through it, but we have to be able to change our views as the markets change. The only way bouncing off that bottom and then turning up past 9000 on the Dowï¿½that would be the only technical factor that would suggest to me that the bear market was over. My feeling is that even if we do hold that November low, we are going to have a very long trading range on the Dow of somewhere between 7500 and the 9000 that we rallied to twice the last year but have failed to go through.
Rather than trying to catch a falling sword and usually getting their hands sliced by it, quite frankly I think whatï¿½s best for investors would be to be certain or fairly certain that a bottom is put in and miss the first 10% or 20% to the upside. I think if and when we do break out above those numbers, weï¿½ll also be hearing things on the economic side getting better.
Now, thatï¿½s not my bet right now, but I think you always have to have a plan to possibly change your view and be set for it if certain things happen. My most likely scenario continues to be that this economy will be very weak throughout 2009, and not just the first half that the bulls keep talking about. And we donï¿½t have any real hope of a sustained equity bull market at least until 2010 at the earliest.
TER: Your writing is bullish on oil, though.
PG: Yes. We suggest that people contain any oil purchases between $35 and $40ï¿½not above $40 at this point in time. Oil longer term is far more likely to be higher than that level than equities looking out the same timeframe. As bearish as oil looks right now in the demand destruction, weï¿½re also having development destruction, which happens very fast. We have argued for almost four years that the peak oil theory, which many people latched onto during the last dramatic rise, couldnï¿½t come into play without another recession and without what has been taking place in the oil market recently. As we get into the next economic recovery, which I think will be more a world recovery versus a U.S. recovery, the peak oil argument could have a more pronounced effect on the oil price. Thatï¿½s particularly true in light of the fact that this decline has caused just about everybody to stop any real new exploration and hold off where expectations of oil were high, such as the tar sands in Canada.
So, if people are still willing to look out three to five years versus three to five days, I think oil is a better risk-reward at this point than the U.S. equity market.
TER: Are you talking about buying oil as a commodity or purchasing oil equities?
PG: Both. Without having to trade actual futuresï¿½where most people shouldnï¿½t be to begin withï¿½we now have the ability to track the commodity prices through Exchange Traded Funds. They donï¿½t track them exactly; they also have some repricing effects so that even though oil may not go down, the ETF can lose some value. Still, itï¿½s a better way of tracking the actual commodity than through an oil stock. What I do like especially about ETFs now is the ability to have a bunch of oil stocks within them. No-load funds are still a good way to go with equities for those who are very long-term oriented. But ETFs are a better vehicle for investors because you can buy and sell as many times as you want during the day, not just get the end-of-the-day price when you sell your mutual fund. Both are useful. But either way, I think you need to track the actual commodity as well as oil stocks.
TER: If weï¿½re looking at a very long-term L-shape bottom to the market, no-loaded funds arenï¿½t expected to give any returns for several years.
PG: I think oil can separate itself; we saw that back in the ï¿½80s, especially the early ï¿½80s when the market was pretty flat, but because oil rose from $10 to $30, oil stocks did quite well. Again, I donï¿½t think there will be much gain in the overall equity market no matter what sector youï¿½re in outside of things related to precious metals. But I do believe that oil is a better risk-reward than the general equity market, certainly for the foreseeable future.
TER: Do you see anything else you like?
PG: One of the first things Iï¿½m looking to do once I believe markets have bottomed is to buy Canadian banks. Of all the banking systems around the world, the Canadian banks (outside of Toronto Dominion) is the only group of banks that didnï¿½t get heavily involved in all the CDS markets and all these derivatives. So the Canadian banking system is one of the places I think will be fairly safe to enter once the equity market has bottomed. Theyï¿½re on my shopping list right now to eventually look at, but I think they will continue to decline somewhat until the markets themselves bottom.
TER: Weï¿½re also looking at the Canadian currency coming into parity with the U.S. dollar as a potential play. Why wouldnï¿½t you buy the Canadian banks and absorb some of your downside risk with the currency trade?
PG: That is a possibility, but Iï¿½m not trying to catch everything. I donï¿½t think the Canadian dollar is about to rise dramatically but over the next 12-24 months I do believe it can be at parity again. First of all, Canada has done what America should have done for the last 20 years. In the ï¿½90s, Canada began to recognize that their fiscal house was not only getting out of order but getting terribly out of order. And they paid it down to where they put this fiscal house back in order.
Second, if youï¿½re a believer like me that oil and other commodities will have their day eventually, the Canadian economy is still driven a lot by commodities.
Thirdly, if you look at the recent announcement when the Bank of Canada lowered interest rates, their forecast on inflation was very low, but they see growth of something like 3% in 2010. If theyï¿½re correct, with such low inflation but great growth, money will flow into their currency. The U.S. dollar has had a little bit of a rally simply because so many people are repatriating their investments where they were short dollars and long other equities, and hedge funds. Thatï¿½s whatï¿½s currently holding up the U.S. dollar.
The Canadian economy has a much brighter future than the U.S. economy. I really wish I was a Canadian citizen not just because I love Canada itself but I donï¿½t think theyï¿½re going to come close to facing the difficulties and the financial worries that the Americans have.
TER: But isnï¿½t the Canadian economy joined at the hip with the U.S.? If the U.S. economy really sinks, can the Canadian economy rise above it?
PG: The tie is not anywhere near where it used to be. Youï¿½re correct; itï¿½s still two big trading partners, but Canada has been smart enough to diversify itself and really is starting to see a good part of sales going outside of just the United States. Plus, because their fiscal house is in order, their consumer purchasing power is going to be better than in the U.S. So, all in all, their house is in much better order than ours. When we look five or 10 years from now in almost every area, I think Canada will be more advanced than the U.S.
TER: You were following Target Explorations and Mining (TSX.V:TEM) and Crosshair Exploration & Mining (TSX.V:CXX) (AMEX:CXZ) in previous newsletters, and theyï¿½re merging again. What do you think would portend from that merger?
PG: The merger was really a necessary evil. I would have liked to have seen both companies succeed on their own. But as good as Crosshair had been in identifying and developing uranium deposits in the Central Mineral Belt in Labrador and Newfoundland, they couldnï¿½t really spend their money to advance the project more because they needed to conserve it for better days ahead. They needed something oriented more to short-term production. Target, which was really a sister company because many of the people involved in Crosshair were also involved with Target, did have the ability to get into short-term production, but not the cash to do it. So it was wise to merge them and at least give shareholders who were really hurt, like everybody else in the junior resource market, an ability to get back on their feet and still have an opportunity to grow and actually become a producer of uranium.
Again, Iï¿½m prejudiced because of a gentleman who runs the companies, Mark Morabito. If I could clone him, the junior resource market would be a better place. Heï¿½s extremely hard working. He put so much of his own money into these companies. A lot of these guys live off the options; he put real money in by participating in all the placements, buying stock in the open market, which is a rare thing to see in the junior market. I follow insider purchasing and selling of juniors through a free website called canadianinsider.com. When you see the few people buying juniors in the open market, thatï¿½s usually a very good signï¿½more than it is in, say, blue chip stocks down in the U.S. Thatï¿½s because these gentlemen and ladies who run the juniors usually live off the option market. They participate in placements, but they rarely buy stocks in the open market, so you have to take notice when they do. And Mark Morabito did a lot of that during the lifetime of both of these companies.
TER: You say itï¿½s a necessary evil, but it sounds like a smart play in terms of having a company that can sustain through the recession until uranium comes back.
PG: Absolutely. It was a good move, a necessary move, and a prudent move, all in one.
TER: And it goes back to your good management team.
TER: One of your blogs suggests that uranium has bottomed out and weï¿½re going to see it up in triple digits in 24 to 36 months. Two years is quite some time away if youï¿½re Mark Morabito trying to keep the company alive. Will the uranium price help him out this year?
PG: I donï¿½t know so much about the price in 2009. Uranium has seen its worst days in my view. I do believe weï¿½ve seen the bottom and I believe it can tick up. The real factor will be how much the new U.S. administration is truly going to look at alternative energy. Itï¿½s one thing to say it during a campaign, but how much will Obama turn to alternative energy? When oil was hitting $140 and $150 and Congress was hauling in the principals of oil companies at $150, they canï¿½t haul them in any more at $40. So I donï¿½t know if theyï¿½re going to do what so many other administrations have doneï¿½and that is to kick the can down the road and let somebody else worry about energy concerns.
That said, it seems to be a serious concern of the current administration, and I think people will realize when all is said and done that the most efficient and effective and perhaps fastest way to increase abilities of getting energy outside of fossil fuels is nuclear energy. And itï¿½s certainly happening around the world. Therefore, I think the uranium price will work its way higher, and I also think itï¿½s only a question of when weï¿½re going to see more nuclear plants built in the United States. Not so long ago, people thought weï¿½d never see that.
TER: From whatï¿½s coming out of Washington, alternative energy seems more like wind farms, solar power and renewable resources as in ethanolï¿½not nuclear.
PG: Iï¿½ll tell you this much. Of everybody I know whoï¿½s been around wind power, nobody likes it. In New Jersey near Atlantic City, which is a casino area, they built these big wind-propelled things. They stick out; theyï¿½re ugly. Every consumer says, Please, God, donï¿½t build them again anywhere because we canï¿½t even stand the sight of them. Maybe theyï¿½ll stand the sight of them if they donï¿½t have electricity for days.
Solar is okay, but I donï¿½t think it can ever be big enough to meet the demands that we expect in the future. Weï¿½ve got all these electric gizmos that we use now, but we still have the same power systems and grids that used provide electricity 30 and 40 years ago. Thereï¿½s no question that we need increased infrastructure, but nuclear offers so much more vast ability to service so many more people than any of the sources we just spoke about.
A Bronx native, Peter Grandich hit Wall Street 25 years ago after starting an investors' club while working as a warehouse manager and launching his now-famous publication, The Grandich Letter, which grew to become a leading newsletter analyzing the metals and mining sectors within global stock and bond markets. After only three years on Wall Street, Peter was Vice President of Investment Strategy for Philips, Appel and Walden, a top New York Stock Exchange member firm. He was dubbed the Wall Street Whiz Kid after he forecast the 1987 stock market crash weeks before it happened. He then predicted that the market would reach a new all-time high within two years. It did. He said that 2000 would see the end of great mega bull market of the ï¿½80s and ï¿½90s. It was. As long ago as 2001, he thought U.S. banks had gone overboard in making loans that required near-perfect economic conditions in order to avoid substantial bankruptcies and expressed concern that some of them seem to have hidden their problems from the average investor. In October 2007, he warned investors to man your battle stations and prepare for the unprecedented economic tsunami that would hit America beginning in 2008. Jay Taylor (Gold, Energy & Technology Stocks newsletter publisher) considers Peter most remarkable for a successful Wall Street proï¿½unashamedly independent and outspoken about his views, which frequently are anything but politically correct.
AGORACOM, North Americaï¿½s only small-cap community built to serve the needs of serious small-cap and micro-cap investors, acquired www.Grandich.com, home of The Grandich Letter, in October, and named Peter Chief Commentator.
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