Apologies for the absence. I spent last week running and biking the trails of Zion National Park in Utah on a needed vacation.
It's an incredible place: steep, deep canyons cut through sandstone mountains.
With such impressive topography, I expected the river responsible to be a big one. I was wrong. The Virgin River is small enough to wade across without getting your shorts wet in most places.
Rather than brute force, the Virgin carved its deep canyons with persistence.
Metal explorers today are all too familiar with the value of persistence.
It has taken focus, creativity, and a tonne of persistence for today's surviving explorers to remain alive. Companies with money in the bank and exploration programs on the go deserve much credit for their persistence in the face of falling metal prices and a deep dearth of investment capital.
It is one thing to persevere knowing that good results will be rewarded. It is yet another to keep on keeping on when good news gets lost as often as it gets noticed, which is what junior explorers have faced for the last few years.
We saw a clear example of that yesterday when Balmoral Resources announced drill results from its Martiniere property. The guys pulled a serious hole: 19.55 grams gold per tonne over 44.5 metres in one hole and 4.28 grams gold over 53.8 metres in another.
How did the market reward that whopper of a result? With a 2¢ price lift.
If an announcement like that can't catalyze some buying, it is no surprise companies are keeping quiet. Even some of those that continued to raise money and explore over the last few summers are pulling back, preserving the last of their cash until things improve.
Everyone knows we are in for a rebound, but few are willing to bet on the timing of it yet. After four years of decline interrupted by false starts and dashed hopes, it makes sense that investors and explorers are gun shy.
Unfortunately it is still going to take some time for the macro forces that matter to shift form. But it is happening. Key to that: data and projections for the US economy are weakening.
Last week the International Monetary Fund downgraded its expectations for US economic growth while upgrading the outlooks for Japan and the Eurozone.
Overall, the fund maintained its projection for global growth at 3.5%. However, the bank highlighted a global economy being reshaped by swings in currency markets and lower oil prices. Importantly, the strong dollar is blunting the re-emergence of the US of the world's economic growth engine.
With that force weakened, IMF managing director Christine Lagarde said the global economy risks becoming mired in a "mediocre" recovery if policy makers don't take bolder steps to boost growth.
So growth is slowing. US markets ain't doing so well either, having traded flat for the last six-plus weeks. First quarter results now rolling in are reminding everyone that prices are pretty darn high compared to earnings that are struggling against a strong dollar and wage pressures.
In short, the bull market cycle is under threat. If bull becomes bear for the broad US markets the Federal Reserves will be unable to raise rates, which will seriously undermine confidence in the central bank, the US dollar, and US markets in general.
And that would be great for gold.
The weakening of the US economy and markets is being discussed openly in the mainstream media these days (a couple weeks after I pointed it all out, I have to note), but there's another factor that deserves attention.
Share buybacks have added much fuel to the US stock market fire, but that form of financing engineering cannot last forever.
For now, the trend continues: in 2015 American companies are set to spend more than $1 trillion on dividends and share repurchases. All that buying means corporate America is now a bigger buyer of stocks that all of America's retail investors combined.
That's why it's not a stretch to say buybacks have definitely fueled this bull market.
Companies still have lots of moolah. The 500 companies of the S&P 500 are sitting on $1.4 trillion. There are five basic options for what those pubcos can do with a their cash.
1. Pay down debt
2. Acquire companies or assets
3. Pay dividends
4. Buy back shares
5. Hold on and earn interest
Most US majors with cash have paid down their debts, eliminating option #1, and interest rates are too low for #5 to work. That leaves 2, 3, and 4. However, high share prices mean acquisitions are expensive, leaving dividends and share purchases at the top of the list.
But while those feel good to investors in the moment, neither is productive. Neither boosts revenues or profits or adds any value to the company as a whole.
It's financial engineering, really, and the kind that will fall apart at some point. Reducing the denominator produces better earning-per-share numbers, but far better is to increase the numerator.
Instead, as mentioned above, earnings are falling. It's not a good set up.
Layered on top of all that are gloomy announcements of various types. For example, while releasing it first quarter results Halliburton noted that it has cut 9,000 jobs from its workforce over the last six months. At the start of the year Schlumberger announced it was planning to axe 9,000 workers. Texas lost 25,400 jobs last month, enough to potentially put the state into recession. Those are well-paying positions, the disappearance of which does not bode well for retail or housing numbers looking forward.
Meanwhile, the supply-demand scenario for physical gold remain bullish, global developments in the bond market bode well for gold, and contrarian continue to establish positions. I will talk more about these points later this week.
All told, things are setting up for a US market slide and a related gold surge.
When? That is the question. Not tomorrow, but before the end of next year? I know – not a helpful statement. But macro movements happen on macro timeframes. All we can do is watch the indicators for anything unexpected, while preparing for the eventual reward.
It will take yet more persistence to survive until the bull market, for investors and companies alike. But like Zion's canyons, persistence will pay.
This note is to thank you SO MUCH for all great work that you do. I know I pay for my subscription but honestly feel you give incredible value!
In particular I’m very happy with your recommendation on Troilus which I wouldn’t have known about had you not recommended purchase.
I am 74 years old and despite my age, my risk tolerance is still considerable. I like base metals, but most of all I like the mine stocks you cover in your Maven letter. Thanks again for your kindness and congratulations on your work.