Lately we’ve heard and read about companies, especially resource companies, taking what are called impairment charges.
Barrick Gold (ABX) was a recent example. The company wrote off $3.8 billion to deal with the drop in market value of the copper mine it bought for close to $8 billion some time ago. ABX has a billion shares, so the write off was close to $4 per share.
Kinross (K) was another example of a company that had to take big write down after a mine it bought had to be re-priced. It had over $6 billion of goodwill on its balance sheet and has written down about $4 billon so far.
Cliffs Natural Resources (CLF) likewise recently wrote down over a billion of impairment charges related mostly to the mining company Consolidated Mining that CLF bought some years ago.
These are not cash costs in the proper sense of the word. But the cost has to come out of recent profits. Banks often set aside money for bad loans during times of stress. However banks also often bring back some of that money as income after they collect on those bad loans. Mining companies likely are not so lucky.
Natural gas writedowns
We might see the same sort of write downs in the natural gas business so we need to be careful with natural gas companies that paid high prices for land that is supposed to have a lot of natural gas.
This might not have happened recently; natural gas has been cheap long enough to hold down prices for new purchases. But there could be some stinky fish somewhere on the books for some companies. As, or if, they discover that the land is producing much less gas or oil than they estimated, or if the wells depreciate too quickly, or they run into some dry holes, and if the price of natural gas stays down too long, we could see impairment charges on some natural gas and oil companies.
I think streamer stocks like Silver Wheaton Corp. (SLW), Franco-Nevada Corp. (FNV) and Sandstorm Gold Ltd. (SSL) are much safer resource-related stocks to own. I own SLW and FNV and sold SSL some time ago. Other companies that should not have write downs likely include pipelines, drillers and service providers.
What brought on these losses or writedowns? Over the past few years, the big cry in the boardrooms and among investors was growth. I have never been too close to the corporate world so I can only guess about some of the chats management had. Why can’t management be happy with a good year? But no, the idea seems to be that we take last year’s success and look for ways to grow. “Just take last year’s good number and add three or five per cent and we’ll be happy” seems to be the way things go in the corporate world.
Where there are takeovers, there are buyers and sellers. Some buyers are overoptimistic or have poor judgment when it comes to the value of an asset.
Whatever the reason, it looks like some resource stocks face or have faced big writedowns
Another significant recent turn of events has, in my opinion, helped to drop the value of our resource stocks. A number of companies have now said that they will be less aggressive on growth and more likely to reward shareholders.
The goal of growing a business can do funny things to executives. Some get excited and pay dearly for their next purchase (I suppose it’s like some farmers paying dearly for the next quarter section of farmland.)
However, these past few years, as commodity prices dropped and demand slowed, suddenly companies discover that they cannot grow their businesses as planned. So they announce that growth will slow down.
We haven’t heard much news on the after effects of that slowdown in growth but I suspect some investors have run the numbers. If a company expects lower growth, its shares should be worth less. How much less? I compare it to an elevator going down a floor or two. So might our stocks.
For First Majestic Silver Corp. (FR), I paid $18 for some share and have collected $5 per share selling calls at an $18 strike price. Now the right strike price might be $15 or $16 or $17. Of course if the price of silver jumps up, optimism might return.
Some investors think seasonality doesn’t affect the price of stocks. I think there is lots of evidence to say it does. Not 100 per cent of the time but often enough to encourage me to think about when a stock is in season.
Take gold (and silver usually follows gold). In India, farmers grow crops with the monsoon season. If the season is friendly, crops will be good. In India, farmers don’t pay income tax on money they make from farming. Storing crops is trickier than here in Canada so most of the crop is sold after harvest.
Indian farmers pay their bills, set some money aside for future expenses and then usually buy gold and or silver with the rest of their money. That is one demand that matches the seasons.
Weddings in India often happen in the fall. Jewelers need gold and silver two or three months before wedding season to make jewelry for weddings. Silver and gold prices often drop going into summer so why would a jeweler buy the precious metal before July?
That’s another seasonal effect.
After wedding season comes Christmas, Chinese New Year and Valentine’s Day. All of these cause people to buy gold and or silver in various forms. Seasonality.
The peaks and rollovers don’t usually come on the same day every year. In 2010 gold rolled over around April 15. In 2011 it was around April 1. In 2012 the price of gold fell $80 per ounce on Leap Day, February 29. It was called the Leap Day Massacre.
In 2013 the price of gold looks to have touched bottom in the first week of March. Time will tell. There might be a price rally for a short time until out of season kicks in. However, the price of our gold and silver stocks might have trouble going up if the market suspects the rally will be short and if growth is going to slow down.
Besides, these days there are other good stocks to own.
Learn two charts
I’ve been studying charts for years. In my opinion, we only need two: the one with the price performance, the $SPX and the 10- or 20-day moving average chart. The $SPX gives us a ratio which we can use to help us buy right, and the 10-day moving average could help us sell near tops.
Here’s how to view these charts on the Internet. Go to www.stockcharts.com and click on “Free Charts.” Type in the name of the stock in the “symbol” box in the middle of the page (for example, Disney, “DIS”) and a chart will show up with DIS in the symbol box on the top left of the chart.
Deep below the body of the chart find the word “Indicators.” Click on the menu arrow on any of the three boxes listed below “Indicators,” find the words “price performance” on the drop-down menu and click on that.
The symbol $SPX should pop into the “Parameters” box. Put your cursor in that text box, to the left of $SPX and enter the symbol for Disney. You should have dis:$SPX in that box. Then click to get a chart. Be sure to put the colon (:) after the symbol DIS.
Now click update (near the top of the page). On the main body of the chart you should see what is called a candlestick chart. White means the price went up that day. Black means down. These days the candlestick chart has been heading up. Now look below to find the price performance chart which shows a ratio of the price of DIS and the S&P index.
As I’m writing, the ratio chart for DIS is heading up. That shows the price of Disney is going up faster than the S&P index. This is not foolproof. If the $SPX was falling and the stock price was falling slower then the chart would still be up, so do look at what the market is doing.
Not too many stocks have a rising chart these days. Most of the resource stocks I own have falling charts. So yes I proved once again that selling when the daily price crossed the 10-day moving average would have been a good thing to do. (I have written about this before.)
On that chart if you want to see how the price of a gold stock is doing compared to the price of gold, instead of $SPX type in $gold and then type in the symbol of the stock to the left of the $gold. For example, Barrick Gold would be ABX.to:$gold. If you have problems call or email me.
As I’m writing on March 5, the Dow Jones Index hit a new high at 14,257. The old high was around $14,100 in October 2007.
The main question is “Are we nearing the end of the old bull market or are we starting a new bull market?” I don’t know. But it looks like the market wants to be bullish at least until the sell in May and go away kicks in this spring.
A reader sent me this statistic: In October, 2007 the 30 stocks on the Dow were priced at 4.6 times book value. These days the 30 stocks are priced at 2.75 times book value. That is 60 per cent of the old book value. I think it suggests the market has room to go up. In steps, and with setbacks, yes, but more up than down. I guess we’ll see.
I don’t often buy in to predictions like this. To me all that really matters is “What are my stocks doing?” If the price is going up and the price has not crossed the 10-day moving average going down, then I think it’s quite safe to keep owning the stock. If that price performance ratio is still heading up, then it should be another sign to think about. Keep in mind that indicator is not foolproof — the chart would be going up if the stock was dropping less than the $SPX index.
I also look at three other indicators: the MACD, full Stochastic and the RSI index, all of which you can find on Stockcharts. If you have questions or comments send me an email at [email protected] or call me at 1- 204-453-4489. †