It’s ABAT Time

Although we personally do not chase breakouts, we know that many of our readers do, so here’s a freebee for you breakout fans. Advanced Battery Technologies, Inc. (Nasdaq: ABAT) just broke out from a major consolidation pattern spanning almost three years.
The significance of this particular breakout, in addition to similar breakouts in other stocks we follow, portends a significant rally over the next few months. Of particular interest are “risky” stocks, such as ABAT. However, as we’ve stated in other missives, we do not wait for breakouts to build positions. We prefer to understand the underlying trends and fundamentals. We then buy the lows of assets that we’ve determined to be undervalued. From our perspective, ABAT was severely undervalued in the low 3 dollar range during the summer of 2010.

However, nothing is without risk, and the fact that ABAT’s operations are mainly located in China may have pressed investors to stay away from the stock. Specifically, trade war fears may have suppressed the stock’s performance, but now the market is telling the lemming traders to not be too fearful. We think the lemmings will listen and jump on board. Watch ABAT, as well as other stocks we’ve identified, make a major run in the next few months.

Copyright 2010 Tarski & Rosen. All Rights Reserved.

Conviction and Patience Needed to Ride a Bull

Vision is required to identify a primary bull market, but conviction and patience are required to ride it.

The time has come for the lemmings to now pile onto the precious metals buy side, especially silver related assets. They finally have their long awaited breakout confirmation, as per many indicators, such as the gold-to-silver ratio shown below, silver, and precious metals mining stock indices.

Do the lemmings understand how predictable they behave? We don't suppose that's a great approach in any walk of life. In contrast, we've been buying quality undervalued precious metals-related assets during this entire downturn, as we described in our last article. As others were screaming "crash," we were buying more of our favorites on sale.

Don't get us wrong, we understand the indecision of the lemming traders prior to this breakout. In a world driven by fiat money and extreme levels of accumulated debt for developed nations, nothing is certain. The reason the lemming traders are unsure is because in a fiat monetary system, those in charge of the monetary levers can swing the entire system in various directions. In an extreme scenario, one could imagine crediting everyone with enough fiat money to pay off all debts. Yes, creditors will get swindled via monetary depreciation, but that is the nature of fiat monetary systems. In another scenario, one could imagine contracting the money supply and causing prices to decline across the board. We do not know for certain what governments and central bankers will choose, but we have some strong thoughts on the subject.

First, most governments are interested in stimulating the economy and creating jobs, if for nothing else, to keep dissent by the governed to a minimum. Also, since government is notorious for its inefficiency, it is of little doubt that the means will not justify the results. In practical terms this implies that the monetary and fiscal policies will be geared toward stimulating liquidity and job creation, respectively.

However, monetary and fiscal looseness has a price. It is no secret that government debt has been growing. Some governments recognize the problem as ever pressing and have taken what has been dubbed as “austerity measures,” at least for a while. However, the U.S. government is far from entering a “spending reduction” phase. For one, the almighty U.S. dollar is by far the predominant reserve currency, which grants the issuer some measure of protection from excessive debt. So, the U.S. government can continue borrowing money and driving up or at least sustaining price levels.

Even in the absence of legitimate buyers for government debt, the central bank can create fiat money to purchase government debt. As sick as this may sound, this dynamic can continue until a critical point is reached and the remaining holders of fiat currency and bonds sell those assets and buy precious metals. We believe such action would thereby trigger a mania phase in the precious metals primary bull market.

In the meanwhile, the price of precious metals will continue to steadily rise as a consequence of money creation in excess of the production of goods and services, so investors must resist being whipsawed out of their long-term positions.

In general, our approach to growing wealth in a primary bull market involves:

1. identifying the primary bull market using vision,
2. finding undervalued quality assets within that primary bull market,
3. buying those assets on price corrections,
4. employing patience and conviction so as to ride that primary bull market,
5. identifying the end of that primary bull market using vision, and
6. then promptly selling all assets associated with that primary bull market.

Copyright 2010 Tarski & Rosen. All Rights Reserved.

Vision is Not a Four Letter Word

Analysis without vision is like logic without imagination.

We all know of situations where a lack of understanding leads to losses. Buying or selling assets based solely on tips comes to mind. Ah yes – such action is foolish, and we are much savvier than that. We buy assets when they are “undervalued” based on the available data, and quickly sell when they are “overvalued” based on the same data. However, this analysis without vision of what will likely come to be serves a long-term investor very poorly. When we understand the general conditions and the fundamentals of specific assets, in combination with the vision to see what would likely come to be, we can ride the big moves while adding on during the major dips.

A case in point that is relevant to the ongoing long-term bull market in precious metals is the present down-turn in some high quality junior gold explorers. One example is Rubicon Minerals (AMEX: RBY), which has a large land package in the prolific Red Lake gold district in Ontario, Canada, in addition to properties in Nevada and Alaska.

Rubicon has already hit significant gold grades during their core drilling of their Phoenix Project in Red Lake. Currently, the market values the company at around $800M. Our estimates indicate that the combined zones of the Phoenix Project may hold a total of about 10M ounces of gold. Our discounted cash flow estimates range from $2B to $3B, for 10M ounces, production costs based on similar neighboring mines, and the current price of gold at slightly under $1,300. We believe that gold prices may double or triple within a few years, which is supported by long-term historical data and fueled by the general lack of confidence in major currencies (namely the USD and EUR) and overvaluation of certain assets classes (namely real estate, bonds, etc.). That would imply that our upside valuation for Rubicon is between $4B to $9B, which is a 5- to 12-fold increase from the current market valuation. Granted, these are our upside estimates, but our downside estimates for in-ground gold of about 3M ounces is between $600M and $900M, which is Rubicon’s current market value. So the market is presently valuing the company based on our worst case scenario and estimates.

Speaking of vision, let us not forget that Rubicon owns other properties in the Red Lake district. As shown in the map above, Rubicon has claims to multiple properties that have some promising markers. Nothing is a given, but our vision requires that we at least consider the possibilities.

We are betting on vision and patience, and letting the trading platforms cannibalize themselves.
Copyright 2010 Tarski & Rosen. All Rights Reserved.