Alan's Alert 6-23-2021

 

The cat was let out of the bag on Tuesday at the second day of the Qatar Economic Forum.  Glencore’s CEO of commodities trading, Ivan Glasenberg, told the crowd that “commodity prices will stay strong for a long while longer”.  How does he know this? He pointed to two big catalysts for commodity prices, China and the US.  In China, Glasenberg sees a big investment in infrastructure spending.  He sees the same happening in the US.  While the US congress has been battling back and forth over how large the infrastructure bill should be, China has plowed ahead with it’s One Belt, One Road initiative.  Glasenberg was concerned about how long new mining projects would take to come online and meet the new demand.  He also thought the mining industry would struggle to keep pace with the new demand from “green” economy initiatives.  Something that caught my ear was when he admitted that China has been pushing their strategic stockpile into the market to hold down commodity prices.  

Unlike Canada’s strategic reserve pictured above, China has been stockpiling copper, aluminum, and zinc.  China rarely sells off its reserves, they don’t even publish how much they have.  Citigroup estimates that China has 2 million tons of copper, 800k tons of aluminum, and 350k tons of zinc.  They believe it to 16% worth of China’s annual copper consumption, 2% of their annual aluminum usage, and 5.2% of their annual zinc consumption.  The last time China announced that they were doing a sale from their strategic reserves of metals was 2010.  This makes it an infrequent event.  I believe the market has been pricing this in and once China can no longer talk the market down, we’ll start to see new highs in miners like FCX, RIO, BHP and associated futures contracts like /HG.

 

Speaking of strategic reserves…

Biden is moving forward with a Trump-era proposal for a US Uranium Strategic Reserve.  Last week Energy Secretary Jennifer Granholm told the Senate Energy and Natural Resources Committee that she is beginning to lay the ground work to establish a reserve and that the money had been allocated for it during the Trump administration.  Once established, the US will begin purchasing and stockpiling uranium.  Taking a quick peak at the last budget bill that passed, Congress allocated $75 million for the reserve and outlined a 10-year $1.5 billion program.  While the administration said they’ll be purchasing from US miners, this amount of purchasing will put a real floor under the price of uranium, boosting all miners.

 

The last time I talked yellowcake I mention that Buffett and Gates had teamed up to build a new reactor in Wyoming.  Not to be outdone, Jeff Bezos is backing a company in the UK that is set to build a nuclear fusion reactor in Oxfordshire.  The big boys are getting in this space in a big way and its time to pay attention.

 

 

 

Subscriber Questions and Comments

Q. Robert Wenzel’s book talked about his forecast of the 2008 real estate bubble that popped.  Do you foresee a similar “correction” in the current crazy real estate market?

 

A. In time I do believe we’ll see a correction but the madness of the Fed is preventing it with their printing press.  Here’s what Robert saw in 2008:

The maroon line is 2008.  I put on the previous four years so you would have a reference.  Money supply was running hot at 17% and 16% in weeks 16 & 17 but then it fell off a cliff.  It’s typical to see a slowdown in the money supply from weeks 16-30 (like I mentioned yesterday), but this slowdown was dramatic.  The supply had gone from a higher high to a lower low.  This is what triggered Robert’s response in 2008.  If you look back to the S&P in 2008, you’ll see that the market was having a tough time gaining momentum.  It had traded sideways from March to July.  Then it took a 7.5% month-over-month drop.  It held it together for two more months until October which had a 12.6% m/m drop, November had a 13.4% m/m drop and December a 15.2% m/m drop.  Even though the Fed only updates the M2 money supply on a monthly basis, we’ll have a good month or two head start towards the exit if something were to develop.

Alan's Alert 6-15-2021

 

One of these things is not the like other, one of these things just doesn’t belong. Can you tell which things is not like the others, by the time I finish my song? Did you guess which thing was not like the others?

 

Above are the charts for retail sales/food services, used cars, and the inventories to sales ratio.  Consumers have come back in droves to retail and food establishments.  They have also not balked at the high prices for used cars.  This has caused the bottom chart (inventory to sales) to drop to a record low.  Usually, I like to look at most charts in a percent change year/year or month/month but with these three, it’s important to see the trend before 2020 and what has been happening since.

With consumers ready to spend, businesses have sold them everything they have on the shelves.  Businesses have been operating on the just-in-time inventory system where management would minimize inventory and reorder when demand required it or projections forecasted it.  This would allow businesses to run leaner on inventory costs and would order from suppliers on a more regular basis.  This management style was pioneered by Toyota in the 1970s and perfected by Walmart.  Unfortunately for retailers, the shutdowns have turned this management practice upside down.

You can see the large spike in inventories to sales as the lockdowns started.  This caused retailers to sit on their inventories as consumers stayed home.  As things have opened up, sales have spiked and retailers are having a hard time securing product for their shelves.  Back-orders, shortages, and shipping delays are regular place now.  

The producer price index printed today.

It came in at 3.2% change month/month (which is 38.4% annualized!), and 19% year/year.  Thankfully we aren’t in uncharted territory here.  Unfortunately, the previous history with PPI this high compares more closely to the early 1970s or the first half of 2008.

Finally, I want to touch on the uranium story that took place yesterday.  Uranium miners had a terrible day as all went down substantially.  The story starts at a nuclear power plant in China.  A French company named Framatome partners with the China General Nuclear Power Group (CGN) to maintain the nuclear power plant at Taishan.  Framatome reported a build-up of noble gases in a reactor at the plant.  Framatome then alerted US authorities to this build-up and subsequent release of gas.  The mainstream press went into meltdown but the reality is that this is a big nothing-burger.  Framatome does business in both China and the US.  They don’t want to be hiding secrets from either partner and want to be transparent.  They also needed US-derived technical information and needed a waiver for that information from their US counterparts.  They wanted to be sure that the releasing of the built-up gases would solve the problem that they encountered.  What was the problem? Cracked fuel rods.  Cracked rods are actually a common problem (usually due to manufacturing defects).  So, what did we learn?  The news obfuscates the truth and yesterday was a day to buy uranium.  I picked up NXE at $4.45/share.  I expect this story to hang around a little bit, so you’ve got time to add to your portfolio, as the uranium story is still intact.

Alan's Alert 6-8-2021

 

                                                                     By Alan Baerlocher

That’s the stuff! 

 

Yellowcake is a concentrated uranium powder that is the intermediate step between mining ore and before fuel fabrication or enrichment.  Uranium is mined out of the ground, processed into yellowcake, then further processed to make nuclear power fuel or nuclear weapons.

 

75% of the world’s uranium is found in Kazakhstan (40%), Canada (13%), Australia (12%), & Namibia (10%).  Roughly 65% of all uranium production comes out of 6 mines.  The remaining 25% is spread out over 16 countries.

 

So, what makes uranium such a great investment?  Well, outside of its capabilities to make weapons, uranium is an important part of nuclear energy.  1 kilogram of uranium-235 can theoretically produce 20 terajoules of energy.  To create an equivalent amount of energy from coal would require 1.5 million kilograms.

 

So obviously, there’s a lot of energy creation potential.  Now the world has fallen in and out of love with nuclear power over the years.  Its last big run was in 2006 when the price per pound of uranium hit $140.  Unfortunately, there was a nuclear disaster at the Fukushima Daiichi power plant in Japan in 2011.  Power plants and projects were reevaluated after this and many were cancelled.  Currently uranium sits at $31.60/lb.  In fact, the price was range bound at $24-26 for years causing miners to abandon expansion projects.  Miners also mothballed exploration and development.  This lack of research and development is one of my catalysts for buying uranium.  This lack of R&D leads to shortages and shortages lead to price increases, causing R&D to come storming back.

 

Another catalyst for uranium is China.  China wants to produce 28% of their electricity from nuclear power.  The current amount produced is 4% from 45 nuclear reactors.  Also, China’s energy consumption is 7.3 PWh (that’s petawatt hours).  For comparison, the US is at 4 PWh with 94 commercial reactors.

 

Also, the technology to build these nuclear power reactors has improved greatly in the past 5-10 years.  These reactors are becoming more efficient and safer.  The industry has really suffered greatly from bad press and they are determined not to suffer any more setbacks.  Safety is a high priority for newly built reactors and power plants.

 

Finally, Bill Gates and Warren Buffett have teamed up to build an advanced nuclear plant in Wyoming.  Now I’m not a big fan of either of these guys.  Bill is great at taking other people’s ideas and turning them into money for himself and Warren knows how to manipulate the masses into fattening his pocketbook.  When I saw that they had paired up to build a new reactor, I knew that this uranium thing could have legs.  Also, Larry Fink of Blackrock has virtue signaled on multiple occasions that he is no fan of the petroleum industry.  This man is the CEO of the largest money-management firm in the world.  Blackrock manages over $8.6 trillion in assets under management.  When he announces publicly that he is embracing the ESG (environmental, social, and corporate governance) mantras, you better listen up.  None of these guys are in the business of wasting or losing money.  That’s why I’m confident that a big bull run in uranium is coming.

 

So how do you play this?  There’s two ways; the first is direct ownership of the commodity through a futures contract (ticker UX) or (for us plebs) a PLC stock with ticker YLLXF.  The second way to get into the game is by owning the miners.  There are 49 companies that claim to be in the business of mining uranium.  Now I’ve cut this list down to seven that I think are the most promising.  In order of greatest financial strength to weakest; NexGen Energy (NXE), Denison Mines (DNN), Energy Fuels (UUUU), Uranium Energy (UEC), Cameco Corp. (CCJ), and Ur-Energy (URG).  If you are overwhelmed by the idea of choosing miners, there is also a uranium miner ETF under the ticker URA that holds a variety.  I am personally holding UUUU, UEC, CCJ, & DNN.

 

Finally, if you look at the charts of these companies and think you’ve missed the boat on the uranium story, I will share with you a quote that I reflect on from time to time.

 

“I will tell you my secret if you wish.  It is this: I never buy at the bottom and I always sell too soon.” 

-Baron Rothchild