American masters of the universe and their toadies give self serving lip service to covering some events in Europe. They are forced to really. But when it comes to the last Ponzi standing,  the US, we see little of the kind.  For example recent estimates of California’s budget deficit soared to $16 billion, compared to $9.2 billion estimated in January. Tax revenues are falling far short.  Now the state proposes more tax increases and spending cuts. Even though California is a non-recourse state, bankruptcies are running hot.  The other state to pay close attention to is Illinois, a political quagmire of the highest order.   My prediction: both California and Illinois are political hot potatoes and Democratic states. Therefore any attempts at Federal bailouts of states will be gamed unmercifully.  Look for this to develop pre-election.

This post is an example of the actionables available on my subscription site. It is distinct from the Daily Rant pieces seen on Winter Watch.

I was an active and successful mining shares investor in the early days of the precious metals bull market. I learned a lot about mining during that period.   I also learned that mining is very tough business subjected to extra risks and cost pressures.  To win in this sector output has to be increasing faster than costs (energy, labor, etc).  Additionally mining stocks have been ETFed to death, and trade too much as baskets not individual stocks. Accordingly I have only rarely used this sector in recent history. However, certain mining stocks now seem to present unusual levels of opportunity, even without any further moves higher in PM prices.  Further, I think we are at an inflection point where the value of the product produced will outrun the input costs.  I have given my view on silver here and here.

One stock I am evaluating is Pan American Silver (PAAS).   PAAS has been severely marked down by the recent Argentine energy nationalisations. There have also been operational difficulties in Argentina because of import restrictions.   Eyeballing the valuations it seems the market has assigned zero value to one top mine (Manantial Espejo) and a world class development deposit (Navidad) that are located in Argentina.  Repairs from problems at Manantial Espejo are complete and operations are normal. There are no indications that a nationalization of mines is a real threat. Company presentations can be gleaned here. 

PAAS produces 22 million ounces of silver annually led by three excellent properties: Alamo Dorado, La Colorada in Mexico and the aforementioned Manantial Espejo.  The acquisition of Dolores (a fourth excellent property) brings this to 24.5 million. About two-thirds of PAAS production is very low cost (sub 7.50).  86% of revenues came from silver and the rest gold, zinc and copper. Late stage developments Navidad (there is some uncertainty here) ,  and the potential mill expansion at Dolores,  could double production by 2015 and the addition will be low  cash costs.  Mine life for existing producers is estimated at nine years, but annual reserve brownfield replacement has been better than 100%.

PAAS recently bought out and merged with Minefinders, a company I followed from the early days.  PAAS bought this right, not overpaying, and will receive significant consolidated cost benefits in its northern Mexico operations.  MFN’s Dolores (already producing) is one of the largest silver deposits in the world and in the hands of the  larger, stronger mine, PAAS, has tremendous greenfield potential. MFN derisks PAAS, an aspect the market has failed to appreciate.

At 16. 25 the proforma market cap of the two companies is $2.55 billion,  but working capital after debt (none) is $0.6 bn, bringing enterprise value down to $1.95 billion.  Existing operating cash flow is estimated at $500 million a year (assumed price $25 silver) over 2012-2015. By 2015  output doubles, and PAAS can easily internally finance these expansions.   PAAS is an extraordinarily cheap call on silver prices. I am setting up this trade up for a 1.5% of my capital position by selling  June 17 naked puts (implied vol is 51).

This post represents the personal opinion of Russ Winter, and not the opinions of the Wall Street Examiner Company or it’s officers or employees. It is not a recommendation to buy the securities mentioned. You should do the necessary due diligence, or consult with an investment professional before any securities purchase.

Over the course of my thirty five year investing life I have noticed that markets often trade on hooks. A hook is when most participants develop a preconceived notion about “how things work”.  Then trading follows a pattern, drawing more in.  In the past, hooks were relatively harmless and when they came undone, they had little lasting overall economic impact. However, in today’s brave new world,  undone hooks will severely and I think critically damage the system.   At present the hook is a doozy. It is that central banks have given speculators a put that will somehow not only save both the system and their bets,  but make them profitable, even in the face of too big to save insolvencies. I hold that this hook is at peak absurdity.

In developing a further understanding of how hooks work today, I would highly recommend a reading of “Boomerang” by Michael Lewis.  Lewis describes the crazy wild-man betting that goes hand in hand with so called, and dubious, central bank puts,  leverage, and financialization.  ZIRP all but guarantees this. This goes far beyond infecting and wrecking capital markets. This infects whole countries, and in his opening chapter Lewis gives the recent financial history of Iceland as an example.  Iceland was sold the bill of goods that being a hedge fund was much more satisfying than actually producing useful goods and services. Like all crazy-ass betting parlors, the Iceland story ended in disaster.  Iceland was a microcosm of a much larger “sistema” (Portuguese) in place today. It also shouldn’t be ignored that, just like in 2007-2009,  some large hedge funds are also making “big short” bets against the current hook.

A thinking person (I would imagine many of my readers) going through the revealing Lewis book would easily come to the conclusion that in bubble financial systems,  gamblers learn no lessons, and given the opportunity will return to the tables for more crazy bets. The aspect that should be apparent is that the players take no heed of clear and present danger.  As such, they distort markets severely and wreck the price signals of markets. This is not capitalism, not in the slightest. Even terms like “moral hazard” don’t do this justice.  It doesn’t help matters that central banks have joined in on the wild-ass betting.  ”Providing liquidity” is Ministry of Truth (MoT) spin language for paying stupid prices for fictitious capital or lending against shakier and shadier collateral.  This is the mother of all wild-ass hook betting. When Greece re-defaults in June, we will  get a revealing test, as the final bill will be sent to the official sector.

In 2007-2008 the markets entered a period when certain investment gambling houses took on the silly season stupid positions of the day in the markets.   It is the marginal buyer who determines prices. That is especially true today, because markets are thinned out.  My suspicion is that the new AIGs, Bear Stearnses and Lehmans of 2012 are even larger,  too big to save institutions and are making stupider bets than ever, mostly around mother-of-all- hook trades.  And they are backstopped by too big to save countries who serve as foils.  And that is the rub.

Trading in markets dominated by the Icelands and AIGs of 2012 can be very challenging. This is the reason that reactions to nasty events seem so odd. The Icelands of 2012 don’t care one iota because they are bound to drive off cliffs,  Wile E Coyote style.  Michael Lewis describes the incentives well:  no claw-backs, and no criminal prosecution, just gamble and collect when there are winnings, and walk away when it blows up. I have mentioned numerous trigger points that will blow the sistema up, but a too big to save failure of a financial institution (or several) combined with a too big to save sovereign defacto default (or several) has as good a chance as any of being the mother of all game changers.

The chorus against the Fed Bubble continues apace as David Einhorn rips Fed’s jelly donuts policies.  Rick Santelli and Fed apologist Steve Leisman discuss the Einhorn’s statement. These exchanges have gone on for a few years,  except now Leisman really seems to be on the defensive in a crackpot blathering rancid stale bread kind of way.  Next up is Ron Paul  with a classic  essay, calling central bankers, “intellectually bankrupt”.  James Grant takes the opportunity to take another shot with strong langauge, ”The Federal Reserve is the giant squid of squids, it is the vampire squid of vampire squids.”  This is no mercy stuff, and I think is marking the point when at last the curtain is being pulled back.

On the third rate black propaganda front and following on CNBC’s declining ratings, Lee Adler aptly describes how Airin’ Burnett Led to CNN Ratings Collapse After She Left CnBS Holding the Bag.  Besides being the worst kind of cheerleader, she is just not credible in a growing atmosphere of civil dissent. The gente are tired of being spun.  He is Burnett’s pedigree in case you were wondering how she was placed as a kelptocratic agent.

Feldstein smiles at one of his star pupils

One of the “elite,” conomist Martin Feldstein was once considered one of the finalists for Greenspan’s spot, before a true sycophant, the Bernank, was appointed.  The rest is history but seems Feldstein is having an Atlas Shrugged, John Galt moment about what has transpired.

“The stock market is, I think, responding to the Fed. I think the real danger is that this is a bubble in the stock market created by low long-term interest rates that the Fed has engineered….The danger is, like all bubbles, they burst at some point”

Other John Galt moments include the veteran investor space as another hedge fund titan,  John Arnold closes shop in the energy arena.  Rejection of the liquidity only theorem at work here? How long would any entity, let alone the balls to the walls moral hazard types survive in even a slightly more normalized world?

Another sign that John Galt Investor has about had it with central planned ‘conomies and markets combined with Ministry of Truth black propaganda are CNBC’s ratings. They are falling off a cliff. Some point the finger at Andrew Soskin, but he is merely a symptom. I see it as more disgust and disinterest in Fed Bubbles, TBTF rigged, manipulated markets.   Another -$1.6 billion outflow from domestic equities, marking 10th consecutive weeks.   This results in more vaccum tube trading, no depth,  algo addled markets,  with the few remaining participants drinking heavily of the spiked Kool Aid.

Tuesday ISM release and subsequent vacuum tube rally took the cake. It was an contradiction among a half dozen other data points pointing to ‘conomic rollover.  We see a repeat of katie bar the door run ups, followed by reversals, wash, rinse, repeats.

Frankly how does anybody plan or do forecasts in a central bank bubble world. Clearly the quick buck artists aren’t even trying, but are merely gambling away. Memories about Worldcom, Enron, LTCM, and Lehman Brothers seem short. The Chesapeake Energy story shows that there are land mines out there galore. One has to ask, how long would some of these entities last without ZIRP, and the too big the fail crackpot theory?  Only days would be my prediction. These implosions will take their governments with them.