Bubble Talk

David Gonigam – May 11, 2011

  • Goldman says the worldwide rare earth squeeze is "nonsense"… King says otherwise
  • The coming "rare earth cull"… which dozen (of 220) will be left standing?
  • Chinese economy slows down, even as inflation heats up: Markets tumble in unison…
  • Ireland taxes pensions to bail out foreign banks… A strange (but sexy) charity effort… and readers supply several new installments of the "refi soap opera"

"Is the Bubble Ready to Pop?" shouts one headline. "More Signs of a Top in the Bubble," screams another.

The darling stock in the sector, Molycorp, has tumbled 14% in the last two days. The Street didn't like its quarterly report. Losses narrowed, thanks to rising rare earth prices, but profits and sales missed expectations.

Even after this latest whacking, "Molycorp is overvalued," Byron King says. The stock was one he highly recommended to readers of Energy & Scarcity Investor last September… and a sell for a 178% gain four months later.

Now? Forget it.

Meanwhile, Goldman Sachs has declared the worldwide rare earth squeeze all but over.

"The market for rare earths will remain in severe deficit in 2011 and 2012," says a recent report, "but prices will trend higher over the next 18 months.

"We envisage a closely balanced market in 2013, and modest surpluses thereafter… with some price softening in the 2013-15 period."

In other words, once production ramps up at mines being built outside China, the problem goes away.

"Goldman," says Byron after reading the report, "is trying to let off some steam from Molycorp — down from a recent, bubbly high of $79."

"The report is a confused mish-mash of facts, partial facts and utter fantasy."

"Whoever wrote it really doesn't know all that much about how the rare earth industry works. RE is NOT gold mining, or copper mining. You have to deal with RE in a uniquely high-end way — as advanced chemical engineering, built on top of low cost per ton of ore."

"I wonder if this [report] is even good nonsense," writes Jack Lifton, one of the foremost experts on rare earths, who often turns up at the same conferences Byron does.

Here's the problem: Right now, three companies account for that 3% of world production outside China. Turns out all three count on China to deliver critical supplies. What's more, their capacity to produce high-purity metals and alloys amounts to less than 5% of world demand.

This "high purity" issue is critical, for reasons Byron suggested above: A miner of, say, iron ore doesn't worry about the end user who will use it to build a car. There are plenty of other companies in the production chain that turn the iron into steel and turn the steel into something the automaker can use.

There's no such thing when it comes to rare earths. "The first rare earth products that will be produced outside of China," Lifton explains, "will be mechanically concentrated ores, the lowest value salable product in the supply chain." In other words, not the stuff the automaker needs for the catalytic converter, or, in the case of a hybrid, the battery.

What's more, "There will be no large-scale sustained production of any of these forms outside of China, the metals and alloys in particular, for several years yet."

"Rare earths will be NOT be in surplus anytime soon," Byron adds. "No way. In fact, I believe that RE will be utterly scarce by 2013, because the name-brand plays will fail to deliver as much as they promise, on time, at quality people want and expect.

"The Chinese have the rare earth markets pulled tighter than a banjo string," says Mr. King, turning to the immediate situation. "One longtime RE buyer told me, 'We used to argue over 5 cents per kilogram. Now we get last-minute calls from our Chinese suppliers telling us that the price is going to be $100 more than what's in the contract. We can take it or leave it.'

"In the RE space, the traditional price and supply structures are transforming rapidly. It's a crazy market out there, where speed is life. The Western companies that get up and running, and move to production the soonest, will skim the cream of profitability for at least several years."

"Of the more than 220 listed rare earth junior miners outside of China, there will now be a cull," says Jack Lifton. "If rare earth pricing requires that one must produce high-purity metals to provide a minimum return on the needed investment to develop a mine, then perhaps a dozen of these ventures will survive even until 2013."

That's why Byron has bypassed most of the "usual suspects" in rare earths. So far, the strategy has worked brilliantly — with gains of 84%… 109%… and 147%. He got readers in — and out — of Molycorp nice and early, for 178% gains in four months. And the best is yet to come, with a "dark horse" candidate in the race to reach production outside China.

This company, Byron says after an onsite inspection halfway around the world, "has the assets, the business plan and the political and economic relationships to make something great happen in the rare earths space."

And after Molycorp dragged down the sector as a whole yesterday, you can pick up shares for just $1.75 each. Learn why Byron is so enthusiastic, right here.

Consumer prices in China rose 5.3% over the last 12 months, according to new figures out today. Whoops, that's a lot higher than Premier Wen Jiabao's 4% target. It also exceeded analyst estimates.

Meanwhile, other figures — industrial production and retail sales — came in lower than expected.

"The economy is slowing more sharply than expected, but inflation is not," sums up Dariusz Kowalczyk, senior economist at Credit Agricole in Hong Kong.

Thus is China proving a drag on just about every asset class today… because without the Chinese locomotive to pull the world's economic train, everything comes off the rails. Or something like that. Some key numbers…

  • The Dow and the S&P are giving up a good portion of yesterday's gains, the Dow back below 12,700
  • Gold is off a few bucks, to $1,512… Silver's been pushed down to 37.45
  • Crude is off more than 2%, to $101.60
  • The dollar index is firming up again, to nearly 74.9.

To no one's surprise, the U.S. trade deficit widened 6% in March, to $48.2 billion — the highest since last June. Yeah, that's what happens when oil prices reach a 2½ -year high.

The euro has hit its lowest point in more than three weeks — below $1.43. On the first anniversary of the Greek bailout, pooh-bahs from the European Union and the International Monetary Fund are in Athens to discuss another bailout… while workers are staging a 24-hour general strike. Good times.

Ireland plans to keep up with its massive debts by imposing a tax on private pensions. Of course, this is being pitched as a "modest" tax — 0.6% — for a "limited" duration — four years.

So Irish citizens will see their pension income nicked so the Irish government will have more money to fork over to the German and French banks that were stupid enough to buy Irish government bonds. Makes you wonder about the precedent this sets…

What do you get when you combine the spirit of enterprise with a desire to help the less fortunate?

The "Support Japan Bra" with matching skirt…

Triumph, a Japanese underwear maker, has introduced the "Support Japan Bra" — more like a bustier, really — with matching skirt. Shortly after the earthquake and tsunami in Japan, the firm's Tokyo office was flooded with handwritten messages of support from the company's other locations around the world.

The 52 messages, plus tiny flags from the 36 countries they came from, now adorn this set. Sounds lovely, but we're not sure what the point is. According to Reuters, it won't be made available for sale.

"I hope to help lift the spirits of people in the devastated areas," says Hikaru Kawai, the young lady modeling the set. Let's hope so… since it won't generate any revenue… and there won't be any proceeds to donate to victims. Baffling…

"I was roaming around Finance.Yahoo.com yesterday," writes a reader, "and found Citigroup new common stock has gone from $5.00 to $40.00 in one day — happened on Monday morning.

"It's somewhat unclear to me why, as Citi posted no real earnings in Q1. And nothing has changed with the company."

The 5: Citi did a 10-to-1 reverse split on Monday.

"To chime in on the state of home finance in our country," a reader and homebuilder writes, "we have had four sale contracts for starter homes in the $100,000 price range — all to buyers with 'pre-approved' credit.

"Guess what? Only one of the sales has actually closed. One is still on the ropes, with the other two having their 'pre-approval' turning to 'de-approval' days before scheduled closing. The problem? Continual changes in underwriting even after approvals received.

"Guess they're too busy refinancing existing loans to worry about new ones."

"I wish those participating in the 'refi soap opera' better luck than I had. I participated in a Helping Families Save Their Homes Act refinance with CitiMortgage in 2009. I made my payments as instructed.

"Imagine my surprise almost a year later when I received a nasty foreclosure notice stating that I had been in default since … wait for it … THE DATE MY REFI TOOK EFFECT!

"Although my payments were collected every month, they were conveniently not credited to the new mortgage AND all records of my refinance seemed to have disappeared from Citi's memory.

"I was about to be thrown into foreclosure, homelessness and bankruptcy despite having made the required payments per the terms and instructions provided by Citi!!!!

"A nasty battle ensued over many months. My daily and, eventually, hourly emails and phone calls were passed around to different departments, all claiming to have no knowledge or responsibility. Most of the individuals I spoke with were completely incoherent, and several flat out hung up on me when I demanded to speak to a manager.

"Even when confronted with copies of my original paperwork sent to me by Citi on its own letterhead, CitiMortgage continued to stall, backpedal and change their story at every turn.

"It took extreme escalation, to the tune of 250-plus letters and phone calls. I filed complaints at five different states' attorney general consumer complaints offices; two better business bureaus; and, my personal favorite, the comptroller of currency to get the situation resolved.

"I can only wish all of you receiving those warm, friendly offers from your banks the best of luck. I suggest you keep a record of every correspondence, phone call and payment.

Most importantly: Watch your back!"

The 5: Yikes.


Dave Gonigam
The 5 Min. Forecast

P.S. "Baijiu is a vile beverage," Addison writes in a brief message from Beijing, typed out in between meetings and dinners. "But in an alluring kind of way."

"Baijiu is a clear drink usually distilled from sorghum," according to Wikipedia, "although sometimes other grains may be used."

Yikes again…


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