Rare Earths and Dim Bulbs

Dave Gonigam – September 19, 2011

  • New developments in rare earths: How two governments make your light bulbs more expensive, and how one rare earths play can help you reclaim your losses
  • Markets tank after eurozone finance ministers meet, talk, party, decide nothing
  • Shut down the finance industry? Protest fail at #OCCUPYWALLSTREET
  • Housing bust parable in Southern California: Coyote drama coming soon to new construction near you?
  • Two boomers wind down our Social Security debate on hopeful, philosophical notes

   China is putting the squeeze on rare earths… again. And unless you have a large stash of light bulbs around the house, you’re going to feel this one personally.

“China is temporarily shutting down most of the industry,” reports The New York Times — closing or nationalizing dozens of rare earth producers.

Considering China already accounts for 97% of world production, that’s putting a squeeze on the producers of everything from wind turbines to hybrid car batteries to ballistic missiles. Oh, and those new compact fluorescent light bulbs.

Betcha didn’t know this contains rare earths

   The average price of a CFL bulb has jumped 37% this year, according to the National Electrical Manufacturers Association.

The increase comes before a federally mandated phase-out of old-fashioned incandescent light bulbs. Come next year, the 100-watt incandescents will be illegal to manufacture or distribute. Come 2013, 75-watt bulbs go bye-bye. And in 2014, even the 40-watt varieties will be no more.

Strictly speaking, the old-style bulbs were not banned under the legislation signed in 2007 by President Bush. Rather, the law set “energy efficiency” standards that incandescents can’t reach.

Think of it as one of the many gifts Uncle Sam bestows on General Electric.

GE, for its part, is defending the rising price of CFL bulbs by pointing out that the price it pays for a rare earth called europium oxide has risen 1,128% in the last 12 months. Things are tough all over.

So what’s behind China’s “temporary shutdown” of rare earths production?

   “They’re busting the rare earths mafia in China,” said Byron King in this space on Jan. 20 of this year. That is, many of the mines were operating illegally, dumping loads of toxic chemicals into the soil and the water supply.

What’s more, the black market accounted for up to 40% of China’s rare earth production.

“Both of these are entirely unacceptable” to China, Byron said, “especially in a communist state with a nominally ‘planned’ economy. China leadership truly views rare earths as a strategic center of gravity for national economic development, future tech of many forms and, of course, military power.”

Fast-forward to last month: “Most of the country’s rare earth factories have been closed since early August,” the Times reports, “including those under government control, to allow for installation of pollution control equipment that must be in place by Oct. 1.”

At the same time, the government is consolidating dozens of rare earth companies, public and private, under the umbrella of four companies tightly controlled by Beijing.

   So rare earths supplies that were already tight are getting tighter. The shutdown comes on the heels of years of tariffs and export quotas that have forced rare earth prices to rise as much as 40-fold.

You might think recent developments are bullish for rare earth stocks. And if you did, you would be wrong. An ETF made up of rare earth stocks, REMX, got hurt worse than the broad market in the August sell-off… and it’s been far slower to recover.

So what gives? “I’ve reviewed pretty much all of the RE plays out there,” says Byron. “I’ve looked at the web sites, reviewed the technical data, perused the 43-101s [regulatory documents], attended presentations and even met with management of many firms.

“There are a lot of good, sincere people out there, all working very hard to build out their respective projects. Any number of these rare earth companies will pull through, eventually.”

“But ‘eventually’ may be a very long time.” One project after another has run into delays. Shares of industry darling Molycorp, with its massive project in California, are no higher now than they were when Byron recommended taking 178% profits back in January.

There’s one player outside China that has potential to get into production soon: “It has a proven ore asset, with associated roads, power, rail access and more. Plus, it has actual production equipment that shaves years and millions of dollars off the development cycle.”

It’s one of a handful of tiny mining plays that Byron is eager to share with you. They’re spelled out in a package of special reports that go to every new member of his premium advisory, Energy & Scarcity Investor. Membership is currently available for half off, so there’s no better time to check it out.

   Well, that was a lot of hoopla for nothing. European Union finance ministers met in Wroclaw, Poland, over the weekend to figure out what to do next about Greece.

In the end, they delivered no dramatic Sunday night announcement timed for the opening of Asian stock markets. Indeed, they came to no decisions at all. Killjoys.

They did, however, express some pique at Treasury Secretary Tim Geithner dropping in to offer advice. “I found it peculiar,” said Austrian finance minister Maria Fekter, “that even though the Americans have significantly worse fundamental data than the eurozone, that they tell us what we should do.”

Shoulda stayed stateside

   Thus, with generalized angst about Greece being the prime market mover today, the safety trade is on. And this time, gold is not a beneficiary. To wit…

  • U.S. stocks: Major indexes are down nearly 2%, back to where they were last Wednesday. The Dow is back below 11,300
  • European stocks: The major indexes gave up most of the gains they made since Thursday, when the world’s biggest central banks promised to flood the European banks with dollars. Keep shooting up the markets with heroin, and you keep getting diminishing returns…
  • Currencies: The euro is likewise going through withdrawal pangs, weakening to $1.362. The dollar index has pushed its way up to 77.3
  • Treasuries: The yield on the 10-year is back below 2%, at 1.97%
  • Commodities: Broadly lower. Oil is back to $85.63 a barrel, while copper has touched a 2011 low of $3.83 a pound
  • Precious metals: Gold, which reclaimed $1,800 late on Friday, has been knocked back to $1,784. Silver has fallen below $40, to $39.52.

   “Late tonight (at least late in the United States), we have the release of the Reserve Bank of Australia (RBA) monetary policy minutes,” says Strategic Currency Trader’s Abe Cofnas — who gets excited by this sort of thing.

“There is likely to be a significant weakening in the AUD/USD currency pair if the minutes create a perception that the RBA may decrease rates,” says Abe, eyeing a trading opportunity.

“On the other hand (a favorite phrase of economists), if the minutes indicate the possibility that it will keep rates on hold or even increase them, the AUD/USD may strengthen.”

Abe is urging readers to take both sides of the trade this week — with the wins in one play more than offsetting the losses in the other. We’ll know the outcome by Friday. Last week, readers had the chance to collect gains of 52%, 72% and 126% — all in four days.

For a one-of-a-kind way to play currencies, and a host of other markets, check out Strategic Currency Trader.

   Business is proceeding apace on Wall Street despite the third day of the #OCCUPYWALLSTREET demonstration.

Organizers billed it as America’s “Tahrir Square moment” in homage to the protesters who forced out Egypt’s dictator Mubarak. In the event, it’s turned out to be, well, something less…

Um… And your point?

A crowd that organizers hoped would number 20,000 turned out to be somewhat less than 1,000 for the first day on Saturday. Police were out in force with barriers to limit where the protesters could camp out. By this morning, the crowd had dwindled to about 200.

It’s almost beside the point to say we saw this one fizzling back on July 15, but we did. The protesters in Egypt knew what they wanted — for Mubarak to go. The protesters in New York, the ones who could articulate what they wanted, were demanding President Obama set up a blue-ribbon panel to look into the influence of money in politics.


That’s hard to put on a sign. Many more signs had a simpler message: “Tax the rich.”

   From California comes a harbinger of a new phase in the housing bust: The Great Coyote Caper.

The story began a few weeks ago, when as many as seven coyotes made a den for themselves in an abandoned, burned-out house in the Los Angeles suburb of Glendale. They’re generally docile, but “eventually they’re going to get hungry,” worried next-door neighbor Cathy Molloy, “and they’re going to turn on us.”

Truly a fat-tail event

Earlier this month, Los Angeles County made plans to trap and euthanize the coyotes. That set off a hue and cry. Animal welfare groups promised to trap and relocate them. Hearings were held, opinions were expressed and the whole thing became a local media sensation last week.

Since the coyotes weren’t threatening neighbor dogs and cats, the county decided not to set traps. Besides, the house is set to be demolished in a few days. That’ll take care of ’em.

We’re sure the coyotes can find plenty of accommodation in the overbuilt — or half-built — suburbs of Phoenix and Las Vegas.

   “I said ‘get a job’ to use the common phrase,” writes the reader who generated considerable baby boomer ire during our Social Security debate last week. “These days it’s really ‘make a job.’”

“I should also have added that I am technically a baby boomer woman. I know plenty about discrimination! But ways of earning money are out there: Jobs are not a zero-sum game. At age 52 (in fall 2009), after three years of voluntarily not working at all, and eight years of part-time work, I got a part-time telecommuting job. When their business tanked, I got another part-time telecommuting job.”

“Most of my high school friends have been laid off in the last few years, and they all found jobs pretty quickly. I now live where one-third of the population is ‘retired.’ Everywhere I patronize has older employees.”

“The key is to stave off depression long enough to keep trying and to think outside the large corporation/government box. And remember there are jerks everywhere! When asked about your age, instead of getting defensive, educate about your work ethic and life experience and wisdom and how all will benefit the company.”

“Agora’s publications have helped me understand the new reality: Companies in the U.S. don’t want employees, and freelancers can be competing with others all over the world. So pick something like nursing, which has to be done in person, or be able to compete worldwide. Create a product or service that others want and be your own employer.”

“There are so many ways to make money now that didn’t exist when we were in school. Hell, PCs didn’t exist when I was in college! LOL! Don’t let ‘the rules’ dictate what you try for: Every job I’ve had I was told I wouldn’t be able to get because that’s not the way it’s done. Fortunately, small employers don’t always follow ‘the rules’!”

   “Yes, I paid into Social Security, and it is unfair to have it stolen,” writes another boomer.

“But then, there are others — for example, those that waded ashore at Normandy or Tarawa or were shot down over Berlin or the Pacific in a flaming deathtrap and had their actual lives stolen by an even greater evil.”

“One can and should try to correct things and make it right. However, after having done all one can do to make things right, at one point one also needs to try to just move forward. We can’t keep frantically grasping onto the ring like Gollum did in Tolkien’s Fellowship of the Ring, when doing so might blind us to better — albeit different — things.”

“As Frodo said to Gandalf when he realized he alone had been bequeathed the fateful ring: ‘I wish it need not have happened in my time.’ ‘So do I,’ said Gandalf, ‘and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.’”

The 5: Amen.

   “I went to the movie theater to see I.O.U.S.A. a reader writes, “and tried to find a disc of it to show friends. It would help to educate people about the national debt.

“But I find it available only with purchase with a package of other items. Is it available stand-alone?”

“Now there is the new movie/documentary. Are these available to buy?”

“Thanks for your articles, information and excellence.”

The 5: Buy the new documentary? Addison and crew are still shooting it! But in the meantime, the DVD of I.O.U.S.A. is available from Laissez Faire Books. Here’s where to get your copy.


Dave Gonigam
The 5 Min. Forecast

P.S. Addison’s most recent documentary shoot was Friday on the West Coast — with Craig Venter, the scientist and entrepreneur whose team cracked the human genome in 18 months. That was an achievement the government figured would take 20 years.

We’re still chewing over something Venter said — about how the work he’s doing will turn medicine on its head. For a century, medicine has treated symptoms, not diseases. Clogged arteries? There’s a bypass operation, or an angioplasty or a stent for that.

But by identifying the genetic markers of heart disease, treatments can now be developed that will prevent arteries from clogging in the first place.

There’s a parallel to this in the field of economics and finance. Too often people in Washington are treating symptoms — rising prices or unemployment — rather than the disease of misallocated resources. Almost always, it’s Washington causing the disease in the first place.

Venter’s work will revolutionize medicine. But who will revolutionize economics in a similar way? We’re still thinking about that…


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