Blood in the Streets - Update - KPMG Report Out!

Silvercorp has just been vindicated by KPMG.

In the morning the price opened at $8.91 (up from Friday's close of $8.13) going nearly straight up to $9.83, before falling back and closing the day at $9.62.

There short interest had fallen from 25 million to 10 million shares. End of July short interest was under 5 million share, while average daily volume is around 3 million shares, so there's still a great deal of shorts to cover.  Metals options expire on October 26, so we can expect volatility on the price of silver.  Chances are we will see the shorts cover when silver spikes downward.  (Basically, SVM prices should be supported on the silver down days, while moving upwards on the up days).

At this point, we are seeing buyers of SVM come in on the long side to catch it on the upswing.  If you day-trade SVM, selling SVM on the downswings, and catching it on the upswings, it's now possible that you may out of a position on a big move up.

Back around mid July, we saw a stock price of around $11+.  This could be considered a reasonable price for SVM (pre-short).  Given that the shorts must unload, which could result in a nice over-correction, it's possible that we could see $14-$16.  From the current price of about $10/share, that's a nice 40%-60% move.  Furthermore, SVM is about to release financials for Q2 2011 (FY2012) (ending Sept. 30, 2011) soon, which should give another boost to the stock price.

What could go wrong with this scenario?  Well, the overall market could completely tank, like in 2008, sending all stocks down by 40%.

So, the safest way to play this move is :
- BUY SVM (or SVM options)
- BUY a position in SPXU as insurance, should the entire stock market tank

If all goes well, then SPXU will stay the same, while SVM takes off for a 40%-60% gain, and at that point you should consider taking profits.

All of the above is for the short term (weeks to months).  In the mid to long term - months to years, many people believe that silver is undervalued, and has reached a local (intermediate) bottom, and could rise significantly from this point.  If you want to hold a long term stock, at current price levels, SVM could be one of the best deals of the decade.

Sometimes, the guys in the white hats win!

Bloody in the Streets 2

By Tony S

On Sept. 23, the CME raised margin on Silver (as well as Gold).  The price of silver dropped from about $40/oz to $30/oz over a day, and continued to drop as the Shanghai exchange raised it's margin requirements the same day.  

Silver mining shares got slaughtered.  The ones I am looking at are Silver Wheaton (NYSE:SLW), Endeavor Silver (NYSE:EXK), and Great Panther Silver (NYSE:GPL).  (I'll talk about Silvercorp Metals (NYSE:SVM) a little later, as that is a special case).

The spot price of silver is currently $31.27/oz (having reached a low of $26 briefly a few days ago).  Many investors (longs) are despondent, and sold, limiting possible future losses.

I view this a bit differently, and I'll explain why.  Since this price drop came as direct result of changes in margin requirements by the CME, it has nothing to do with actual supply/demand fundamentals, and must be short lived (unless the CME again decides to raise margin requirements).  As a result, if you bought into the silver market for fundamental reasons, then this is an opportunity to buy more - at a discount/bargain price.

If you are looking at Bollinger bands, flag patterns, and various other technical indicators, then there is uncertainty in the marketplace, and you may not feel comfortable holding such a volatile investment.

So, with so many people selling (to meet margin requirements), who was buying?  Well, it turns out to be the LCNS (Large Commercial Net Shorts).  So that large short position in silver is emptying out.  This appears to be sometime before the CFTC would enact any position limits (as per the Dodd-Frank bill).  It appears that the LCNS has escaped/is escaping financial ruin (as some believe their short position was untenable).  It is possible that the institutions which were large net shorts, might even turn around to become net longs (or at least buy long positions to offset their shorts, and prevent financial ruin).

So, if the people who have always made money (the Large Commercials) are closing out their short position, or limiting their downside exposure by going long, then wouldn't it be a good idea to join them?

This doesn't mean that SLW, EXK, or GPL might suddenly rise (if the price of silver rises), as their prices tend to be suppressed by short sellers (and possibly naked short sellers).  They certainly are undervalued relative to the current silver price.  Compared to what the price of silver would be if the CME did not raise margin requirements, they are incredible bargains.

Earlier, I mentioned that SVM was a special case.  If you read my "Blood in the Streets" article, then you know that this company has a huge short position, and that rumors were spread regarding fraud and corruption.  Since the time of that original article, management has fought back, buying back shares, opening the books, hired KPMG to audit his books, invited investors to come to China and tour the mines, refiners, and locals,  Rui Feng (CEO) is also suing market manipulators in New York courts.

It looks like this combination of tactics may be working as SVM is currently trading at $8.66.  Compared to $6.48 a few weeks ago, this stock has certainly gone up significantly.  Recently, Casey Research has complete d a report (written by Jeff Clark), and indicates this as a strong buy.  His only reason to not go all in - is that a 2008 crash event may occur which would effect SVM as well as every other stock.  My take on it, go long SVM, and buy some insurance - ProShares UltraShort S&P500 (NYSE:SDS).
If the market crashes, then SDS will pay off, and use this gain to buy either SVM, SLW, EXK, or GPL at a further discount.

In closing, remember, in the stock market, you don't really make money when you sell - you only realize a gain (or a loss) on a decision that you made earlier - when you bought.  Also, if you sell at a profit, you lower your entry price into your position.



Disclosure : I'm currently long SVM, SLW, EXK, and GPL.


Legal Disclaimer : This article is intended for education, information, and entertainment purposes.  Do not buy or sell any stock without performing your own due diligence.

Under no circumstances should it be mistaken for professional investment advice, nor is it intended to be taken as such.
The commentary and other contents simply reflects the opinion of Tony S alone on the current and future status of the markets, various economies and world events. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered there.

Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do not purchase any security or investment without doing your own and sufficient research. Tony S is not under any obligation to update or keep current the information contained herein. Tony S, at times and probably does, have positions in the securities or investments referred to here and may make purchases or sales of these securities and investments while this article is published. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.


References :

http://www.gotgoldreport.com/2011/10/comex-commercial-silver-net-shorts-lowest-in-eight-years-.html
http://www.gotgoldreport.com/2011/09/stunning-plunge-in-comex-commercial-silver-net-short-positions.html

Somebody's Reading Your Blog :)

Interesting …

http://www.scribd.com/doc/66332507/Federal-Reserve-66281284-Frbny-Social-Media-Rfp

It appears that somebody wants to read/monitor the entire internet, and determine market sentiment…

For more information see :
http://www.zerohedge.com/news/here-comes-fiattackwatch-bernanke-goes-watergate-prepares-eavesdrop-everything-mentioning-fed
http://silvergoldsilver.blogspot.com/2011/09/silver-babies-are-not-impressed-with.html

In light of that, here's some cool text :
- the best thing since sliced bread
- where would we be without such fabulous leadership?
- great
- awesome
- wow
- they're great
- amazingly amazing
- exceeding all expectations
- excellent

and here's some links to the mass media
- http://www.cnn.com/
- http://www.forbes.com/
- http://finance.yahoo.com/

and here's some links to pop culture
- http://www.ladygaga.com/
- http://entertainment.yahoo.com/

and some links to some shopping sites
- http://www.ebay.com
- http://www.hsn.com

and here's some links to dating sites (let's see what the program thinks of that)
- http://www.match.com
- http://www.eharmony.com

Yay!

Silver Slammed

Starting after the NYMEX closed on Sept 21, in NY Globex it was slammed from over $40/oz to just under $40.  The following day (Sept. 22), it was taken down starting in London, and continuing thru NY trading, it was slammed from the around $38 down to $35.   Finally, on Friday (Sept 23), it was further slammed down to just over $30 - closing the day at $30.93, with markets closed worldwide for the weekend.

It came to light that the CME arbitrarily raised margin requirements - like they did in early May (5 times in 9 days) from 21600 to 24975 (16% increase).  The end result, is that futures traders have to liquidate their position (or come up with more cash).

This move smacks of desperation on the part of the CME.  There are currently rumors of low inventories of silver for delivery, so this could be move to try to save the entity that has the massive short position in silver.  If asked to deliver, it is widely believed that they would not be able to, and the result would be a massive increase in price.

The CME has a history of acting in unilateral manners, so the best move during times like these, is to BUY physical silver at discounted prices, and take if off the market.  This reducing the overall supply of silver, and can only drive up prices in the long run.  The cheapest way to get guaranteed silver is the US Silver Eagle bullion coin - as these sell for a few dollars over the spot price of silver.

Options expiry takes place on Tuesday, and this drop in price probably saved the shorts from having to deliver millions of ounces of silver they probably did not have.

The COMEX has announced (as expected) that they will not implement position limits for trading of precious metals (which saves the possibly too big to fail bank which has this massive short position).

See the work of Adrian Douglas at Market Force Analysis and GATA for further details of how bad this short position is for whoever holds it.

See the video from the CFTC meeting in April 2010 for disclosure of market manipulation exposed by Bill Murphy of GATA, and Andrew McGuire.

See various commentary of market manipulation as silver was struck down from $50 down to $33.

This could be the biggest open secret on Wall Street.  The only question is, "Who is this secret supposed to be kept from, if everybody knows about it?"

Blood in the Streets

In 1871, Baron Rothschild was quoted to say “Buy when there’s blood in the streets!”.  Say what you will about the Baron, there is no denying he made a ton of money.

People have fled the stock market, and with good reason. With the stock market collapse of 2008, the advent of high frequency traders, allegations of front-running, Bernie Maddoff's ponzi scheme, high unemployment rates, an anemic economy, incompetence at the Fed (QE1, QE2, Twist, … ), wall street bailouts, too big to fail (and the corresponding too little to succeed), near 0% interest rates - combined with banks who aren't lending, politicians looking for higher taxes, government deficit spending out of control, fear of sovereign debt collapse in Europe, the housing collapse, bank bailouts (as opposed to wall street bailouts in 2008), the tsunami/nuclear issue in Japan, middle east unrest, the BP oil spill and resulting environmental damage to the gulf coast region, and combine that with the Dow's miserable -4.62% return (year to date), it's no wonder.

The stock market is bleeding, but I don't see blood in the streets here in general.  The various bailouts have led to moral hazard, and markets are kept afloat via injections of various flavors of quantitative easing.

The blood in the streets I see comes from market manipulators.  The typical scenario goes something like this.  A group of short sellers target a company.  They take a massive short position.  Then they start rumors on the street of fraud or embezzlement.  When the public hears about this, the stock tanks.  As the stock tanks, we automatic stop losses triggered, and the stock continues to tank.  Then the original short sellers cover at significantly lower prices, netting huge gains.  Meanwhile, there are secondary traders who jump on the band-wagon continuing to short, hopping to drive the price down even further.  These new shorts are working off the greater fool theory.  If they can create enough rumor and innuendo, then they hope to drive the price lower, and get out.

So, what can companies do to defend themselves in these times?  Well, SilverCorp (SVM) has recently been the subject of such an attack.  A massive short position of 23 million shares was initiated, followed by an anonymous letter alleging fraud and accounting malfeasance.  This was followed, by internet rumors sourced from AlfredLittle.com.  AlfredLittle cites International Financial Research & Analysis Group.  Going to the IFRA web site, we find a total of 4 pages, a single contact email, and a single phone number.  There is no address given.  In fact there is no time time zone specified, so not only do you not know where in the world this firm is located (and what financial standards are expected in that location), you don't really know when to call them. In fact, there are no times given for phone number contacts.  (As a side note, if you google IFRA, the top hit is the International Fragrance Association).  This leads me to conclude that International Financial Research & Analysis is a bogus web site, and if AlfredLittle is citing their analysis, then AlfredLittle's reputation /credentials/motivations come into question.

Finally, we see ambulance chaser lawyers initiating an "investigation".  Their investigation consists of only looking at SilverCorp financials, hoping to find any irregularities, and net a nice fee from a class action lawsuit.

The CEO (Rui Feng) of SilverCorp is pissed, and he's not taking it lying down.  He's telling everyone about what happened, and providing his side of the story.  He's opened up his books, tax records, and bank statements.  Rui Feng has sent out an open letter to SilverCorp shareholders, responding point for point to each of the allegations put forth from the anonymous letter and AlfredLittle.

My personal opinion is that the original short sellers are out of the game, having sold or covered their short positions, and the current shorts are working off momentum.  Why do I think this?  Because it took about $200 Million to initiate this short position.  That means it probably didn't start from some rinky dink boiler room operation out of Long Island, but somebody with a lot of money, or access to a lot of money.  So chances are the current holders of the short position are secondary players - probably a bunch of them who are riding on momentum.  Like jackals who feast after the lion departed, they are not strong players.  But their problem is that SilverCorp has over $230 Million cash in the bank, and no debt, and issues a dividend.  Last quarter, SilverCorp was netting $34 million, and they are spending that money to buy back SVM stock at discounted prices.  As of September 15, the company has purchased $31 million of shares.  If silver prices maintain their current prices, then SilverCorp can keep buying back shares every quarter.  Silver production is up 15% and gold production is up 30% (from year ago levels).  Which means even if prices don't increase, their cash flow is increasing.  If silver prices do go up, then who knows where this stock might go.

At current prices ($7.13 as of 09/21/2011), we're looking at a trailing twelve month PE ratio of 15 with a dividend yield of 1.2%.
For 6 months of the last year, the price of silver was significantly cheaper than it is today.  So if we take today's price of silver, and project it twelve months forward, then we're looking at a forward PE of around 12.  For comparison purposes, Silver Wheaton (SLW) has a trailing PE of 29, Endeavor Silver (EXK) has a PE of 42, First Majestic (AG) has a PE of 26, and Hecla Mining (AG) has a PE of 25.

Make no mistake, there is a war going on for SilverCorp shares.  I suspect that the original shorts have already covered, netting their gains, and that all that's left now are the secondary shorts.  If Rui Feng is successful, he'll squeeze them and SilverCorp shares will recover in price, outpacing other stocks due to the suppression by the shorts.  There's another possibility.  Rui Feng has indicated he is fearful of a hostile takeover - somebody purchasing the company outright at depressed prices.  SilverCorp has no debt, and is in great shape financially, so this is a real possibility.

My personal opinion is that any weak hands who are long SVM have been shaken out.  Others may have doubled down on their bet - lowering the average share purchase price.  If somebody attempts a hostile takeover, they will have to do so at above market prices, and it will immediately show that the stock is undervalued.  As a result, the current shorts would get blown out of the water, due to a rising share price.  It is possible that a hostile takeover attempt could even trigger a bidding war, and we could see share prices skyrocket.  Hence, I don't really think a hostile takeover is really in the cards for SVM.

But there's blood in the streets today.  A year ago, Silvercorp was trading for $8.22.  Today it's around $7.13.  A year ago, the spot price of silver was around $20/oz.  Today it's $40/oz.  With a trailing PE 15, it's far below similar mining shares.  If Rui Feng succeeds, expect a massive blowout as the current holders the short position get squeezed.  But, don't forget to thank them for the bargain they've presented.



Disclosure : I'm currently long SVM, SLW, and EXK.  I'm considering going long AG and HL.



References :

Silvercorp Financials : http://silvercorpmetals.com/financials/financials/

Silvercorp Response   :
http://silvercorpmetals.com/news/2011/index.php?&content_id=304
http://silvercorpmetals.com/news/2011/index.php?&content_id=307
http://silvercorpmetals.com/news/2011/index.php?&content_id=308
http://silvercorpmetals.com/news/2011/index.php?&content_id=309
http://silvercorpmetals.com/news/2011/index.php?&content_id=318

Casey Research Report (reprint)
http://silvercorpmetals.com/_resources/BigGold_September_2011.pdf

Korelin Economics Report
http://www.kereport.com/2011/09/14/situation-silvercorp/

BNN Interview with Rui Feng
http://www.bnn.ca/News/2011/9/15/Silvercorp-CEO-calls-allegations-criminal.aspx

Jim Puplava Interview with Lorne Waldman of SilverCorp
http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/09/17/03/lorne-waldman-silvercorp-responds-to-allegations

Jim Puplava Interview with Keith M Barron PhD, Leanne Baker PhD, and David Morgan regarding SilverCorp
(various experts in the silver industry)
http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/09/17/02/silver-stocks-fraud-or-manipulation

Various analysis:
http://seekingalpha.com/article/292389-silvercorp-proves-it-s-not-a-fraud?source=yahoo
http://www.fool.com/investing/general/2011/09/07/setting-the-record-straight-on-silvercorp-metals.aspx
http://www.metalaugmentor.com/analysis/charlatan-exposed-silvercorps-shorts.html


Anonymous Letter
http://finance.yahoo.com/news/Silvercorp-Notes-Large-Short-iw-1745542873.html?x=0

Alfred Little
http://alfredlittle.com/2011/09/13/silvercorp-metals-questionable-customers-geologists-production-quality-and-serious-related-party-failures/

International Financial Research & Analysis Group website
http://ifragroup.com/

S&P Downgrade - Market Crash - August 8, 2011

Dow is down 634.  Nasdaq drops 174 and S&P plumets almost 80.
Gold steady at over 1700.  Silver takes a minor setback.

Thank you Mr. President.  Your words have inspired the market - to panic.
The President says the debt ceiling must be raised, or the US cannot make it's debt obligations (US Treasuries).
Standard and Poors takes him at his word and combine it with the debt ceiling theater in DC and Downgrade US Debt.
Stock markets plummet.  The President makes some kind of speech - and markets panic some more.

The mass media says all of this was caused by an S&P downgrade of US Debt on Friday (after the market closes).   There is an FOMC (Federal Open Market Committee) meeting tomorrow where Ben Bernanke decides what to do.  At this point, it seems almost inevitable that there will be QE3 announced.  If it's not, then expect more market collapses.  Nobody with half a brain is in this market.

So, how does the S&P downgrade effect the stock market exactly?  A downgrade of US Treasuries (which are considered the safest form of debt since the US can print it's own money), implies that various debt instruments may have principle risk - ie: the bondholders might not get back their original principle.  This should lead to a bond sell-off - which does NOT go into the stock market.  Stocks are considered riskier than bonds.   If bonds sell off, then stocks get devastated.  People look to put their money into "safe" instruments (This has been discussed by John Exter (former NY Fed chief) in the 1960's - see here for details).

As markets flee towards safety, the natural places are - bonds, cash, and precious metals (ie: gold/silver).  The general media would lead us to believe that a downgrade of US Treasuries results in people buying US Treasuries.  I find this preposterous.  If somebody downgrades the financial instrument - people don't flee towards it.  They run away towards something else.  The fact that US Treasuries did NOT plummet - implies that somebody is buying US Treasuries.  There can ONLY be ONE entity which can buy US Treasuries in the face of a general market fleeing US Treasuries.  That entity is the US Federal Reserve Bank.

Let's look at how a downgrade would naturally work, and what would normally occur.  Bonds are sold at a discount to face value.  A $100 bond might be sold for $80 and when the bond matures, will be worth the entire face value of $100.  This discount is computed to a compound interest rate, and we say that a bond is paying 5% compounded.

When there are more buyers of bonds than sellers, the price of the bond goes up (towards the face value), and as a result interest rates fall.  The maximum price of the bond is it's face value, and this will result in a payment of 0% interest.  When there are more sellers than buyers, the purchase price of the bond falls, and interest rates go up.

So we see that the bond market is the real driver for interest rates.  The US Government pays interest on its bonds (Treasuries).  Since the rates are near zero, the government is not paying much interest.  Suppose that interest rates for Treasuries started rising.  In this case, the interest expense (which is currently near zero), would rise dramatically.  The money supply would shrink (consumed by interest payment), and the economy would grind to a complete standstill (if it isn't already).

So, let's look at what actually happened.  We see a stock market sell-off (in expectation of a shrinking money supply), and a flight towards bonds.  Buying bonds before the price drops ties up your money for a long time, or guarantees a loss.  So the logical reaction (buy people who want to make money) is to sell stocks and stay in cash, or even better short the market, or buy S&P out of the money puts (for a short term) - but NOT to buy bonds.  But we did not see the bond market collapse, therefore somebody must be buying the bonds.  I posit that the somebody can ONLY be a Central Bank, or several Central Banks working in collusion.  These institutions are not driven by profit, but by maintaining the status quo.  By purchasing US Bonds, they keep interest rates artificially low - which results in money going into the stock market (in effect the Central Banks prop up the stock markets of their respective countries).  Since the US Dollar is currently the world's reserve currency, nobody can afford the US Dollar to collapse.

Tomorrow's FOMC meeting should result in QE3.  Which should stabilize the markets.  The Fed will claim that they have no choice but to initiate QE3.  If it does not happen tomorrow, it will happen soon.  The markets will stabilize after this news - and trillions of new debt will be monetized.

It's a very interesting sequence of events...
QE2 ends - and the fed stops pouring money into the stock markets
Debt Ceiling limit reached - the US Congress cannot issue more debt (which gets monetized and become US Dollars)
Stock Market collapses
Fed becomes "forced" into QE3

If these events did not happen in this sequence, we would not see money being created and injected into the stocks market and into the banking sector (QE3 will also bail out the banks, as there are currently rumors of large US and European banks being in trouble).  It's almost like a script that is being followed.

Since QE3 increases the quantity of US dollars in existence, this makes gold priced in US Dollars go up, and similarly for silver.

The FOMC meeting will result in a statement being issued tomorrow at 2:15 Eastern time tomorrow.
It seems we live in "interesting" times (as per the ancient chinese saying).

Crash of August 4 and What the Future Holds

Here's a half-hour explanation of the forces at work causing yesterday's crash in silver prices.

http://www.youtube.com/watch?v=rRv_hK_z5Qs

... basically, the price of silver drops from 42 (which appears to a key short term price point - somebody might have a derivative position that kicks in here, who knows?) down to 40, and today is around 39.

Gold is relatively steady - yesterday's high was around 1680, and today it's around 1660.

Silver Prices

Chances are it will be a very rocky ride.  It won't be comfortable.  Overall, though, it can only go up. Here's a James Turk - Eric Sprott interview explaining why.

When silver prices are low, it gets consumed at an even greater rate, and physical stockpiles (COMEX reserves) drop to all time lows.  Today, it is estimated that there is something like 27 million ounces available for delivery from the COMEX.  Eric Sprott tried to purchase a few million ounces of silver to start his Physical Silver Fund, and it took him several months.  Some of the silver that was eventually delivered, was mined some months after he had paid for it.

Price is the result of supply and demand coming to agreement.  It looks like the supply is low, and demand is constant.  At some point, we should see a major correction in prices.

What About Additional Margin Hikes?

At the start of May, Silver was close to $50/oz, and the price collapsed to the mid-low $30's.  This happened due to 5 margin increases issued by the CME in the space of 9 days.  In essence, somebody changed the rules mid-game as the wrong people were losing.  Can't this happen again?

It's possible. But, the more the kind of action takes place, the more people will come to believe that the market is manipulated.   If people believe the market is manipulated, some will leave in disgust, while others will understand that when markets are manipulated in a particular direction, it means there will be an even bigger correction going the other way.  These people will not operate in margin - and hence will not be effected by margin increases, and will demand physical delivery.  Others will purchase actual physical silver - depleting any physical supply.

The end result will be a depletion of any physical inventory followed by a massive correction in prices.

Junior Mining stocks?

Looks like prices on junior mining stocks (and silver streaming stocks such as Silver Wheaton (SLW)) have taken a major beating.   These stocks were hit significantly harder than makes sense, when looking at the silver price.  But several of these companies are flush with cash - as the price of silver is far above the cost to mine it (ie: digging doesn't cost that much, you just have to have the right place to dig).  

Endeavor Silver (EXK) just had a conference call yesterday discussing their recent Q2 earnings.  They have a growing cash position, and last quarter decided not to sell silver (growing their inventory) which hurts their earnings numbers.  Due to the IFRS accounting rules, they cannot put this silver inventory on their books at the current market value, but must put it on their books at their cost of production (mining cost).  There have already used some of the cash to expand operations, and purchase additional land.  But since silver revenues are bringing in a ton of cash, it's conceivable that they could purchase other miners.

In essence, while the stock price of silver miners are oversold, and at the same time, certain silver miners are flush with cash, it's only natural that a consolidation phase might start in silver mining shares.  Some mining shares might decide to buy back their own shares (as it could provide better return than mining).

So, miners will increase the number of ounces of silver (mined, in the ground, etc) per share, taking advantage of the cash build-up combined with discounted silver prices.

Finally, we see rumors that silver mining stocks are being naked shorted.  If this is true, then when these shorts get over-run, the up-side correction for junior miners will be spectacular.