Monkeys & Elephants

Why Play the Lotto When You Can Play….

Everyone buys lotto tickets in the slim hope that by some miracle they can win it big. The truth of the matter is, it’s just as likely that your lotto ticket will turn into a Unicorn and give you a high five than it is to make you a winner.

Why spend that $2 a week when you can find a couple of micro cap stocks that have the potential to make you a big winner? I have two micro caps with the potential of finding billions, YES BILLIONS of barrels of oil. Let’s take a look:

This first one I’ve mentioned before: CGX Energy (CVE:OYL). They are exploring offshore Guyana, which is widely believed to hold similar oil resevoirs as offshore West Africa, since back when all of the continents were one, Guyana and West Africa were connected. Although, they’ve had their share of trouble – they drilled one duster and their second well (Jaguar 1) had to be stopped early due to safety concerns around high pressure – but there were good shows of oil. CGX collapsed on the news of the Jaguar well as funding concerns crept up. CGX is 35% owned by Pacific Rubialas, and has Repsol as its partner on the Jaguar well, so I think the funding will come and they will reassess the Jaguar well and re-attempt to drill that play in 2013. This play is big, and could hold well over 1 billion barrels of oil which would propel CGX stock into the $5-10 range from .25.

The second pick is Horn Petroleum (CVE:HRN). They are also chasing billions of barrels, but this one is in Somalia. Similar to CGX, Horn believes that they can find billions of barrels as they believe the trend from oil rich Yemen extends into Somalia. They recently drilled a duster and their stock price collapsed to .37, but they are still in early stages of exploration. Similar to CGX, Horn has big name backers as African Oil own 60% and they have the financial backing of the first family of resource, The Lundin family. Again if they can hit a big find they too can be propelled to the $5-10 range.

Let’s Recap:
Horn and CGX have:
1) A geological trend with proven large hydrocarbon pools
2) Big name backers (so buy outs are also a possibilty for both)
3) The Monkey’s and Elephants stamp of approval

Again, as positive as these picks look they are still exploration plays and require financing to drill wells as they have no production to generate cashflow. So please keep an appropriate weighting for a high risk/high reward play.

*Ladies and Gentlemen…..QE3!!!

For my upcoming birthday, Ben Bernanke thought long and hard all summer about what he should get me as a gift. After careful consideration, Bernanke had an “Ahh-haa” moment and realized that I would probably love another round of QE. So on Thursday September 13, 1 week from my birthday, he announced the birthday present of all birthday presents… QE3!

The markets rallied on the news of QE3 for one key reason, it’s open ended.  It has no expiry date: Bernanke said that he will keep printing money and buying mortgage backed securities until he sees significant economic and labour market improvement. Bernanke has essentially written a blank cheque.

The question now is, can QE-Infinity really get the US out of their economic problems? That is up for debate and only time will tell.  But for now it’s great for commodity investors while the US dollar falls and commodity prices rise. On Thursday and Friday all commodity stocks ran up, but is it too late to get in? I don’t think so. Commodity stocks have been beaten up so badly that they are well off their 52 week highs, and well off their all time highs. Gold stocks should be given the biggest losers this year and they have plenty of room still left to run.  I can see gold topping $2000 an ounce and at that value the gold stocks are seriously undervalued. I’m going to list a few stocks that I think are the most undervalued in their sectors:

Gold

Eldorado Gold (TSE:ELD) – arguably has the best production growth profile of the big name players, but investors have put it in the dog house because their most recent acquisition saw it pick up mines in Greece.  I think the Greeks will be desperate for foreign investments and Eldorado should get favourable terms in developing their mines. I think it’s time to get into Eldorado gold.

Kinross (TSE:K) – It’s no secret that investors did not like their acquisition of Red Back mining.  And so far investors have been right as there have many delays and write downs on their Tasiast mine.  But with that being said, Kinross is still the fifth largest gold producer in the world, and has tremendous growth.  It’s bounced off the bottom nicely but it’s still well off its all time highs.  I think there’s an easy 50% gain in the name.

Oil and Gas

Niko Resources (TSE:NKO) – they wrote down their major asset by over 50%, but the stock price is down over 90% from its all time highs.  Last week they announced a dry well and the stock plunged over 30%.  This was a complete over reaction and stock price have rebounded 20% since then.  They also have 300 million in convertible debt coming due in December so their is a risk of dilution, but I think the company will either sell high yield bonds or do an asset sale before they would do an equity issue.  They have one of the best exploration blocks in Trinidad and Thailand, which is evident in the big name players that have entered into joint ventures with them.  Niko has plenty of high impact exploration wells coming in the next 18 months which, if successful, will propel the stock to multiples of where it’s trading at now.  Also with the stock price at these depressed levels there’s always the chance that they will be taken out.

*As Fed Disappoints All Eyes on the ECB

Ben Bernanke at 2:15pm in a loud booming voice said….what he’s been saying pretty much all of 2012, the Fed is ready to act if things don’t improve or get worse. Like a high schooler asking their parent for help with an assignment (aka do it for me), investors are disappointed, upset, frustrated and just want the Fed to DO IT (as in QE3, not Nike or making love). There is hope though, the majority (89%) of market participants in a recent CNBC survey feel that QE3 or some further form of stimulus is coming as early as September (for my birthday ).

While the markets now wait for the September Fed meeting, all eyes turn to the ECB meeting tomorrow and with bold statements from ECB President Mario Draghi saying he’ll do what ever he can to ensure the Euro’s survival, expectations are pretty high. So with high expectations come big disappointment (I should be a motivational speaker), well at least that’s the case when it comes to the Euro crisis. The German central bank is opposed to bond buying, euro bonds, LTRO, pretty much everything. They have a “You made your bed now lay in it” approach to this whole Euro crisis. So the most I’m expecting is more promises out of tomorrows meeting.

If there is any bold action or if the ECB promises a real blockbuster solution, the markets should go up quite sharply. But for the time being I’m skeptical as we’ve been through this many times before with Europe since the onset of the Euro crisis with no real results.

But if you’d like a nice pop, Petrominerales is reporting earnings tomorrow, and should also have an exploration update. With any exploration success and a nice increase in production I think PMG can easily be up 10% or more. This stock has been beaten up so badly and is so cheap fundamentally, any good news should give us a beautiful pop.

*Quick Post for a Quick 10 Bagger

With all this turmoil in Europe and the US and China, wouldn’t it be nice to have an opportunity to make a quick $10 a share on a $15 stock? Well just sit right back, because I have a stock for you….Amarin Corp (AMRN).

Amarin is up for FDA approval on July 26 for its AMR 101 cholesterol drug. It is widely expected that the FDA approval will be granted, and we should see a big pop in the stock upwards of $10. The key to the amount of the pop will be if the FDA grants the New Chemical Entity (NCE) status. This would grant exclusivity of the drug to Amarin for 5 years and would pave the way for a buyout in the mid to high 20′s. If FDA approval is granted without NCE I’d expect a smaller pop of around $3-5, which still isn’t too shabby. Please remember this is not a sure thing, FDA approval looks good, but is not guaranteed, so take the appropriate weighting in your portfolio.

*China still Hungry for Oil

Chinese state run CNOOC, looked at Canada’s Nexen (TSE:NXY) and said “Boy I’d sure like a piece of that…” Then upon further consideration they said, “why take a piece, when I can have the whole thing?” and bada bing, bada boom $15.1 billion later, they put out a friendly take over bid for Nexen.

This is a great deal for Nexen investors, as Nexen has had its fair share of issues at its Long Lake oil sands project and continued issues with its North sea assets. A deal of this size must get approval from the Canadian government, and many investors fear that this deal might get Potash’ed (aka government says “No way, no how, no deal!”). CNOOC has already made promises to keep headquarters in Alberta and list on the TSX. I think that this deal will ultimately go through.

I am also excited about this deal because this shows that China is still hungry for energy and oil. If China was afraid of a true growth slow down they would not be buying oil and gas assets with $15 billion price tags. To further my point, Sinopec another state run chinese oil company just bought a 49% stake in Talisman’s (TSE:TLM) North sea assets for $1.5 billion. Slowing Chinese growth, poppycock!!!

Other potential takeouts in the oil patch:

Meg Energy (TSE:MEG)
Athabasca Oilsands (TSE:ATH)
Legacy Oil + Gas (TSE:LEG)
Banker Petroleum (TSE:BNK)

Just to name a few!

*Markets Waiting for Action

The markets have been drifting lower on low volumes.  Markets are struggling for direction, waiting for the Central Banks to print their little hearts out.  Economic data out of China, the EU and the US have all been, much like my singing, just horrible.  So markets are looking to the central banks to come to the rescue.  I think we’ll get Easing out of China and EU before we get it from the US.  Ben Bernanke and the gang will most likely wait until their September meeting to announce a fresh new round of easing.

Chinese GDP data will be released Friday, and there are whispers that it will be below 7%, which would be horrible news for commodities like copper, iron ore and oil.  But if the numbers are sub 7%, I’d expect the Chinese government to act quickly with reserve cuts and easing.  Either way I’d stay out of the markets until after Chinese GDP is announced.  If its above 7%, markets and commodities will rally, but they are so cheap that you can still get into them at a good price. But if they miss you could be looking at a big downward move and then that’s when you should step in, because easing should follow which will cause a rebound.

So we’re once again playing the waiting game, waiting for governments and central banks to act.  Be patient the time to buy will come, just keep the powder dry.

*Print-a-polooza!

This summer brought to you by the central banks around the wooooorld…..Print-a-palooza!

With such weak economic data coming out of Europe, China and the US, this summer could see the world’s central banks go on a printing frenzy. It’s widely expected that the UK central will do another round of QE tomorrow, and the ECB will cut rates and might also do some money printing or another LTRO for EU banks. China may also this summer further decrease reserve rates and may also do some money printing. And finally the Fed and Captain Ben Bernanke may also get in on the excitement and do QE3.

So what do we do? Well when money is printed commodities soar. So let’s get on board the Gold train and also get some oil. Let’s look at big caps, because they’re cheap. Barrick Gold (TSE:ABX), Goldcorp (TSE:G) and throw in heavily beaten Kinross (TSE:K). On the oil side you can’t go wrong with dirt cheap Canadian Natural Resources (TSE:CNQ), Suncor (TSE:SU) and Cenovus (TSE:CVE).

If you’re feeling more risky, I have 4 names that can easily triple your money. Gold:
Avion Gold (TSE:AVR) – coup in Mali is behind them, they increased full year production guidance today.

Lake Shore Gold (TSE:LSG) – big reserves in safe jurisdiction (Ontario), they have big production growth but markets worried about funding. Funding issues should be met through royalty agreement with Franco Nevada and gold linked loan from Sprott.

Oil:
Bankers Petroleum (TSE:BNK) – heavily beaten down, but sitting on 265 million 2P reserves and growing. This company should be $10. Once they get production on track expect an easy double or triple.

Ithaca Energy (TSE:IAE) – takeover bid for them fell through as oil prices collapsed. They will be tripling production in the next 2 years, I expect more take out chatter. But even if that doesn’t happen, as production comes on I expect them to trade closer to their NAV of $3.75, which is a double from here.

*All Eyes on EU Leaders

There are two big reasons why the world will have its eyes on Europe this week:

1) The Euro Cup: We’re down to the final four, Germany, Spain, Italy and Portugal. Three Bankrupt Nations and the one Nation holding them all up. I wonder if Germany will play the bailout card during the games? “uhhhh hmmmmm, do you guys want those 100 Billion Euros?? Then give me back the ball.”

2) On June 28th and 29th, the EU leaders will gather and HOPEFULLY come up with a solution for the debt crisis in Europe.  We need Germany to agree to some sort of Euro bond, gold backed bond or something, anything!  The markets may run up in anticipation of good news from the EU meeting, but be careful. The markets ran up in anticipation of the Fed meeting and more easing, and the next day it took a 3% hit because the Fed disappointed. The EU does not have the best track record when it comes to coming up with big solutions for their on going debt crisis so don’t get too caught up in a pre-meeting rally.

There are a couple of plays that you can make now that should pay off in the long run. Horizon’s Beta Pro has two ETFs, HEP (TSE:HEP), and HEE (TSE:HEE).  These are covered call ETFs that pay out the option premiums and any capital gains to their holders. HEP is currently yielding 18% and HEE is yielding 14%. HEE is a play on the Canadian oil sector and HEP is a play on the Canadian Gold sector. I believe that these two areas are still the place to be, and when Europe gets it act together and the Fed announces QE3, these two areas will outperform. The dividends are paid out monthly so you’re getting payed to wait, and because these ETFs hold a basket of stocks, the individual risk of a specific company (production misses, earnings misses, mine failures etc.) won’t cause any huge drops. I should warn you that the dividends are not guaranteed as they do depend on how well the managers do in terms of capital gains and premiums they receive for selling covered calls. But their track record speaks for itself and they’ve consistently paid out a handsome dividend. I think this is a great play to ride out the volatility in the market and get paid to wait.

*Fed Fizzles!

Bernanke must have read my “How Low Can Oil Go” article and looked to Chubby Checker for some more wisdom and what did he find?

Come on baby, let’s do the twist
Come on baby, let’s do the twist
Take me by my little hand and go like this
Ee-oh twist baby baby twist
Oooh-yeah just like this
Come on little miss and do the twist

The markets had been running up over the last four sessions as they were hoping that Ben Bernanke would announce QE3. What they got was an extension until the end of the year of Operation Twist. The markets quickly sold off after hearing that no further easing was forth coming, but stabilized near the break even mark into the close. Bernanke again said that the Fed will stand ready if the economy needs him and the Fed to step in. Bernanke essentially threw the ball back into the EU leaders’ court. Bernanke didn’t exactly say that is what he’s doing, but he wants to keep the powder dry in case Spain or Italy gets into deeper trouble and the markets and the economy spiral out of control.

So Europe (aka Angela Merkel) the ball is back in your field (and I’m not talking about the Euro Cup). The next big event is the EU leaders’ meeting next week, if we don’t get concrete plans out of this meeting, the summer will not be kind to the markets.

*Greek Elections went the Right Way?

The Greek election have the markets jumping back into riskier assets, well at least for now.  The Pro Bailout New Democratic party appears to have 29.5% of the greek vote, followed by the radical anti-bailout SYRIZA party with 27.1% of the vote.  With game show like rules, the winner of the greek elections gains a bonus 50 seats.  Even with this bonus, the New Democracy party will need to form a coalition government with the PASOK party to form a majority government.  The PASOK party did say before the election that they would go along with the New Democracy party, so a pro-bailout party  should be formed and a Greek default is yet again fended off for another day.

Markets are cheering this news, as oil is up 1.5% and the US futures are currently up about 1%.  But how long will it last.  Remember this doesn’t solve any of Europe’s issues, this just removed an immediate threat of a Greek default.  The new government in Greece wants to re-negotiate the terms of the bailout and lets see how that will go. Markets will continue to be choppy without hard evidence that the EU (and I mean Germany), is willing to do whatever it takes to secure the Euro Zone.  We need something like a Euro bond, or a EU Banking Union or some easing.  At the end of June we will be getting an EU leaders meeting and hopefully from that we will get some concrete solutions to shore up Spain, Greece, Italy, Spain…..etc.  It’ll also be interesting to see if Ben Bernanke blinks and announces QE3 or an extension of Operation Twist at the US Fed meeting June 19-20.  If we get more easing from the Fed the risk trade will be back on.  Hopefully the US will take the lead and show Germany just how fun and fulfilling printing money can be.

I’d love to tell you that this result out of Greece means its time to get back into the market, but there are major concerns on Spain and Italy as their debt yields continue to rise.  They may both require bailouts, and Italy is just too big to bailout.  And if it comes down to an Italian bailout….well lets just say, I think a Zombie Apocalypse might be easier for the world to deal with.