“When the China Bubble Bursts: 6 Investments to Give You Profits PLUS Protection Through the Coming Crisis”

By Travis Johnson, Stock Gumshoe, August 9, 2011

Today’s teasers come in from Mark Skousen, who edits the Forecasts & Strategies newsletter and has graced our pages a few times in the past — most recently when he touted Cubist Pharmaceuticals very aggressively as a “winning lottery ticket” and “superbug killer” (that one did quite well, thanks to both the FDA and a legal settlement, though it has come back down a bit this week, along with everything else — and, of course, a 50% gain is not what you dream of from your Powerball ticket).

This time he’s talking about the pending crash of the Chinese economy, which he calls a “classic bubble” — he quotes Edward Chancellor, who is a bubble-ologist, in noting the telltale signs of a bubble. He says these are:

“A compelling but exaggerated growth story….

“Blind faith in the competence of authorities….

“A government-fueled investment boom….

“… massive commercial and residential real estate construction despite lack of perceptible demand….

“Easy money and risky lending…
“A fixed currency.”

So it’s a reasonable argument — you can certainly make the China situation fit all of those if you make even a little bit of effort, and though I think China is likely to power the global economy for several more years I do think there’s plenty of risk. Just the single fact that state and local governments continue to be so involved in business ownership and funding should remind us that those companies will often continue to act in the state’s interest, not in their public shareholders’ interest.

And yes, the central control of the Chinese economy probably means we’re putting too much faith in a small number of people’s ability to manage the economic affairs of a billion global consumers, so there’s certainly reason to worry, whether or not you think the massive growth will stop in the near future (they are certainly trying like hell to keep growing — whenever jobs dry up, protests sprout up … and they hate protests).

So what, then, does Skousen think we should do? He’s got some ideas to sell us — six investments that he thinks will give us “profits PLUS protection” when the crisis unfolds (assuming that it hasn’t already done so — most Chinese stocks have taken a beating over the last month, reacting as they often do with an exaggerated response to the performance of the US markets).

And we’d like to sniff out those six ideas so you can decide for yourself — you can try Skousen’s Forecasts and Strategies if you like, it’s gotten mixed reviews from my readers, but don’t try it just to find out what these six picks are … for that, we have the mighty, mighty Stock Gumshoe Thinkolator on your side. Clues please!

“‘Bubble-Proof’ Profit Opportunity #1: A ‘Rare’ Challenger to a Chinese Near-Monopoly

“The phrase ‘rare-earth elements’ may not mean much to you. But here’s why it should — especially in light of everything I’ve just been talking about with regard to China.

“Rare-earth elements — little-known elements like scandium, yttrium, and lanthanides — are key components in a host of cutting-edge technologies: hybrid automobiles, wind turbines, computer hard drives, fluorescent light bulbs, ceramics and glass… and (VERY important) a number of critical military applications.”

Criminy, rare earths again. Well, just because this is a wildly volatile and political and strategic market with very little in the way of comprehensible supply and demand dynamics doesn’t mean that rare earths haven’t shot up like crazy over the last year, and dragged the stocks of explorers and developers with them (I’d call them “miners” but so few of the rare earths stocks have a mine to their name yet that it seems inappropriate). So which one is Skousen touting?

The rest of the clues:

“… just started to trade here in the United States. It is the 100% owner of a rare-earth underground mine in one of Canada’s territories. Under the leadership of its exceptional CEO, the mine is in advanced stages of development and its drilling program has resulted in a significant increase in mineral resources. The company is way ahead of other non-Chinese rare-earth companies.

“With prices of rare-earth companies on the upswing, this company is already a great investment. But when the China Bubble bursts, expect its share prices to skyrocket.”

This then, must be Avalon Rare Metals (AVL in both NY and Toronto)

Avalon is the only rare earths company that has a project in Canada and recently got a US listing, as far as I can tell — there are other companies with recent US listings (REE, MCP), but they have US projects, and there are other Canadian projects, but most are not nearly as far along as Avalon’s Thor Lake/Nechalacho project in the Northwest Territories, near Yellowknife.

Avalon has been around the block a few times as a teaser target, largely because it is the most advanced potential rare earths company with a high percentage of “heavies” in its resource estimate — “heavies” are the heavy rare earths, also called HRE or HREE, called “heavy” because they’re, well heavier. These are generally considered to be the rare earths that have an atomic weight of 65 (Terbium) or greater, and they are more rare than the lighter rare earths (LREEs).

Avalon’s project is sort of in the second tier of rare earths development — at the front are Lynas (LYC in Australia, LYSCF on the pinks) and Molycorp (MCP) with their Mt. Weld and Mountain Pass projects, both of which are producing or on the verge of producing ore (and maybe oxide — the refining and metallurgy sometimes seems to be as big a challenge as the mining). Avalon is a few years behind, still in the process of completing the bankable feasibility study and making tentative deals with possible customers, and planning for a production timeline that would have them delivering oxide in 2015 or 2016.

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They’re arguably years ahead of other projects like REE’s Bear Lake, or the often-teased Kvanefjeld project in Greenland or Quest’s Strange Lake, but they’re probably in a similar development position to Dubbo or Nolans Bore in Australia. Pretty far along, and with a US listing that has helped them to raise additional money during this latest rare earth investor frenzy, but still quite a few years from paydirt. That means they’re driven by news, for the most part — including possible offtake agreements that might come in the next year sometime (they’re in nonbinding deals now for some possible customers to do their due diligence), a possible change in the resource estimate when they assess their latest phase of driling, probably leading to announcements in September or October, and the planned completion of the feasibility study in about a year. That’s about all I know about Avalon Rare Metals, so feel free to chime in below with a comment if you’re a rare earths fan and want to fill in my gaps.

We’ve got more “bubble proof” investments to sniff out, though, so let’s keep moving …

“‘Bubble-Proof’ Profit Opportunity #2:
“The (Non-China) Asia Fund That NEVER Loses Money

“Mixing short-term emerging market sovereign bonds with longer-term developed market sovereign bonds, this fund enables investors to capitalize on the bright prospects of emerging market bonds and global funds WITHOUT exposure to the China Bubble.

“That’s because it concentrates its holdings OUTSIDE of China in Australia and elsewhere in Asia.

“And because it benefits from commodity-based currencies like the Aussie dollar, commodity guru Dennis Gartman uses this fund as one of his favorite places to park money.

“But here’s the sweetest part: measured over a 3-year, 5-year, 10-year, or even 20-year period, this fund has never, EVER lost money.

“In fact, since its inception in the mid-1980s, this fund is up over 800%, if you reinvested all dividends.

“In addition, 71.2% of the fund’s total invested assets had a credit quality ranking of “A” or better from the top rating agencies. As of this writing, it pays 3.5 cents a month, or about a 7% yield.”

Well, in addition to teasing this one to potential customers Skousen has also been banging the drum for it in free articles — so I can leave the Thinkolator in neutral and tell you that this is the Aberdeen Asia-Pacific Income Fund (FAX).

Skousen touted this one in free articles last Fall as well, and he tends to stick with his favorites for a long time — you can see a quick note on it here at Seeking Alpha when he called it a “counter-cyclical stock.”

This is a closed-end fund, which is basically a mutual fund with a set number of shares that trades like an ETF. Unlike ETFs or mutual funds, which create and redeem shares based on demand, the changes in supply and demand for a closed end fund mean that, because of that fixed number of shares, they will typically swing from premium to discount prices compared to the actual net value of their assets (or, more accurately, from small discounts to large discounts — closed end funds that routinely trade at a premium to net asset value are very rare). Right now FAX is trading at a discount of somewhere between 5-10%, though with wild market swings it’s hard to be sure — the closing net asset value per share (the actual value of the fund’s holdings) was $7.55 as of the close last night, and the current price is just over $7, which puts them right about where their average discount has been over the years.

They do pay a monthly dividend of 3.5 cents, so that works out to just under a 6% yield at the moment (though that number can be goosed by an additional return of capital gains in some years as well). The fund does invest in Australian and “developing Asia” fixed income, mostly shorter term bonds and notes, and they just celebrated their 25th anniversary so they’ve certainly been doing it far longer than most. You can see the basics of the fund, along with the fund manager’s monthly reports, on their website here.

If you look at a long-term chart for this one (more than five years) you’ll see that it’s certainly possible to lose money, as it is with any investment — the price does move, after all — but it’s a far less volatile ride than most (the shares did dip by about 30% or so during the 2008-2009 debacle, but otherwise have been in a pretty consistent trading range of $6-7 over the last six years, with that yield assuring at least some return on your investment. I don’t know how this fund will perform if the Chinese economy is really a bubble and it does really pop, since Australia and the emerging Asia nations are extremely dependent on the Chinese market, but since this is about shortish-term debt and currencies rather than corporate profits any impact should at least be muted.

So there’s a start for you with the first two investments he teased — I’ve got a few more from Skousen in the Thinkolator ready to stew overnight, and will cover them for you tomorrow. If you’ve got a thought on the future for China, or on picks to profit from Chinese collapse, feel free to toss ’em out for our consideration with a comment below. Thanks!



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August 9, 2011 11:58 am

That ticker symbol is wrong for Lynas. Lynas ticker is:

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August 9, 2011 12:06 pm

I am having trouble comprehending why if China's bubble bursts, why that would impact their rare earth business. It seems to me that if worldwide demand remains after a China crash, that they would still be selling rare earths. It also seems to me that with so many others planning to enter the rare earth business because of China's near monopoly on the business, that there is likely to be a glut of rare earth commodities in the world market. I just can't justify in my mind that rare earths is a good investment for my portfolio.

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