“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…
[and]
“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