BullMarketRun.ca

Gold is marching higher this morning on strength in the euro and bullish news out of China…as of 6:10 am Pacific, the yellow metal is up $16 an ounce at $1,659…Silver has jumped 34 cents to $30.31…Copper is up 4 pennies to $3.70…Crude Oil has gained $1.90 to $100.60 while the U.S. Dollar Index is off its lows but is down nearly half a point at 81.06…

Spain took in its stride today the first test of investor appetite for its debt since a two-notch ratings downgrade, selling 4.88 billion euros ($6.2 billion U.S.) of treasury bills ahead of a far trickier hurdle later this week…

China – Will Today’s News Quiet The Critics?

China’s economy expanded 8.9%  in the fourth quarter of last year, exceeding expectations but extending a slowdown that began at the start of 2011 and is expected to continue into 2012…the “China Crash Theory” seems increasingly suspect, however, especially considering the Chinese government is now squarely focused on propping up growth with inflation much more under control…

Yesterday, John provided an interesting chart on the Shanghai Composite Index which just recently started to show some bullish signs…indeed, today, the Index shot up 4.2% as it gained 92 points to close at 2298… that’s the biggest single-day gain for the Chinese market in 27 months, fueled in part by investors’ relief at the strength of the growth data and the prospect of further monetary easing…in addition, China has been granting a flurry of approvals to foreign institutions to invest in equities as it steps up its attempt to lure more cash into the country’s stock market…

A potential strong rebound in the young and speculative Chinese stock market is another reason why we believe the Venture Exchange has likely bottomed out and a new uptrend has started…you won’t see this anywhere else – a 12-year comparative chart from John showing the Shanghai Composite and the TSX Venture Exchange…they have tracked each other quite closely and they’re both down substantially from their 2007 highs…

There are different views on China, but the one individual whose opinion on China we trust the most is Frank Holmes of U.S. Global Investors Inc. which you can check out at www.usfunds.com…Holmes is well-known (some of our readers have no doubt heard him speak at various shows) and has spent a considerable amount of time in China, so he definitely has his pulse on what’s happening there…below is an excerpt of a piece Holmes wrote last weekend at www.usfunds.com as part of his Investor Alert…

Holmes:

“The overwhelming debt burden in developed countries translates to an expected slowdown in imports from the emerging world. However, the grandest of those countries, China, likely won’t be affected as much as some people assume. This is “the biggest misconception” about the country’s economy, says CLSA’s Andy Rothman. Exports only play a supporting role for the Chinese economy. The world’s second-largest economy is actually largely driven by domestic consumption from a population more than 1 billion strong with more padding in their wallets.

“Andy says 10 years of tremendous income growth and little household debt, make China the “world’s best consumption story, for everything from instant noodles to luxury cars” in 2012.

“According to December Chinese trade figures, month-over-month and year-over-year imports of aluminum and copper increased significantly. This may be a result of China restocking ahead of Chinese New Year, but M2 money supply growth rapidly rose in recent months, a sign the government is attempting to reaccelerate the economy. Also, the urban labor market has been robust over the past two years, with an annual change just below 5 percent—a record high over the past 15 years.

“Along with rising urban employment, income growth has been tremendous as well. CLSA says that last year was “the eleventh consecutive year of 7 percent-plus real urban income growth,” with disposable incomes rising 152 percent over the past decade.

“Investors shouldn’t expect China’s growth to be as robust as it’s been, as the country’s fixed asset investment growth drops below the 25 percent year-over-year pace of the last nine years, says CLSA. China’s 12th Five-Year Plan has less infrastructure spending compared to the 11th five-year plan. Transport and rail spending is also expected to drop, with only water and environmental protection spending growth rising.

As shown in the BCA chart above, GDP growth has declined below 10 percent, but the growth is currently not the lowest we’ve seen in recent years. CLSA believes that China will prevent GDP growth from slipping below 8.5 percent for the full year, as “Beijing has the fiscal resources and political will to quickly implement a much larger stimulus.”

Judging by the record number of articles mentioning a hard landing in China in late 2011, investor sentiment has swung from euphoria to excessive pessimism, according to BCA Research. Last fall, more than 1,000 articles discussed the risk of a “China Crash.”

As I’ve mentioned before, contrarians view extremely bearish sentiment as a potential attractive entry point. BCA believes the pessimism has been priced in, as technical indicators as well as valuations for domestic and investable markets appear “deeply depressed.”

– From www.usfunds.com, Jan. 13, 2012.

Yes, there are plenty of China skeptics out there…some European hedge fund managers are among them and they are betting that China’s once red hot economic growth will cool dramatically this year, hitting companies, economies and commodity prices that have been fueled by the world’s second largest economy in recent years…managers are taking bets ranging from short positions on equity markets or the currency to buying credit protection on companies that export to China…others are shorting natural resources stocks in other countries that rely on Chinese demand…

“China is an inflated castle in the air,” said Pedro de Noronha, managing partner at London-based hedge fund firm Noster Capital, who is using futures to short Chinese H-shares and is also holding a short position on the yuan (he was quoted in a CNBC article)…

“We’re quite skeptical and worried,” he added…”China needs a healthy U.S. consumer and it’s not getting it right now…China could be a catalyst for a severe leg-down in markets,” he stated…(actually, the U.S. consumer is quite a bit healthier these days)…he also cited recent cases of fraud in China and the country’s booming real estate sector as issues…

“Corporate governance and the rule of law is very different from the West,” he said,”…”and there’s a huge bad loans issue in banks…the real estate market is probably in the biggest bubble in the world we have right now”…

Meanwhile, the Emerging Sovereign Group (ESG), one of the few hedge funds that saw the euro zone crisis coming, is one of the world’s biggest private equity groups and it told its clients recently, according to a Financial Times report, that “We have a gathering sense that the next act of this rolling global debt crisis may well play out in the East”…ESG apparently sent a team for a two-week “deep-dive research trip” to China in October…”Even though an aggressive stimulus program allowed China to sidestep a post-Lehman recession, rendering events there, for a time, secondary to developments in the U.S. and Europe, the Chinese economy could soon take centre stage”, the firm said…

Rainbow Resources, Sandspring  Resources

John has two company charts this morning, the first one on Rainbow Resources (RBW, TSX-V) which is one of our favorite exploration plays and a “no-brainer” at current levels between 15 and 16 cents…Rainbow was essentially a “shell” until it acquired privately-held Braveheart Resources last fall…what the company now holds is a promising package of Silver and Gold properties (the “Big Strike” Project), including the highly prospective International Property (Silver) that was being developed by Braveheart...but Rainbow has much more going for it than just the International Property as we just discovered through some due diligence on the B.C. Energy and Mines web site…we’ll have more on this tomorrow, but 26,000 tonnes at an average grade of 74.53 ounces per tonne (2,113 g/t) produced 2 million ounces of Silver at the company’s Ottawa Property, mainly in the early part of the 1900’s…lead (793,852 pounds) and zinc (28,162 pounds) were also mined along with minor amounts of Copper and Gold…the Ottawa Property is developed on nine levels and has to be considered an excellent geological target as much was likely overlooked by those working the property a century ago…it’s also amazing how much land in the West Kootenay region has gone under-explored over the years, but there are various reasons for that including a general economic downturn brought on by troubles in the forest industry…we see higher Gold and Silver prices as the year progresses and that should translate into even stronger interest in mining and exploration in the area…

John’s chart shows accumulation of Rainbow in the 15 to 17 cent range makes sense given the bullish technical posture of the stock and what we expect will be strong fundamentals…RBW has yet to have its first major “run”, so this we believe is a unique situation…

Note: Jon and John hold positions in RBW (Terry does not)…

Sandspring Resources (SSP, TSX-V) is a quality situation that we have mentioned on occasion but not for a while…Sandspring may have bottomed out around the $1.20 level and is worthy of serious consideration after closing yesterday at $1.42…

Note: John, Jon and Terry do not hold positions in SSP.