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Mickey Fulp May Seem Pessimistic About the Short Term (But He Still Sees Opportunity Out There)

on 7/12/2010

Mickey Fulp, "the Mercenary Geologist" is always an entertaining interviewee. He has great insight into the market overall, he chooses compelling stocks to talk about, and his contrarian opinions are a breath of fresh air; even if they aren't always optimistic about today's market conditions.

We spoke to Mr. Fulp recently about his review of the market, what stocks he's following right now, and where he thinks the opportunities are in the near future.


He started by giving us his take on the market's recent volatility and what people are thinking about during this period of confusion. "The markets are in a bit of a tumultuous phase. Basically there was the flash crash, as it's being called," (where the Dow dropped nearly 1000 points in one day in early May), "followed by what I call the six day war: A six day major correction in the market that led to fear amongst investors; a bit of a panic and people bailing out of the market."


Moving back in time, Mr. Fulp talked about the factors that contributed to this situation, as well as to the rise in gold prices. "The flash crash was predicated by the Greece bailout and initially there was fear that there would not be a bailout, which would lead to a deflationary environment. However, when it was decided that there was going to be a bailout, then there were fears of hyper-inflation." Mr. Fulp said. That fear led to a flight to safety by investors. "When people are fearful, they go to the safe haven of choice and that often is gold. In this case [people also fled to] a currency with perceived less risk; the US dollar. So we've seen this bit of an unusual union of a rising gold price and a rising dollar. The last time we saw this was in January 2009 right after the financial crash. There was a lot of debt to be paid in US dollars so lots of people went into dollars and there was a lot of monetary debt that was settled in US dollars and, at the same time, a fear factor drove up gold prices."


While gold prices are going up, a lot of juniors' stock prices are declining. We asked him why this was and if it appeared to be an unusual situation. Mr. Fulp responded: "Thedisconnect between juniors and the price of gold is very easily explained. There is fear in the market. People go to gold for safety but what they also get rid of their most risky, speculative investments – the micro cap segment of junior resource sector."


This isn't an unusual situation, asserts Mr. Fulp, and investors who pay attention to buying and selling activity in the junior market might actually have an unfair advantage over other investors: "Preceding the financial crisis [in late 2008 through 2009], the junior resource sector was the canary in the coal mine. Junior resource companies hit their all time highs between April of 2007 and December 2007 and things started going south from there. The junior resource market started to crash in December 2007."


Things were rocky with periodic sell-offs throughout the months that followed December 2007, and then, the rest of the world caught up. Mr. Fulp said: "Right after Labor Day of 2008, the world financial markets had started to crater but the junior resource market had preceded them by 8 or 9 months. I don't think we'll see a bearish phase in the major markets without going through a bearish phase in our markets… because of the speculative nature of our stocks."


So, if that's where we've come from, we asked Mr. Fulp where he expects things to go. With the clearly stated disclaimer that he's not a financial advisor, he told us about what he has been doing in the markets. "I thought things were a little too heated as early as mid-March. In earlymid May I started taking money off the table. Over the course of the month of May I sold out of one-third of my stock holdings. I took profits from most of them – some of it handsome profits. I didn't hit the highs in the markets but I still took profits because I didn't like the look of the market."


And since then, throughout early June, he has cautiously approached the market in a limited way with a careful approach to the summer. "I haven't sold anything. I actually went in and bought some some companies that I feel are undervalued. I will tread very lightly in the market throughout this summer. I might take more money off the table; I might sell stocks and go to cash."


Investors might wonder my Mr. Fulp is being so cautious for the months to come. The reason has a lot to do with a frequent trend called "the Summer Doldrums": "From mid-July through Labor Day, most of the professional financial types in North America go on sabbatical for 4-6 weeks and people don't do a lot of trading."


On top of that regular annual trend, Mr. Fulp is just seeing generally quieter markets: "I'm seeing very sharp volume drops on the venture exchange. That's my barometer to what's going on in the market. In late April we were averaging 250 million shares traded a day but [recently] we were averaging about 60% of that… about one hundred fifty million shares traded a day. There aren't a lot of buyers; not a lot of liquidity. Even if you want to sell there won't be a lot of bids… I'll tell you what I see based on seasonal trends: I don't think it will be a great summer for the markets. In a normal market we'd expect a better market in the fall once the summer doldrums are over."


Even with this less-than-enthusiastic view of the market, we wondered if Mr. Fulp had any stocks he was still thinking about.


Of course, there are the ones he follows publicly: In the gold sector he follows Amarillo Gold, Animas Resources, Eurasian Minerals, Otis Gold, and Pediment Gold. In the rare earth sector he follows Avalon Rare Metals, Quest Rare Minerals, Rare Element Resources, and Tasman Metals. And in the uranium sector he follows Strathmore Minerals.


We asked him to highlight one of those companies and he spoke about Tasman Metals. "Tasman Metals is run by a couple of good geologists that I've known since 1998, when we all worked in Peru. Their company, Tasman Metals, is a rare earth element company focused on Scandinavia. These guys have tied up a number of rare earth element projects in Sweden, Finland, and Norway."


For our readers who aren't as familiar with rare earth elements, they are primarily produced in China but have a wide variety of applications, including an important role in green and clean technologies. Mr. Fulp added: "There will be a substantial demand for green tech and clean tech. The EU may even subsidize the development of green and clean tech… and the EU will want their own supply. Based on geology, one of the best places to [get rare earths outside of China] is Scandinavia and Tasman is set up there."


Along with Tasman and the rare earth elements sector, Mr. Fulp is also interested in the uranium sector. He said: "I'm a contrarian and I like to buy when no one else is buying. The uranium sector has been hit horribly by this downtown so there are some bargains out there."


We asked him for his advice on the uranium sector – how to trade and who to pay attention to. He said: "If you want to invest in uranium, you want companies with developable projects in geopolitically favorable parts of the world. For me, that's North America. I don't look at uranium companies in geopolitically risky parts of the world because I think there is enough risk to begin with so I go to places where uranium has been produced before. I like companies that have discoveries in the Athabasca basin. I like companies that have near term developable projects in Wyoming, New Mexico, and South Texas. If you're interested in uranium, go find some under valued stocks in those areas. I particularly like Strathmore Minerals."


Speaking to Mickey Fulp is always a fascinating, contrarian look at the market and this time was no different. We came away with a clear idea of why the market is acting the way it is, what the market will probably do in the near future, and how investors can take advantage of the limited opportunities available.



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