Mickey Fulp is Bearish for the near Term

By Dr. Allen Alper and Aaron Hoos
on 5/30/2012

Mr. Fulp is a well-known and widely-respected geologist, analyst, and critic of the junior mining industry. We had an opportunity to interview Mr. Fulp briefly at the recent Hard Assets Conference in New York to gain his insights on the current junior resource market conditions and his forecasts for where the industry is going.

Investors should always be asking two critical questions about their portfolios: "When is the right time to buy a particular stock?" and "When is the right time to sell a particular stock?" The answer to those questions might not be a specific date, but rather a particular set of conditions that make a stock a good value to buy and a profitable price to sell.

To answer these questions, investors listen closely to experts who have their fingers on the pulse of the industry. And few people have the pulse of the junior resource industry as accurately as Mickey Fulp – "The Mercenary Geologist".

Mr. Fulp first talked about the short-term history of the market – where it has been recently and what it's like today: "A lot of people are running away from this market and that's been the case for something on the order of 16 months," he told us. "The Toronto Venture Index is a good proxy for what goes on sector-wide. We hit a 4 year high or close to it the day before the Prospectors and Developers Association Conference (PDAC) in early March 2011. It's been downhill for the most part ever since."

Next, Mr. Fulp explained why the junior market is so soft: "The main reason is risk aversion. In these unsettled markets, people decided to buy only the Dow Jones – the Dow has been strong until very recently. So there's risk aversion and the speculating public does not view our industry in a positive risk/reward profile at this point."

So, what does Mr. Fulp see in the near term? "We're in the 'sell in May and go away' [phase] right now." The problem is liquidity, there's no volume in the market. People aren't interested in our sector. We've got July and August – the typical summer doldrums where everybody in New York is on vacation in the Hamptons; everybody in Europe is on 6-week holiday at the beach; all the Toronto promoters are at their cottages on a lake in Ontario; and the snakes, sharks, charlatans, and shysters in Vancouver are relaxing in the mountains and not at their desks. So liquidity historically goes down this time of year and therefore, market capitalizations follow suit. I don't really see anything on the horizon that leads me to think that this summer is going to be any different than the norm in our business."

Mr. Fulp continued, giving us his overall assessment of the near-term market: "I am very bearish for the near term. I will not define the near term exactly, except to say that I see no catalyst that will improve this sector until Labor Day at the earliest… and that's at the very earliest. Generally, markets pick up a little bit after Labor Day but that doesn't mean our sector is going to be in favor. This is because of extreme risk aversion in the world (due to the ongoing Euro-debt crisis and the printing of more and more fiat currencies, which inflate and devalue and make “stuff” cost more “money”)."

In fact, Mr. Fulp goes on to say that it's perhaps even worse than he has indicated: "Lots of analysts and writers are saying that we're at the bottom… I don't think we're at the bottom. I think we have lower to go and it's going to get worse before it can get better."

Next we asked Mr. Fulp what he believes investors should do. Before he answered, he reminded our readers that he is not a certified financial advisor so he cannot give investment advice. However, he is able to share what he does with his own portfolio. "Personally, I am not buying much right now because I think valuations could go lower."

Then he told us what combination of factors would prompt him to start buying again: "I'd buy specific stocks that look fundamentally strong, with the right combination of share structure, people, and projects, that are very well capitalized at this point, that can weather this storm (however long it's going to last) and come out on the back-end of this economic turmoil bigger, and stronger, and better."

He looks at mergers and acquisition opportunities as a way for the junior market to become more efficient. "There are way too many companies that were easily financed when money was being thrown at anybody with an exploration project. Very few of those will succeed [in this market]. The good companies will survive this [bear market] and come out stronger." So he concludes: "The weaker juniors with good projects but blown out share structures or unsuccessful management will be taken over, consolidated, and merged with stronger companies."

Although Mr. Fulp is bearish overall, he reminds investors that it will not always be this way. As stock prices fall, valuations will reach a point where investors say 'I have to own that stock at that price'."

And, as we approach what might be the bottom, Mr. Fulp urges investors to spend more time looking at stocks rather than trying to time the market: "If you want to buy, try not to buy too early. You can't pick the bottom but if you can buy a good company close to its bottom, that works."

Mr. Fulp usually provides a few stock picks in other interviews we've done with him. But in this interview, Mr. Fulp was bearish enough not to give any stock ideas. That missing element to the interview should be instructive to investors! Mr. Fulp is holding back, preserving his cash, and waiting for the opportunity to buy. All investors should take a page from Mr. Fulp's investing book, focus on the fundamental value of specific stocks, and be ready to buy when the valuations are compelling.