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August 2007



Long Live the Credit Bubble

August 31, 2007 – Comments (3)

Today Bush announced plans to essentially bail out irresponsible lenders, developers, borrowers, brokers, basically anyone involved with the subprime mortgage mess, as this news release outlines.

There are a number of responses, critical as in Mish's post, and I do think Mish is right on with his analysis.  

I am not sure what to make of "Parting the Bankrupt Sea."  He points out that those hurt by this move are those who correctly assessed that these were bad investments and there would be a crash.  I simply don't get the part of this post that says:

This is a good move by our government (unless Bush does something really odd during his speech later today or Bernanke usurps President Moses Bush with comments that are at less than positive and supportive)

I don't see at all how it can be a good move to bail out highly irresponsible activities.  Governments role is to regulate highly irresponsible activities, not dip into taxpayer's pockets to make irresponsible activities ok.  At best, it is a short term solution that allows the wealth to cut their losses.

Another post, just a graph, shows the degree to which US debt has risen relative to that which makes a nation strong.  The graph screams to me the degree to which today's promise is short term, unsustainable and further cannibalizes the future.



Declining grade of Gold – Are the cost disadvantages linear?

August 25, 2007 – Comments (8) | RELATED TICKERS: GG

This is an analysis that I have been meaning to do for a while that simply looks at how mining a declining ore grade affects costs.  This is a particularly important analysis for investors of gold stocks as my sense of the market is that the grades of gold being mined are declining faster than any other commodity, and additionally, replacement reserves for gold companies are grossly lower quality than reserves that are currently being mined.  [more]



I don't like GameStop

August 23, 2007 – Comments (2) | RELATED TICKERS: GME

I tend to rate stocks as underperform when I see stuff I don't like and the market continues to surprise me that people in invest in it.  So, instead of rating Gamestop, I'm just pointing out I don't like it.

It simply would not surprise me to see the market to continue to push it up...

So, here is what has me not liking this stock...

When it started in 2002 there were about 20 million shares, now there are 165 million fully diluted.  This share dilution thing kills the valuation of investments more than any other thing.  It is about an 8-fold dilution over about 5 years, and I suspect it is far more, but I did not take the time to look.  This level of dilution is so profound, it leaves me wondering if the stock performance can ever catch up.

To give a perspective of the market cap growth, at $4.90 in 2002 with the roughly 20.8 million shares, that is a market cap of about 102 million.  At the $46.34 right now, well, that's a fully diluted market cap of $7.64 billion, and I'd be willing to bet if I looked for dilution I'd find that figure low.

So, market cap is 7500% of what it was five years ago.  The sales growth has doubled between 2006 and that first offering in 2002.  With the 2007 estimate, well, the growth is 240% of what it was.

It seems to me that even though it is a fantastic growth story, the growth in market cap is far, far, far, far in excess of the over earnings of the stock.  Indeed, even making their $1.45 guidance this year, that is earnings of about 3% of the market cap and the rate of growth has to seriously slow down at this stage of the game for this company.  [more]

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