With the U.S. dollar rallying recently and ‘risk assets’ lagging the overall market, one big question that comes to mind is where gold prices will be heading over the next year, following the 10-year bull market which has seen prices rise more than five-fold.  One recent addition to the ‘bearish camp’ on gold is Dennis Gartman, author of The Gartman Letter.  The yellow metal’s recent decline has seen it dip to roughly US$1,630 per ounce, after climbing a record high of US$1,921 in early September.  “We have the beginnings of a real bear market, and the death of a bull.  Since the early autumn gold has failed to make a new high. Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low.”  Even more disconcerting is the fact that China has been an aggressive buyer of gold in recent weeks. The total amount of gold entering mainland China from Hong Kong reached 286.8 tonnes in the first 10 months of 2011, which is more than triple the amount just a year earlier.  While buying of that sort should have sent gold prices soaring, instead they plunged.  “One of the oldest rules of trading is simply this: a market that cannot or does not respond to bullish news is a bearish market not a bullish one,” Mr. Gartman said. “This was manifestly bullish news and it was received very bearishly indeed.”

Of course, differing opinions is what makes markets.  In response, Peter Grandich has called out fellow investment newsletter writer Dennis Gartman on his assertion earlier  that gold is now entering a bear market.  In the latest installment of The Grandich Letter, he said that Gartman is a “true master of self-promotion whose track record better suits him for the lead role in ‘The Boy Who Cried Wolf’.  He is one of three people who many in the media continue to quote despite a nearly decade-long poor overall track record on gold.”  Mr. Grandich said he is willing to wager US$1-million that gold will hit US$2000 an ounce before it hits US$1,000 on the COMEX.  Indeed, he has already arranged for a law firm to hold the funds in trust.  “For once, let one or all of the most arrogant and often wrong gold forecasters truly put their money where their mouth is when it comes to gold forecasting.”  Let’s watch the markets settle this bet!

Research in Motion finished off an extremely disappointing year in 2011 with earnings that met reduced expectations but they also guided to lower sales in the 4th quarter to reduce inventories.  The shortfall continues to be generated primarily in the U.S. market where they have lost huge market share to both Android and Apple smart-phones.  Market share there has fallen to 10% from almost 40% two years ago and now represents only 20% of total global sales.  The bigger negative though was a delay in the release of the new Blackberry10, which is the first of their new ‘super phones’ that will have the new software from the QNX acquisition, until the second half of 2012.

Clearly the company failed to meet our expectations in the past year and the value of the stock has performed even worse, falling to an incredibly low valuation on current earnings, showing that investors have very little faith that the earnings decline is over.  Though the temptation is always there to just sell the stock and be rid of it, we have to look at the whether that strategy makes sense at the current price of $13 per share.  On the positive side, international sales were up 56% year-over-year and they added 5 million new subscribers for the quarter to bring the total to almost 75 million, up 35% year-over-year.  The Blackberry7 is now selling in over 175 countries globally and is gaining strong market share in emerging market economies.  The value of the BBM network, the enterprise server business and the accumulated patent portfolio (which is what attracted Google to pay $12 billion to acquire Motorola Mobility earlier this year) is easily worth more than the current stock price.  Moreover, the company has over $1.5 billion ($3 per share) in net cash on their balance sheet, they are still very profitable and they are still generating strong net cash (which should move up to over $2 billion in the next quarter).  While the iPhone and Android-based phones are winning share over everyone else in the U.S., the U.K. and Canada, the RIM products continue to dominate the business market due to their higher level of security and true multi-tasking (which is also why they continue to develop and upgrade the Playbook for the tablet market….the next release is due in Feb. 2012).

The company may have to be re-invented somewhat to surface that value.  That could include a bigger focus on their networks and operating system as opposed to their handset business.  One analogy of the RIM story is that they are akin to a company which owns a private super-highway and also builds the cars that drive on this highway.  The car business is losing momentum, so why not just open up the highway to all the other car-makers and charge them a fee to use your highway?  This might be where the ultimate value is in the stock.  We have not been adding to the stock position right now since we still see one or two more quarters of poor sales momentum until the Blackberry10 products hit the market.  But there is still far too much value there to be a seller at current levels in our view.  Realistically, we have to reduce our fair value target for the stock but still can easily see over $25 per share in value today.  That target could also rise if they do regain some sales momentum, but the stock is still exceptionally under-valued just on the current metrics.

When everyone is negative it’s hard not to get caught up in that belief; but it doesn’t mean that it is right.  I saw this story recently and thought it was an interesting, light analogy of the current market mood.  Author unknown:

“A man lived by the side of the road and sold hot dogs. He was hard of hearing so he had no radio. He had trouble with his eyes, so he had no newspapers. But, he sold good hot dogs. He put up a sign on the highway telling how good they were. He stood by the side of the road and cried, ‘Buy a hot dog mister.’ And, people bought. He increased his meat and bun order and he bought a bigger stove to take care of his trade. He got his son home from college to help him, but then something happened. His son said, ‘Father, haven’t you been listening to the radio? There’s a big depression on. The international situation is terrible and the domestic situation is even worse.’ Whereupon the father thought, ‘Well, my son has been to college. He listens to radio and reads the newspaper, so he ought to know.’ So, the father cut down his bun order, took down his advertising signs, and no longer bothered to stand on the highway to sell hot dogs. His hot dog sales fell almost overnight. ‘You were right son,’ the father said to the boy. ‘We are most certainly in the middle of a great depression.’ ”

Best  Wishes for the Holiday Season

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