SuttonWatch.Net: A Portolio Manager's Greatest Fear

Answer: The overnight, out-of-the-blue, outrageous, and shocking Corporate Announcement in your largest stock position!

In the 38 years that I have been trading, investing, and managing money, I've seen my fair share of shocking corporate announcements. And I have been on the wrong side of a few of them, but I fortunately have managed to dodge most of them. When I was younger I employed the less-than-optimal trading strategy of "placing all your eggs in one basket, and then watch the basket very carefully". Lessons of time and money have prevailed and I now "diversify" a little more, although "overweight" situations are probably still more common than they should be in my current investment approach (i.e. gold stocks).

On Thursday morning, February 4th, I woke up early as I usually do and reviewed all my positions for potential overnight activity. I remember feeling great with my massively "overweight" allocation in precious metals mining shares, as everyone one of them had posted 25% to 50% gains since I bought them in mid-January 2016. In my head I was thinking "Master of the Universe" after what looked like a brilliant call on the U.S. Dollar (down) and Gold (up) earlier this year (in this column and with my portfolios). To capitalize on my bullish view on gold and silver stocks, I could have taken the easy and safe route with purchases of the most popular ETFs (GDX, GDXJ, and SIL), but I reached deep into my "master of the universe" stock picking talent and bought 6 of my favorite names in this hated sector. Those 6 names were AG, CDE, EXK, IAG, SSRI. and PPP. Yes, PPP !?

After the close late Wednesday, February 3rd, Primero Mining Corp. (symbol PPP) announced that its Mexican subsidiary, Primero Empresa Minerva had received a legal claim from the Mexican tax authorities (better know as SAT) seeking to nullify the Advance Pricing Agreement (better know as the APA) issued by the SAT to Primero Mining Corp in 2012. This APA confirmed Primero's basis for paying taxes on realized silver prices for the years 2010 to 2014. Mexico's SAT did not identify any different basis for Primero to pay its taxes, but Primero's management and its legal counsel indicated to investors that they strongly believe this latest "legal claim" by Mexico is "without merit" (and they will fight it "vigorously").

Of course, even though I held 6 different names in my precious metals portfolio, Primero was my largest allocation. Given that Gold and Silver prices were up sharply again Thursday morning (in a strong uptrend), I remember thinking early Thursday morning that PPP may actually open unchanged or just slightly lower, but the market would then quickly shrug off this negative corporate "tidbit", especially given that the Mexican government was looking at increased taxes on Primero's silver sales, and PPP is mostly focused on Gold mining. Primero traded as high as $2.73/share intra-day on Wednesday, February 3rd, but closed suspiciously weak that day at $2.63/share. After the overnight negative news, PPP opened at $2.10/share and promptly went south to close out the week at $1.62/share which was down 41% from Wednesday's intra-day high. I consider myself fortunate to sell my billion shares of PPP at $2.04/share. And when I was selling my entire stake in PPP, paranoia began to take hold and I started to think that Mexico would soon go after every mining company to nullify ALL its ATA agreements in a semi-Nationalist attempt to secure (steal) much-needed additional revenue for this impoverished State. Of course, all my mining stocks have Mexican properties, so by Thursday's close I had blasted out of every mining stock I own. Most gold/silver mining stock portfolios posted gains of at least 5% on Thursday, February 4th, but my 6-stock portfolio actually lost 3% that day. We can all think of worse war stories (i.e. October 1987, May 2010), but it still hurt none-the-less. "Master of the Universe"? Perhaps not yet!

Bottom Line:

1. While I don't have any horses in the race right now, I still think Gold/Silver mining shares will be among the big winners of 2016 (assuming they aren't nationalized).

2. My computer trading system has triggered some interesting buy signals in the U.S. stock market (see charts below). I am not sure right now if I will attempt to participate on the long side, but there is no chance that I will be shorting the S&P 500, the Russell 2000, or the Nasdaq Composite anytime soon.

3. While central banks across the globe look like they are no longer omnipotent, I strongly suspect that they have a few more tricks up their sleeves to boost financial assets prices in attempt stimulate economic growth.