It seems that in these times of uncertainty and financial chaos, different types of cycle-theories become popular. I've seen these types of articles all over the place in the last few months - not that cycles weren't popular before, especially among those propagating rising prices in commodities. The rise of cycle explanations for economic events seem to go hand in hand with uncertainty - like it's a last resort of trying to bring clarity. I'm not saying that there aren't cycles, it's obvious that things tend to fluctuate; It's just that the introduction of the cycle often seems a bit strained or awkward - like it's not enirely necessary for explaining events. After all, we know that a credit expansion is going to have to contract at some time, but why call it a cycle? When the cycle is introduced we are venturing into the realm of philosophy.
Luckily for me and my readers, I actually studied philosophy for almost two years before I studied economics and my main interest there was in philosophy of history and cycles (don't be confused: history of philosophy is the actual history of philisophical thought - philosophy of history is a philosophy OF HISTORY). In economics we have cycles of many different sorts, some span over more than a hundred years while some span only over months or a few years. They're all related to the basics of economics - production and demand - and how these two can be manipulated by different 'forces'. In philosophy we have cycles that are generally focused on the elusive concept of culture; perhaps the most well-known of these cycle-philosophers is Oswald Spengler who identified (or theorized about) the rise and decline of cultures - like the rise and fall of the Roman culture. In short, what he identified was a type of original virility and strenght of the culture that then got weaker with time and finally ceased to exist, however this 'culture' did not coincide exactly with the Roman empire, which in it's later stages had lost all of the Roman culture and was nothing more than a zombie - and this zombie-analogy was transferred onto the modern western culture, not entirely unjustified (!). At about the same time as Spengler there were other philosophers who had taken on impressions from Hegelian-Kantian philosophy as well as Spengler and went a step further. I think the most well-known would be René Guénon and Julius Evola who both introduced cycles that not only covered cultures but also spirituality. A lot of their thought was actually formed not only from philosophy, but also from hindu and greek sources. It was the same basic lay-out as Spengler's culture-cycle, only here the origin was one of a pure spiritual understanding that over the course of many thousands of years became weaker and more and more forgotten and eventually led to a state of spiritual confusion. In hindu and greek traditions there are very clear accounts of these spiritual cycles, some may know of Plato's tale of the four humans - gold, silver, bronze and iron - that all represented a different age of humanity.
Ok, so we've briefly covered the philosophical cycles now and although I don't fully agree with the necessity of cycle-theories I am able to recognize a degree of truth in all of them, and that truth is best expressed in my all-encompassing theory of cycles (both philosophical and economic), namely the 'douchebag-cycle'.
What combines all the cycle-theories is that things start out good and then turn bad. Or as I like to think of it - some people are really clear about something, they're fired up and ready to go, but as they've kept going and the purity of their reality is realized they gradually loose passion for the state of things and forget about what was important. This is what a typical douchebag kind of person would normally do - they get fired up about something and then they loose interest and soon enough they're sitting around eating snacks and watching TV, while everything slowly fades away. Therefore: The douchebag-cycle. It explains everything! If you forgot to whipe your ass - blame the douchebag-cycle. If you are too lazy to pick your kids up from school - blame the douchebag-cycle. If you got really drunk and made an ass of yourself, blame the douchebag-cycle. Soon enough, you'll see Ben Shalom Bernanke on TV blaming everything on the douchebag-cycle. And why not give the guy a break, right? He's just on the wrong side of the douchebag-cycle!

I realized from my China-post that I had kind of forgot about alternative energy lately, what with the financial crisis and all. I think it is still a market that should be overviewed, not only because of the long-term problems of energy sustainability, but also because the strive for clean energy is very much alive, despite the economic worries. I beleive that today there are a couple of really good and sustainable clean energy alternatives; wind, water, thermal and solar power. I still have a few doubts about wave-power... but, economically I can't see how these alternatives could ever really go out of fashion - if it was economically feasable to build wind-mills in the harsh economic climate of 500 years ago, then it will be so 500 years from now as well. When alternative energy comes up people usually point to how much cheaper nuclear-energy is, and they're right, it is much cheaper. But we all know it isn't sustainable and if it is economically sound to produce alternative energy today to make the transition easier when uranium starts running out, then why not. The four alternatives I mentioned above are all economically sound today and were actually so even before energy prices started rising a few years ago. Obviously water is the best alternative, second to it I think wind is the best choice (unless you're living in Iceland with heat boiling up from the ground all over the place). So, I decided to take a look at a smaller wind-power company that is in a good position to grow, and I think that AAE fits that position perfectly.

AAE has just opened up a production facility for turbines in Quebec/Canada and so far they've delivered two turbines. The technology used is one acquired from Germany and is licensed for unlimited use in North America, the UK and France. The business-model is very simple; instead of focusing on huge wind-parks like many of the larger players do, AAE will focus on smaller parks or just deliveries of one turbine at a time, with turbine-sizes of 1-2MW. This model will make margins thinner than for large producers, but there's no reason to doubt it's profitability.
They have an agreement to deliver 61 turbines in 2010 for Mont Louis Wind, and they have agreements of one or two single-turbine deliveries. So far there have been a couple of public offerings and private placements of equity financing and it looks likely that there will be further dilution until 2010, when some real money starts rolling in.

Today AAE has an mcap of ~CDN$23M and basically no debt. They already have a good bunch of ordered turbines and although these things are impossible to predict I think that orders will keep on coming. The market for wind-power is still growing and it is still a seller's market. Even if the economic crisis could take a good bite out of this business, AAE could actually benefit as they are focusing on smaller scale projects, which may become more attractive as funds shrink in all sectors. At least AAE has it's operation pretty much secured until the end of 2010, and with that considered they have a lot of time to try and get new orders.
Let's assume that AAE is able to sell 50 turbines a year, and with a net profit of CDN$0.3M per turbine, then the 23M mcap isn't looking too expensive. I could be way off in my guesstimate here, but a alot will really be uncertain until some real money starts moving in this company. But on the whole they are in a really good position and if they land some more larger orders then they should be set to start climbing.

I got a lot of positive response on the post I wrote on Russia, so I figure there is a lot of curiosity out there about the state of some of these more exotic growth-economies. There is undoubtedly a lot that is unclear and uncertain about how things might shape up in these countries that are low in BNP per capita, that have low debt levels and strong growth. I feel that China is, just like Russia, one of the most elusive countires on the planet, not just economically. For the past couple of years I've unknowingly dismissed China as simply a country that is nothing more than - as the title says - an export driven slave camp. And I've held the position that as things start to go bad, and chinese exports go down, they're gona be left with nothing - because all they have is a huge population that is willing to work at slave-type conditions. After having done some well-needed reading on the subject, I'm gona try to give a more nuanced picture.

Let's just look at some numbers first: Foreign exchange reserves ~$2trn, external debt ~$300bn. The surplus of imports-exports is somewhere around $300bn today, what is very interesting to note here is that although exports for the last few months have gone down ~2,2% (in nominal terms), the imports have actually gone down even more ~18%! This big decline really shows how great the import of commodities in China really is; with the big decline in prices for the last few months, China is actually benefiting.

What caught my attention most of all about China is the very overlooked public sector, which is estimated to represent about 60% of the economy. With all the attention that the private sector has been getting, one might almost get the impression that they have almost no public sector. If we just look at this in a workforce perspective - China has a workforce of ~800M, where only ~130M are export-oriented jobs.
Since not too long ago, communist China started to allow a private sector and foreing investments in the country, as a way to "speed up the path to the socialist dream". Well, whatever you think of China's commuist-capitalist system, I'd say it looks like it's working; poverty in the country is down greatly and the technological modernization has been quite strong as the private innovations spill over into the public sector. So, the backward technology and inefficiency that plagued China before privatization has been much improved, still much needs to be done - not least in the inner and western parts of the country that are less exposed to these innovations.

So, couldn't China just expand it's public sector to fill in the slack of the private sector? - after all, the privatization adventure has already given so much. Well, this is what they are actually doing, just recently they announced a $586bn stimulus program, and have also declared an intent to continue adding more stimulus-money to the economy, going forward. Most of this money so far has been aimed at infrastructure-projects. It's impossible to say now what effect this will have, but obviously it will ease the pain of some of the people that will lose their jobs in the export-sector.

The privatization in China has brought a lot of wealth and development into the country and I think that a strong public sector really can uphold employment for a few years if export-driven growth greatly decreases. But what does this mean for investors? I would think that the strong growth of China will definitely go down, however it might not necessarily turn negative and so the domestic market might very well continue growing even as western countries are crashing. I do not beleive that here will be a decoupling of the chinese economy, but considering their strong demand for commodities (which looks unlikely to slow down that much) they will probably take the role as a helping hand for those economies that are faring most ill.

Some have forecasted political problems in China (or a breaking up of the country) because of its great economic inequalities both regionally and on a per capita basis. I don't see this as too likely; the chinese government is working very hard to combat these issues and although many migrant workers are losing their jobs, the big public sector will probably be used to swoop these people up. For example the chinese military was expanded by ~17% last year and again by ~15% this year, I think that the chinese leaders can produce jobs quite easily - at least in the shorter term of a couple of years.

Now, I might be dead wrong about the ability of the public sector to swoop up unemployed people, but I really don't see how; China has huge reserves and still a political and economic structure that makes these things much easier than in more capitalist countries. With the stimulus-money going into infrastructure, the rest of the world will not be losing the chinese demand for commodities and although things go really bad all around us, I beleive that China will be able to maintain a fairly firm position. The problems that China faces are more long-term - because they really are dependent on exports of goods, just like Japan, where exports have been dropping insanely. Both these countries need commodities from the outside to exchange for whatever they can produce. And it is no secret that China has been going around the world lately doing what they can to secure the flow of commodities into the country. Many people are aware of the danger in this situation, and unless technology for a self-sustaining society in terms of (foremost) energy can be created there will be wars for natural resources in the future.

Wow, that ended on a bad note. But it may well be a scenario that never has to come true or it may well be far off into the future. The economic down-turn is probably going to make the developed world less hungry for energy and therefore ease the strain on oil-supplies and the competetiveness around it; therfore this isn't necessarily an issue in the coming years and with the financial strenght and 'special' structure of the chinese economy it should be fine for at least some time to come.
So finally, should one invest in China? Well, I think that companies for the domestic market might just make it fine in the coming years, but not those who are more export-oriented. Perhaps a small or mid-cap chinese fund is a good idea, but on the whole the economy will probably be growing very slowly, if at all.

AGQ is another junior (soon to be) mining company. For those of you who are familiar with the story of Novagold, you'll see that AGQ has a lot of similarities. Novagold has huge resources of metals (mostly precious), whereas AGQ has a - not exactly huge - but large resource. Novagold has a mine that was in production recently and probably will be again soon - and so does AGQ. I'm not 100% on these numbers, but last time I looked I think that Novagold had something close to 30M ounces of gold, and an mcap of CDN$250-300M. AGQ has about 80M ounces of silver equivalent and 2.55M ounces gold (in total ~4M ounces of gold equivalent), and an mcap of only CDN$8M. Although the numbers for Novagold are not 100%, I think this relation is pretty striking: for AGQ to be on a similar valuation as Novagold, they would have to be valued almost ten times higher. Of course one could easily argue that Novagold is grossly undervalued, which would make AGQ ridiculously undervalued. Another thing that speaks in favor of AGQ in relation to Novagold is the fact that they still do not have any large loans, which is something that Novagold has.

So, let's look at the projects of AGQ: There are three main projects; the first is the San Jose project, which was a producing mine until 2001 - which means that pretty much all the infrastructure is in place already. San Jose holds about 80M ounces of silver eq., with high-grade silver along with zinc and lead. The property has a huge potential to expand, and ongoing exploration keeps showing up great results. The mine is set to re-start production in 4Q 2009.

The second project is named Calicato. It does not yet have a determined resource, but is considered to have potential for over 25M ounces of silver eq. The average grade so far has been 200-250g/t silver and 0.5-1g/t gold, along a vein-system of (in some cases) over 4m width.

The third project is named Tepal, which holds a 2.55M ounces gold eq. resource. It's a copper-gold-silver porphyry project. It has seen exploration since the 70's and is still open to further exploration in many large areas. The average grades are so far 0.47g/t gold and 0.24% for copper, whereas the silver has a very marginal importance.

I know some of you might think that the comparison with Novagold was a little out of place - after all Novagold has projects or stakes in projects that are huge and with much better grades than AGQ - but the most important thing today is to get some money flowing, and in that case they are very similar. Both of them are going to have trouble getting money to keep things up until they can cover their expenses by an operation (I also talked about this in the Oroandes post). But both Novagold and AGQ have some great projects and by the looks so far, they are still able to raise money.

By just looking at the valuation of the peers of AGQ, it does look very undervalued. It is only a few million dollars away from the same valuation as Oroandes and other junior explorers who are just valued on the hope of big findings - AGQ has already got big resources and an operation that is about to start up in a couple of months ... and that should count for something.

Ok, todays stock-review is going to be short. Since I wrote about Millicom I've been a little curious if there are other companies like it, and possibly in better positions. Well, there are:
MTN is another company in the mobile-telephony business which is very strongly exposed to the african markets. Really all they have is exposition to Africa, and to a small degree, the middle-east. And as you might remember from my Millicom-exposé, Africa had the absolute best growth-rates of all the places where Millicom was active (~100%). In comparison of the two, Millicom has a p/e of ~10, and MTN has almost 14; the revenue-growth of Millicom is 29%, and MTN 35% - this compares Millicom for full year 2008 and MTN for only first half of 2008; MTN will release full year results on March 12.
The reasons for Millicom's lower valuation I suppose would be because of it's large dependence on the much more mature markets of Latin-America. MTN practically dominates african markets and are present in most countries there. The greatest revenues come from Nigeria and South Africa with 30% and 40% respectively. As is well-known, the economies of these two countries have been driven pretty strongly by high prices of oil and metals, but they are still showing better growth than Latin America (between 06-07 Nigeria had growth of ~40% and SA had ~18%).
We're all aware of the great instability that has plagued Africa for many years, and obviously this is very problematic. But if you consider the great growth and the great potential for continued growth and the very large number of countries where MTN is active, political problems might just represent minor bumps. Because of the great instability of Africa in the past it might just, oddly enough, represent the most stable place to be in right now and for a few years ahead - especially in a strongly growing sector like telecommunications. I might add that the middle-eastern countries where MTN is active also show very strong growth, like Iran's 485%! Don't worry - I'm not going to make some lame bomb-Iran joke...!
In conclusion, I would personally prefer MTN to Millicom, but only by a thin margin - african instability still makes me plenty nervous, but so does 'instability' of financial chaos...
(edit: Odd coincidence, Millicom had a minor crash today as they announced a change in management. That thin margin might just have switched in Millicom's favor.)

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