Well it's official, a bank has collapsed in the United States.  IndyMac Bancorp was seized by federal regulators last night after an already a large run on the bank.  If guys like Eric Sprott and Jim Rogers are right, this should be the start of many many more bank failures.

This is a follow up to my article on "How to Spot the Trends".  Well it seems like the trend is to now buy gold stocks.  All of the best managers here in Canada have moved into gold stocks and energy services.  Peter Hodson of Sprott Asset Management, in his June commentary, said he believes gold is the best call he can make right now.  David Taylor of Dynamic Funds has sold a lot of his energy stocks and moved heavily into gold and energy services.  And last, but definitely not least, is Andrew Cook from Marquest Asset Management.  His fund is up 50% over the past year and has been generally kicking ass with a 50%+ annualized return for the past 3 years.  In his June 27 commentary, he said he believes during this high oil price and poor financial liquidity environment, gold stocks will rally.  Perhaps even more impressive is his market timing skills.  In that commentary, he said he had up to 40% cash because he expected a correction which would be a significant opportunity to re-buy right before the next rally.  And guess what?  We've had a nice correction over the past week!  Not only that, but gold stocks have already started to rally just like all those experts have said above.

I personally expect (hope) the correction to continue a bit more and hopefully I can buy some stocks that are on my list.  This was why I raised some cash a couple of weeks ago.

Legendary value investor Sir John Templeton has died.  I have written about him here on StokBlogs as he was a great investor that contributed much knowledge to the field.  The key point I will always remember learning from him is to “stay flexible, open-minded, and sceptical”.

Best wishes to his family and may he rest in peace.

Everyone has an opinion on the record-high oil prices these days.  Half the experts thinks hedge funds and speculators have driven the prices up, whereas the other half thinks it's all supply and demand.  Interestingly enough, Warren Buffett is the latest to weigh in on his opinions -- he is in the supply/demand camp:

Becky:  You mentioned oil prices, and there's been a huge debate we've been having on our show, and throughout the day, where people are trying to figure out, is this supply and demand picture or to the idea that there's speculation going on in these markets.  That there's a lot more money in these markets than there used to be, say three years ago.

Buffett:  It's supply and demand.  I mean, if somebody buys a thousand forward oil contracts and somebody sells a thousand forward oil contracts, somebody's speculating on the downside and somebody's speculating on the upside.  The only way you could have speculators having a big impact is if you had a huge amount of storage where they started actually withdrawing actual, physical oil from the system.  But it's not speculation, it's supply and demand and the situation is that in my adult lifetime, up until the last year or two, there's always been a huge amount of excess supply available.  There's been reserve capacity.  And that goes back 30 years ago, in this country we produced way more oil than we needed here and we had something called the Texas Railroad Commission that shut down wells.  And a matter of fact, we got down to where they would only let wells operate in Texas for eight days, we had so much extra capacity.  We don't have excess capacity in the world anymore, and that's what you're seeing in oil prices.

Becky:  Except we had a series of people who came to Capitol Hill, to Congress on Monday, who said, the analysts, if you tamp down on speculation, you could cut 50 percent, as much as 50 percent, out of oil prices immediately.  Do you think that's just hogwash?

Buffett:  (Laughs.)  I think if they closed the oil futures trading, I don't think it would make much difference.  Incidentally, the five-year oil price, you can buy oil for delivery in 2012 now, or 2013, that price is very close to this price.  Now if anyone thinks that short-term speculation is entering into oil prices,  where are they paying 130 dollars a barrel for delivery in 2013.

An article on bargains that value investors in Canada are currently looking at:  Canfor, Torstar, Jean Coutu, Yellow Pages Income Fund, Pfizer, UnitedHealth Group, ProEx Energy, and Brookfield Properties.

When markets were going straight up a few years ago, value investors like Wade Burton had a tough time finding any bargain-priced stocks.

"We spent five years banging our heads against the wall," says the portfolio manager with Mackenzie Cundill Investment Management.

But when the credit crunch hit last summer, everything changed. Now, there are cheap stocks everywhere. "It's awesome," Mr. Burton says.

Value investors look at measures such as price-to-earnings and price-to-book ratios to find stocks that are trading at bargain prices. A key premise of value investing is that markets often overreact to negative news, pushing stocks below their true worth. The idea is to buy the stocks when nobody else wants them, so you can profit when the market comes back to its senses.

Sound simple? It isn't. Buying stocks others are ditching requires a strong contrarian streak and loads of patience while you wait for the price to recover. Sometimes it takes years; sometimes it never happens.

Something I have noticed in the marketplace, especially here in Canada, is not only do the best fund managers trade in and out of stocks, they always seem to be in the same kind of stocks!  At first, I thought to myself: How could this be?  Are they moving in herds together?  Is this some sort of self-fulfilling prophecy where the best managers move into some stocks, and then the rest follows?  Or perhaps is this some sort of collusion where the public is continuously left holding the bag?  Or, maybe, just maybe, the best money managers somehow always know where the next rally will be.  Much like how the best hockey players, as Wayne Gretzky says, goes where the puck is going to be and not where it was.
 
For example, at the beginning of this year 2008, it seemed all the best fund managers were calling for natural gas, potash, and silver stocks to be winners.  Just watching old videos of the Sprott guys on BNN, looking through their portfolios on Sedar, perusing newspaper articles about Rohit Sehgal's Power team, or even reading about America's own Ken Heebner, and you will see evidence of this.  They were all in those sectors.  And low and behold, natural gas and potash stocks have since been on a tear!  I guess this is why those managers are called "the best".  This is how they pull off 25% returns every year.

Perhaps silver is next?

But I digress.  This article is not about potential winners; it is more about how to pick the winners.  One of my biggest challenges over the past couple of years has been to learn to identify the trends -- to find the best ideas at the right time.  This is so important because I have seen many value investors buy stocks at the wrong time (ie while they are still falling) and then having their money trapped for several years before things turn around.  Many, albeit, will argue that this is how value investing should be done.  You should buy now when prices are low, they say.  I beg to differ.  For not only have I seen the success of the managers listed above, I have also seen the failures of those who do not pay attention to the macro-environment.  Many investors who were recommending Citigroup last year, for instance, did not yield to the signs that the mortgage and derivatives markets were set to explode.  Or even those value investors who recommended natural gas stocks two years ago sat through a lot of pain before the commodity turned the corner.  Or how about those investors who bought lumber/paper stocks two years ago?  Had you bought those stocks supposedly on the cheap, you would have witnessed the sector getting crushed further from a slowing economy, and your stocks following suit.  Same said with media stocks.  Like everything in life, timing is key.

No I'm not saying I want to be able to time the market.  For that would be nearly impossible.  But I believe if you just "listen to the street", you can cut the waiting period down to a year or so.  Many value investors are always in stocks too early, and then they correspondingly miss out on huge gains because they exit their positions early after having waited patiently many years.  Some of them are even proud of this!  At first I thought this is how it is done, but after watching the best managers, like Ken Heebner, rack up giant gains year in and year out, I have realized combining value with a top-down approach can add many percent points to your portfolio returns.

A key point in accomplishing this seemingly difficult goal is identifying the catalyst.  Ask yourself why is the trend likely to change?  Why will it go up?  Why now?  Natural gas was a great example.  For not only did you have Rohit Sehgal (his hedge fund has a 60% 5-year record) bullish in January, there was mounting evidence from other experts that natural gas prices all over the world had been rising.  Once a commodity begins to rise, as most people know, the stocks – especially if they were beaten down like natural gas stocks were - will usually follow suit.  Lest not forget the icing on the cake: insiders of Canadian natural gas companies were buying tons of stock in December 2007.  Insiders - the people on the front lines of their respective sectors - are always the first to know when things are truly turning around.

So it seems these signs are out there, you just need to pay attention.  Perhaps the best advice on this subject has been from none other than one of the greatest macro-investors of our time, Eric Sprott:

While the supply of ideas may be limited, there's no magic to coming up with them, Sprott insists. "I believe that a little bit of hard work and keeping your eyes and ears open can make you a successful investor," he says. "There are things to see and notice - they're quite readily available - you just have to be receptive. You have to read between the lines a little to see what's happening."

And how does one keep their eyes and ears open?  Read.  Read everything.  Read what all the best fund managers are doing, read the news, read magazines, read books, and read blogs.  I am always looking for ideas.  More importantly, I am looking for those catalysts which will be why a sector is turning around or what has changed in a stock to make the upside huge.  Videos and audios too are useful.  BNN is my favourite financial TV station here in Canada, CNBC is the equivalent in the U.S.  I watch both.  Furthermore, I routinely seek out any media clips on Bloomberg or any other financial media hubs on the Internet.  Once again, the idea here is to listen to the street, especially the best investors or experts on the street.  If you can get an inkling to what they are thinking or doing, you too might be able to spot the trends before everyone else.

Let me conclude by telling you how I did not follow my own advice here and recently missed a huge opportunity with coal stocks.  Suntzu and I met for coffee late last year in 2007 and we were talking about stocks as usual.  In passing, we mentioned how Grande Cache Coal (GCE.TO), a stock we both followed, had reached the penny-stock level.  We talked briefly about the ridiculously low stock price and the company's high debt levels.  But then the conversation quickly moved onto the subject of gold.  For, at the time, the entire world was consumed with the gold price.  Anyhow, had we stopped to listen to the street, we might have noticed that coal prices had already doubled.  Or we would have noticed a lot of fund managers had started to take small positions in coal stocks.  Needless to say, Grande Cache's stock went from a low of $0.71 to $10.50 today!  That's less than half a year.  Eric Sprott was right: It really pays to be receptive.  (He, by the way, has made a killing in coal stocks since.)

So keep your eyes and ears open at all times.  The trend indeed is your friend.  But first you must spot it.

A lot of experts, including Charles Oliver at Sprott Asset Management, seem to think silver is going much higher.

"That is the time to buy," he said. "I am not sure how high it could go, but I wouldn't be surprised to see it at $22 or $23 by the end of December."

Silver is used in jewellery, but has varied industrial uses, including in electronics equipment. Like many silver bulls, Mr. Christian predicts a big price driver will be rising investor demand for the metal as a "safe haven" because of concerns about inflation, the devaluing U.S. dollar and the global credit crisis.

The recent pullback in price, meanwhile, stems from some industrial users reducing inventories in the face of higher costs, while investors have been taking profits after a strong runup.

David Morgan, a U.S.-based precious metals analyst and writer of resources newsletter The Morgan Report, recommended his clients take some money off the table in March.

"I love silver, but let's be realistic," said Mr. Morgan, who is also founder of Silver-Investor.com. "These things can get over exuberant."

"I see a bottoming process [for the metal] between June and August," he added. "By the end of the year, I see gold over $1,000 per ounce, and silver back over $21 an ounce. I think the fourth quarter is going to be very strong for metals."

Gold for August delivery closed up $13.20 yesterday at $886.30 on the Nymex.

Mr. Morgan's bullish case for silver stems partly from the declining supply of above-ground, investable supplies of the metal as governments such as that of the United States have sold off their stockpiles.

Silver stocks, which he likes and owns, include: Pan American Silver Corp., with a two-year target of $50 (Canadian); Silver Standard Resources Inc., with a two-year target of $40); and Silver Corp., with a two-year target of $16. Among the juniors, he likes Minco Silver Corp., with a two- to three-year target of $5.

Evidence of rising investor demand has been the popularity of the iShares Silver Trust, an exchange-traded fund launched in 2006 and which is now backed by more than 190 million ounces of bullion.

Silver has also attracted wealthy investors like Microsoft Corp.'s chairman Bill Gates, whose Cascade Investment LLC is the third-largest shareholder of Pan American Silver. Billionaire investor Warren Buffett's Berkshire Hathaway bet heavily on silver in 1997, and bought 130 million ounces, but he has alluded to selling this investment by 2006.

Nick Barisheff, president of BMG Management Group Inc. in Toronto, expects silver to rally in the fall because of seasonality patterns tied to the wedding season in India.

"Gold and silver are a big part of dowries," said Mr. Barisheff, who runs the $189-million BMG Bullion Fund, which invests equally in gold, silver and platinum. "My view is that silver will be above $21 (U.S.) by the end of the year."

Silver soared as high at $50 an ounce in January, 1980, when the Hunt brothers of Texas tried to corner the silver market. But that spike only lasted a day, and the average price for silver that year was about $21 an ounce.

Charles Oliver, an investment strategist with Sprott Asset Management Inc. in Toronto, is forecasting silver to reach $40 and gold to hit $2,000 an ounce in four years.

The price target stems from calculating that gold historically trades at a 50-to-1 ratio to silver, even though those numbers can get "out of whack, periodically," he said.

He oversees the $614-million (Canadian) Sprott Gold and Precious Metals Fund, which has 9 per cent of its assets in silver bars and another 20 per cent in silver stocks. He currently likes Hecla Mining Co. and Silver Wheaton Corp.

"We are probably at the higher end than some of our [equity] competitors" in terms of a weighting in silver, he said.

Some interesting thoughts on trading from Peter Hodson, portfolio manager of the successful Sprott Growth Fund:

In other words, find a quality stock with momentum.

It is a general principle that also drives Peter Hodson, senior portfolio manager at Toronto-based Sprott Asset Management Inc.

"I'm a big believer that strength is a better thing to buy than weakness," he says.

"I've made far more money buying new highs than new lows, that's for sure."

Mr. Hodson says he rarely buys on downticks unless it's "the kind of panic situations where people are behaving irrationally and selling everything willy nilly." He cites as examples last Aug. 16 and this past January, when markets tumbled.

As a growth investor, Mr. Hodson says he is puzzled by people who are reticent to buy when a stock is on the high side.

One of the reasons for this, he says, is that "they've looked at where the stock's been and they beat themselves up saying, 'I could have had it at half the price six months ago. I must have missed it.'

"I hear that from investors all the time."

But he says investors have to change that thinking: "The price is the price. You have to decide if it's worth the current price. Where it was four days ago or six months ago is irrelevant."

One other point that Mr. O'Neil makes, and with which Mr. Hodson concurs, is many investors would rather buy large amounts of low-priced stocks over smaller amounts of higher-priced stocks, a tendency that can also undermine investing in quality stocks.

"[That tendency] clearly exists," Mr. Hodson says. "Once again, it doesn't make any sense logically or mathematically. But yes, that's why there's a market for penny stocks."

Ned Goodman, lead portfolio manager at Dynamic funds, is another phenomenal investor here in Canada.  In an article in the National Post last month, he doesn't think oil and commodities are in a bubble.

"First of all I'm an optimist," said Ned, who's a friend of mine, in his opening remarks. "That's because I've never met a rich pessimist."

The Dundee/Dynamic family of funds have outperformed most and their portfolio managers are all top-ranked, both in Canada and internationally. For instance, Rohit Sehgal, Chief Investment Strategy guy at Dynamic, was ranked the world's second smartest hedge fund manager this year by Barron's. He runs its Dynamic Power Hedge Fund and lots of other stuff.

What's best about attending such an event as this, apart from flying on a private jet with Ned to get there, is the collection of brilliant investment nuggets that are pure gold to investors. So here are a few gathered from the speakers this afternoon:

• "The bull market in commodities will last for another decade," said Ned.
• Oil at $130 a barrel is "not a bubble" because commodity prices are being driven by international supply and demand realities.
• Three game-changing companies, identified by Adam Domsky of Dynamic's Focus funds, are: Apple ($21 a share in cash, no debt and only 1% of cellphone market); Roche Group of Switzerland which is concentrating on cancer cures not bandaid pharma treatments and Wal-Mart Stores Inc., which is undervalued because it benefits from the slowing U.S. economy as well as 4% share buyback announcement.
• Three themes investors should keep in mind for at least the next ten years: FOOD (staples and healthcare); SHELTER (infrastructure, engineering, materials) and ENERGY.
• The credit crisis is not over yet, more writedowns, so it's too early to buy "financials" like banks and other intermediaries.
• Top 10 stocks in Dynamic's "growth" portfolio: RIM; Potash; Agrium; Petroleos Brasilia; Duvernay Oil; PetroBank Energy; Reliance (India's largest conglomerate); Niko (junior exploration in partnership with Reliance in the world's largest gas discovery); Suncor and Pacific Rubiales Energy.
• Outlook for gold is a steady annual increase of US$100 an ounce indefinitely because of supply-demand factors, said Rob Cohen, the group's mining analyst.
• Oil will be "bullish for 30 to 60 days", there will be volatility in the price and natural gas prices will increase dramatically on a global basis, said its oil analyst Andrew Taylor.

Inflation fears are overstated, said many speakers, because the brake on it is the deflationary factors such as collapsed housing prices in the U.S. as well as the continuing flood of cheap exports out of Asia to the rest of the world, thus lowering living costs.

"There will be inflation for some time. It's not like the 1970s, but there will be continuous inflation because of the rise in commodity prices," said Ned. So it's time to pick stocks, rather than rely on indices to rise.

Great article from last year on Seth Klarman:

EARNING 22 percent on your investments while holding half of your portfolio in cash is no easy trick, but last year Seth A. Klarman pulled it off, and it was not the first time.

Mr. Klarman, a 49-year-old hedge fund manager, has turned in market-beating performances since 1983, while perpetually warning that the markets were dangerous and that investors should minimize risk.