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Wednesday, August 15, 2007

“Pushing down on me, pushing down on you
Watching some good friends
Screaming let me out
Pray Tomorrow-Gets me higher
Pressure on People-People on Streets
Turned away from it all like a blind man
Sat on a Fence But it Don't Work...”

-David Bowie and Queen

We thought that these lyrics from an older song pretty much summed it up. Wall Street and Bay Street have people scared to death, and have people just wishing the markets would be closed. Many of the casual investors at this point have walked away, and even those who did decide to sit on the fence and park their money in a money market account have felt the wrath of the market. Money market funds have been found to contain tainted paper in the form of mortgage backed securities which paid out a higher yield than the fund and allowed the fund management company to turn a profit. It seems that now the entire financial sector is entangled in this sub prime web of deceit that we can finally all begin to relate to the 'pressure' referred to.

The past 3 weeks have gone from ugly, to uglier, and we have finally arrived at ugliest. It is admittedly hard to sit back and watch as the entire uranium sector gets pounded day after day, but in these times research pays off. Luckily we had the chance to escape out of town for a brief vacation, which allowed us the freedom to watch afar and keep away from the day-long market watch we usually engage ourselves in.

Now that we are back in town, and our battery is a bit recharged, let us tell you the reason we sleep very well at night. First off, the bull is alive and well so long as world mine production stays below the world's reactor requirements and there is not a repeat of Chernobyl or Three Mile Island. We have also positioned our portfolio so that it has uranium miners from producers to explorers and everything between. This diversification allows us to play the entire industry and know that even if the explorers find nothing, we will not be left empty handed.

Months ago an article ran on this site warned of the coming implosion of Private Equity, and that it would be a revolt from small investors tired of funding what were really LBOs. The article which included that idea now seems to have come full circle, however not exactly as predicted. Investors did balk at the LBOs, and quit buying the paper which funded the deals, as they had been taken advantage of for far too long, and this is when the pendulum began to turn back. Next the hands which fed this LBO craze decided to cut off funding for the deals in order to protect themselves (those on Wall Street always look out for 'Number One'). This will clear up, but everyone is running scared as a few hedge funds have gone belly up and others are unwinding huge trades. In all honesty, if you look at the number of funds we know have gone under versus those out is a small number, but one which is likely to grow still.

So what is one to do in this market? Honestly, this past week out of town reminded us just what we should also do...NOTHING! That's right, nothing. If you look at the broader indices, and then break it down between large caps and small caps it is easy to see where the selling is. Going over the stats which we missed, it appears that large caps are taking the beating to a larger extent than their smaller brethren. This may fall within the area that everything that can be sold either will be sold, or has already been sold. It is kind of hard to move large numbers of shares of illiquid stocks when no one wants to buy, in fact in this type of market that would be impossible. This was not an original idea from us, but we confirmed that this is what is going on, and when you want to see someone selling in an illiquid market and what it does, well then look no further than the current situation in the uranium equities. We are experiencing the inverse in our current situation, where the smaller, higher risk explorers are being abandoned without remorse and the near term producers are falling with the general market. 

Should you doubt our reasoning here, look no further than Continental Precious Resources (CZQ), Mawson Resources (MAW), and then like and then take a look at Denison Mines (DML) and Uranium One (SXR). The two explorers have had extremely high volume the past 7 trading days while the large cap uranium companies have seen a modest rise in volume over the same time. Mega and Pinetree have come under intense pressure the past few days with both stocks down around 40%. Most likely due to hedge fund or mutual fund selling in the case of PNP, but in general people are afraid of the market right now. Make no mistake, the streets are awash in blood which is usually a great time to buy however there are still more uncertainties in the market and more blood may spill. Long term traders could enter the market here, but our guess is many will keep their cash on the sidelines until it is clear the credit crisis is over.

You will find no bigger bull out there for the economy, uranium, and stocks in general however I must admit it looks gloomy at best. We could be in store for some very dark days as we sort through the housing/mortgage/sub-prime mess we currently find ourselves in. Uraniums could test their lows for the year which were achieved around this same time last calendar year and the general markets in the US could retest their lows set in February. If we go below those, this could be a replay of the '98 Asian Contagion, and as bad as that was we must all remember how brief it affected our markets. The strong US economy bailed the world out in those times, and now the world may very well pay us back with its healthy economy.

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