Double Dip? and Acquisition of Avalon (AVL)

Good Morning Readers.

It has been a wild week on Wall Street as an avalanche of information arrived in force and not much of it was good. Consumer confidence plummeted, the ISM manufacturing report missed by a mile and the ADP Employment fell off a cliff.

European debt concerns continue to percolate, state finances are in disarray, Middle East tensions are on a rise and Moody’s announced it will downgrade government debt if we don’t raise the debt ceiling.

I can only conclude that the obvious question is “are we in a double dip recession?"

For the last 10 years central banks worldwide have printed a ton of money and encouraged the assumption of debt. The banks hoped that while no one noticed a legitimate economic recovery would supplant the credit led boom. The dollar devalued 40% so anything measured in dollars like bread, gas, gold, etc. benefited from the decline of that measuring stick. As Gerald Loeb taught us it is not the amount of dollars we have it is the value of the dollar that  counts. We outsourced our middle class jobs for cheaper foreign labor. If you listen to the Washington Bureaucrats or the talking heads on the media this was an unintended consequence of our push towards globalization. A void between the “have” and “have nots” grew ever larger and hopefully no one was watching as the spending habits of the rich masked the middle class struggle to exist.

In response to the first phase of the financial crisis, the government administered drugs, like candy, that masked the symptoms (liquidity) rather than administer medicine to cure the disease (debt destruction). As I said in my last post, that’s like giving a drunk another drink with hopes that this last drink will sober him up. The Feds “repaired” the balance sheets of corporate America but at what cost? While the "powers that be" synthetically shifted the DNA of the marketplace, they can’t artificially create housing demand or job growth. It’s an old story. What Hubris! Let’s check with Odysseus and find out how that worked out.

The risk, like a phantom, has moved through the financial sector then through the economy and now has found a home in the social sphere. All around, evidence abounds as we see it manifest itself through acrimony, social unrest and geopolitical strife. As all of the great writers of history have taught us economic hardship always has been a precursor to global conflicts.

So the question remains. If the government lifeguards saved corporate America in the first act of this play called the “financial crisis” - who is left to save the lifeguards? This is the primary concern surrounding the Greek default. It is no longer a national economy; it is a global economy as a massive derivative maze connects the industrialized nations around the world.

So to return to the original premise - are we headed for a “double dip?” I would argue that we never truly “undipped”. There is a huge difference between a stock market rally which can continue and a true economic recovery. So at the end of June, if the Feds make good on their promise of ending QE2, we will find out if the markets can stand on their own two feet. Until then, the question will remain unanswered.

On Friday, June 3^rd there were rumors flying that Avalon Rare Metals (AVL) were about to be acquired. Dr, Donald Bubar President and CEO of Avalon made an appearance on CNBC and said that there had been discussions with un-named sources but that in the end there would be no acquisition of the company. Forgive me if this is rude but if Avalon was really going to be acquired did this dim witted, “not quite Victoria Secret model” that CNBC just made a guru stock market analyst really think that CEO Dr. Bubar was going to tell her on national TV?  

Rather than belittling someone in the 3^rd person let’s have a look at the chart below.

Except for one piece of the puzzle missing, a look at this chart has all of the classic signs of a company that is about to be acquired. From March 14^th until around April 11^th it had a strong move from $6.50 to hit an intraday high of over $10.11 but settled back to close on April 13^th at $9.88.  From there it moved sideways for almost a month before correcting back to support of $6.58 on May 16^th. From May 16^th until May 31^st put in another show of strength and closed on May 31^st at @ $7.81. I moved sideways until last Friday June 3^rd when it closed the week at $6.98 on rather anemic volume of 1.4 million shares traded.

This will be a very interesting week to watch this stock because if we see one last shakeout followed by strong institutional buying this stock might be ripe for a take out.

I will be posting a video on YouTube today under the nom de plume “InvestingAdvicebyGeo” so if you have a chance please take a look but in the mean time please stay tuned for further developments.