25th January 2011: Rare Earths ‘Day Trading’

In mid-2010, Ben Eltham and I discussed various ’emerging’ threats to traditional military strategy. One of them was rare earths: 11 elements used in defence, automobile applications, consumer electronics, and next generation turbines. We foresaw but didn’t act on the speculative bubble that occurred in rare earths between October and December 2010. There’s a lot driving market sentiment: ‘China’, ‘commodities’, ‘political risk’, ‘first mover advantage’, ‘iPods’, ‘greentech’, ‘next generation automobiles’, and ‘defence’.

Jason Miklian, a researcher at Oslo’s Peace Research Institute did act. Miklian invested in ‘day trade’ stocks of rare earth companies using $US9000 in personal savings. His account is revealing for several reasons. Miklian also foresaw the speculative bubble and continued to do fundamental research on the sector and markets. He timed his market entry. Then, Miklian lost what he had gained through attempting to ‘short’ the market in December 2010.

Miklian blames the market but perhaps the error lies in his ‘day trading’ strategy. Miklian traded a small account. He used options which increased his potential profits yet could quickly engulf his trading account if wrong. He bet on firms like the US-based Molycorp (MCP) which, although their stockprice doubled, are still years away from resolving the production problems with its Mountain Pass facility. Many other firms had questionable earnings and their stocks rose on mainly speculative activity. Others are relying on bullish activity when new production facilities come online in the next 18 months and major deals are signed. What Miklian perhaps needed was a valuation model and assessment of future earnings as well as his sector research. Finally, Miklian mistimed his exit. The volume of trade activity means that despite some market skepticism, trading in major stocks will continue. Technical analysis suggests that stocks of rare earths companies will trade within a range, rather than suddenly collapse.