So…how is everyone enjoying the bear market?  Unless you are the manager of a macro hedge fund, “not much” (if not something a little rougher) will likely be your answer.  There have definitely been some excellent trading opportunities from the long side, but that is what they have been – trading opportunities.  Hold on too long and you quickly find yourself at a price beneath where you started, with the safety net so far down you can’t see it.
     We said in our previous issue of The Contact Comment that there were two major things the market had to overcome: destructively high oil prices and continuing weakness in the financials as they work through the subprime mortgage debacle.  A month later, where do we stand?
     There has been some let-up on the oil price side of the equation, and although we badly need a further decline, at least there has been a measurable degree of relief.  The 18% drop in the price of oil from its all-time high is definitely welcome, as reflected in the stock market’s ability to bounce back some 5% from recent lows.
     A few factors are behind this, including falling demand (U.S. drivers logged 9.6 billion fewer miles in May 2008 than in May 2007), strength in the U.S. dollar, and also the age of the story.  As much as analysts and other professionals in the investment community claim that markets run on fundamentals, the reality is that they run even more so on sentiment, a dynamic composed of one part fundamentals and two parts emotion.  Stories get old after a while and supporters eventually look for a new place to play.
    That being said, it is far too early to say that oil is down for the count.  Crude can fall as far as $112 per barrel and still be in a long-term uptrend.  As such, until we experience a sustained drop below the magical round number of $110, oil will only provide equities with so much support.
     Let us now turn our attention to the financials.  Stocks in this sector have firmed somewhat of late, reflecting the Federal Reserve’s decision to stand behind Fannie Mae and Freddie Mac and also the stricter stance against naked shorts.  There is some good news on the subprime mortgage front, which we will get to in a moment, but we caution against investors becoming more than moderately optimistic.  As we have said many times before, the subprime mess is one of mammoth proportions and 12 months is too short a period to put the problem behind us.
     Summer 2008 marks the peak in terms of subprime mortgage resets (approximately 7% of subprime mortgages will reset each month until early autumn) and it does not take a doctorate degree to figure out that this is cause for concern.  Thanks to the large interest rate cuts by the Fed earlier this year and other measures, however, it does not represent nearly as big a problem as it otherwise might.
     Earlier in the year and all through 2007, homebuyers facing rate resets sometimes saw their payments as much as double, which, given the shaky credit character of most borrowers in the subprime category, was often too much to handle.  Reset rates are typically determined by taking a reference rate (more often than not LIBOR – the London InterBank Offered Rate) and adding a profit margin on top of it.
     LIBOR has faithfully followed the Fed Funds rate lower and, believe it or not, some of the resets currently occurring result in slightly lower payments than what the homebuyer faced when they originally took out the mortgage.  The pace of foreclosures is still dreadful, with June 2008 foreclosures up 53% compared to June 2007, yet the number was down 3% from May 2008.  The problem remains vast and real estate values continue to be vulnerable.
     Alas, there is another wrinkle to the story.  Although we are working past the peak of subprime mortgage resets, a new wave of problems threatens us in the form of Option ARMS, many of which began as interest-only mortgages but will soon require homeowners to start paying down principal as well.
     As this is not a rate reset scenario but rather a point at which the homebuyer must finally face the full extent of their debt, the Option ARM situation is troubling indeed.  We can only hope that most of the homebuyers who used these are able to somehow hold on, as anyone opting for an interest-only mortgage likely squeezed themselves into their property with the slimmest of margins for error…or none.
     Now, data is definitely skewed by several markets where chronic overbuilding laid the groundwork for predictable disaster, examples being states such as Nevada, California and Arizona.  What will eventually lead the U.S. out of its crisis is stability in areas where demand for housing is “real” -- where home values have dropped but economic activity is solid such that working families and others can purchase and maintain their homes in a relatively stable environment.
     One of the real estate market’s hardest-hit areas is actually offering us among the first glimmers of hope, as after over two straight years of uninterrupted declines home sales in California actually rose year on year in April, May and June, with 40% of transactions representing sales of foreclosed properties.  Conditions are still bad but at least some clouds are starting to come with silver linings.  There will, of course, be real estate markets that take much longer to recover, with Las Vegas being one that comes immediately to mind.
     What this means for the broader financial markets is that absolute disaster triggered by a collapse in the housing market has been avoided for the time being and stocks have the potential to rally for short periods on good news.  Again, though, we caution investors against getting carried away.  In merely the past few months we have seen Bear Stearns collapse, Fannie and Freddie teeter on the brink, IndyMac implode, and several regional lenders disappear.  At the same time, many of the financial world’s most prestigious names have raised huge sums to shore up their balance sheets, money without which they, too, might have gone under.
     There remains plenty of bad news to come, likely in the form of regional bank failures and economic statistics that at first glance investors find hard to believe.  Stocks will continue to go up and down like a yo-yo.  The takeaway: now is the time for value investing (and opportunities are plentiful), not momentum investing.
     Turning our focus to interest rates, what the aforementioned comments on the housing market also mean is that despite speculation the Fed will begin raising rates in the near future, it won’t, because it can’t.  It has to hold rates down so that resets (which as we roll into 2009 will still run monthly at 4% of the total subprime market) can take place with minimal impact on foreclosure rates.  Do not expect the U.S. economy to be strong any time soon either.  Stability is the best we can hope for.
     So, where are we going with this?  Well, potentially into a very nice looking medium-to long-term bond position.  Given that U.S. economic conditions remain weak and the Fed has its hands tied with regard to rate movements, a few bad economic reports could spark a nice rally in the bond market.  We don’t want to position ourselves for this, but rather against it.  Were the yield on the 10-year Treasury to reach 3.5% (it finished Friday at 3.93%), we would look to put on a short Treasury note position, as the Fed will have its hands tied for some time yet but eventually will have to raise rates to contain inflation.  And this is where the final part of our thesis comes into play.
     As we have stated in previous issues of the Comment, inflation in the U.S. is not being driven by overheated economic activity but rather by high energy prices and the terribly depreciated value of the U.S. dollar.  The Fed’s raison d’etre supposedly being to contain inflation, it will be eager to move interest rates higher to bolster the currency and help reduce inflation as soon as it can.  We don’t think that it will have the flexibility to make this move until 2009, but if in late Q3 or Q4 of 2008 we get the aforementioned rally in bond prices, this would provide a very appealing point for entering a short Treasury position primed to take advantage of rising rates as the U.S. finally regains a degree of economic stability and the Fed can no longer stand the continually high rate of inflation.  For those unable to stomach the volatility inherent in the 10-year note, 5-year Treasuries will also work.
     This idea also plays into a theme which we introduced a long time ago in the Comment which is that Asian bond markets and other alternatives to U.S. Treasuries will develop over time, thus decreasing demand for U.S. government debt…of which there is already way too much outstanding. Decreased demand for U.S. debt means that interest rates will have to rise to attract capital, and this, too, will help the proposed short Treasury position if we are able to maintain it longer term.
     Turning our attention to the stock market, the S&P 500 clearly has no idea where it wants to go, having traded in broad ranges for the past two weeks before ending each Friday more or less where it started the preceding Monday.  Much as with the euro chart just before the dollar began its latest rally, we have a short-term double top on the S&P but also a clear short-term uptrend line.  So, some key chart points to be aware of: if the S&P breaks 1,235 then it is going to retest 1,200, which if it held would make for a very nice double bottom as we move toward the end of summer and the time when the pros return to their desks, hopefully with an appetite to buy.  Were the index to climb past 1,292, however, stocks would actually be looking nicely primed for some short-term strength.
     Markets love to retest lows and highs before making their final turns, so although it would be unpleasant, we almost would like to see the S&P take another look at 1,200.  A double bottom just holds so much more promise than a simple V bottom.
     The euro has put in a classic double top and looks as if it wants to challenge 1.53 in the near future.  While it could lock itself into a trading range and meander between that level and 1.60 for another couple of months, a break past 1.53 would make 1.50 a target too enticing not to test, sending oil into a mini tailspin and helping stocks.
     Given the back-up in the euro and investors’ continuing penchant for taking risk off the table, times have been particularly tough for our focus sector of resource exploration stocks.  Even so, companies with the right fundamentals can still do very well, a perfect example being Puget Ventures, which we introduced in our June issue.  Puget traded more than 30% above the price at which we brought it to our readers’ attention, before a major acquisition led to its halt 14% higher.  Below, we introduce another company with an equally compelling investment thesis that closed Friday at the appealing price of $0.235.  We hope you’ll take the time to check it out – although commodity prices are down, the spot prices for some metals are below the marginal cost of production, and that does not make sense.  Don’t count commodities out yet by a long shot, as there will continue to be plenty of demand on a global basis and there simply are not enough large, high-quality sources of supply coming on stream.
     Let us leave our readers with one more thought before closing our commentary for the month.  In tough times such as these, it is useful to step back, put things into perspective and work on ideas with a long-term view.  Long-term positions are where the big money is most often made and there is so much noise in the market right now that missing the forest for the trees is extremely easy to do.  Good luck in riding out the rest of the summer and we’ll see everyone in September!

     With the stock market in such poor shape, it is more important than ever to make sure that one invests only in stocks with solid risk profiles, or to be more specific, stocks for which prudent analysis would suggest a risk/reward ratio of at least 1:5.  Clearly, the idea here is to strictly limit downside risk while positioning the shareholder for large gains if good company-specific news emerges or a major market turnaround takes place.
     Appleton Exploration Inc. (TSX-V:AEX) offers the textbook example of a good risk/reward profile, as it features the right starting price (in Appleton’s case, under $0.25), a very good share structure (17.5 million shares issued and outstanding…and they’re well-held), and a strategic plan built around exciting new projects guaranteed to consistently yield news.
     It doesn’t hurt that the company is exploring for two commodities – copper and gold – that have held up well in what lately has been a severe price meltdown for the sector.  Copper, in particular, is a commodity that you have to like the outlook for, as we shall go into later.
     Appleton’s flagship project is in Chile, a country that produces more copper by far than any other in the world.  If Julia does not get investors excited, it is hard to imagine what will, as this project sits in the copper-rich Atacama Desert region of northern Chile and has returned stellar numbers from early exploration.  How stellar, you ask?  Try grab samples as high as 10.4%, with plenty of >3% and >4% rock chip samples running consistently down the centre of the property.  Also encouraging is abundant evidence of artisanal mining, itself a sure sign of high-grade mineralization.
     The size of the property is enticing as well, coming in at an impressive 4,400 hectares.  The copper-bearing agglomerate it contains can be traced for over 8km and at some points exceeds 30m in width.
     As previously stated, the exploration timetable for Julia virtually guarantees steady news flow, with sampling and excavator trenching scheduled for Q3 2008 and drilling to begin in Q4.  Because of the project’s location, exploration work can be conducted year-round, meaning that if the team has early success it can quickly follow up and keep the momentum going.
     It is important to have good local talent with international projects, and fitting the bill for Appleton in this regard is Harry Floyd, a British expatriate geologist with 25 years of experience in the mineral exploration industry.  Harry is Appleton’s man on the ground in Chile and is eager to get to work on what he believes to be one of the highest potential projects he has ever seen.
     This provides the perfect segue to our next point, which is the strength of Appleton’s management team.  As a group, the people who run Appleton have participated in the development, construction or operation of no fewer than six mines.  They have also individually worked on teams that discovered over 5 million oz. of gold.
     Every manager and director at Appleton is a strong player, and that starts at the top with President and CEO Tim Henneberry, who not only brings years of successful experience in Canadian exploration to the table but possesses management acumen rare in a hands-on geologist.  Tim is organized like few managers one will ever meet, a welcome trait in an era where costs are rising and work often stretches beyond its original schedule.  Not with Tim Henneberry running the show – time is money and neither of these precious resources gets wasted on his watch.
     Playing an important role alongside Tim in Appleton’s early development has been director Paul Cowley, Vice President of Exploration for Merit Mining Corp. and a geologist instrumental in the discovery and advancement of four major deposits in northern Canada.  The fact that he worked in South America for BHP is not exactly a strike against Mr. Cowley either.
     Fred Sveinson, also a director, is Merit’s CEO and among other career highlights is his lead role in developing the Greenwood gold project to production.  Jim Walchuk, an Appleton director and former CEO of Tournigan Energy, is a highly experienced mine builder and operator, with the well-known Bulyanhulu gold mine in Tanzania being just one of the facilities on his impressive resume. Steve Butrenchuk, Appleton’s independent QP for both Chile and Canada, was trained at Cominco in the 1970s and 1980s and brings a strong structured exploration background.
     All of this gold experience will be put to good use with Appleton’s other project, Dora, which is located in British Columbia’s Spences Bridge gold belt.  Work on Dora to date includes a 2,000m by 1,800m soil grid totaling 3,196 samples that outlined six strong, cross-cutting, gold-in-soil anomalies.  Bedrock chip samples returned values of 0.919 grams per tonne gold over 6m and 0.512 grams per tonne gold over 5m.
     The work schedule for Dora is also quite aggressive, with excavator trenching already underway and drilling scheduled for Q3.
     At the risk of overstating the case, we must say again that we particularly like the copper aspect of Appleton’s story, as while other commodities have run to fantastic heights only to come crashing down soon after, copper has remained consistently strong, its modest run-ups and pullbacks all taking place within a well-defined range never far from the metal’s all-time high.  Its use in a variety of construction applications, but especially infrastructure, inspires confidence, as both developing and developed nations face the need to dramatically enhance infrastructure in order to be prepared for growth in population and economic activity.
     In Appleton we have a story that is both simple and powerful, one based on enviable projects, good share structure, strong management and a commitment to activity that will generate news flow and keep the stock on the investment community’s radar.  Not to mention, it is going for a song.  Don’t say we didn’t tell you...

• July 9: AIX and Geo Minerals announce that a borehole license application has been submitted with regard to the companies’ recently acquired potash claims along the Manitoba-Saskatchewan border.  A drill program of three holes at most, to maximum depths of 1,500m, is proposed on their freehold title.
• July 14: AIX says that it has commenced IP/resistivity surveying and drilling on the Fog Lake property in Southwestern Alaska.
• July 22: AIX and Geo Minerals report that during due diligence work on their joint-ventured leases in Saskatchewan they found information regarding a potash test hole drilled by Canadian Exploration Ltd. in 1965.  The hole, located two sections away from claims recently acquired by AIX and Geo, was drilled to a total depth of 3,204 feet and encountered two potash zones.  A report states that the main zone extended from 3,077 feet to 3,087 feet with an average grade of 27.5% K20. A second zone of 9.2 feet was also encountered, averaging 17.4% K2O from 3,119 feet to 3,128 feet.
• July 29: AIX announces completion of the 2008 field program at its Fog Lake prospect in the Iliamna area of Southwestern Alaska.  One IP/resistivity line of 1.4km was surveyed and two drill holes of 151m and 155m were completed.  The first hole targeted the core of the historic copper/gold soil anomaly at the property while the second hole, within the zone of the geochemical anomaly, targeted a chargeability anomaly detected in the geophysical surveying.

• July 24: FV reports results from the final 16 drill holes of its most recent drill program at the Torlon Hill high-grade zinc-lead project in Guatemala.  A total of 36 holes totaling 3,458.7m were drilled to depths ranging from 19.81m to 185.97m.  Highlights include a significant expansion of high-grade zinc on the west side of Torlon Hill and identification of highly anomalous, up to ore-grade zinc and lead values (3.40% zinc and 6.10% lead in hole TH08-93) in the first round of drilling targeted on soil geochemistry anomalies.

• July 9: GM announces that a borehole license application has been submitted with regard to the recently acquired potash claims along the Manitoba-Saskatchewan border.  A drill program of three holes at most, to maximum depths of 1,500m, is proposed on the freehold title.
• July 22: GM reports that during due diligence work on joint-ventured leases in Saskatchewan information was found regarding a potash test hole drilled by Canadian Exploration Ltd. in 1965.  The hole, located two sections away from claims recently acquired by GM and Alix Resources, was drilled to a total depth of 3,204 feet and encountered two potash zones.  A report states that the main zone extended from 3,077 feet to 3,087 feet with an average grade of 27.5% K20. A second zone of 9.2 feet was also encountered, averaging 17.4% K2O from 3,119 feet to 3,128 feet.
• July 28: GM says it has received a further “Comfort letter” from Saskatchewan Energy and Resources stating that of the coal permit applications processed to date on behalf of GM, a further 45,526 acres of issued Coal Prospecting Permits (CPP) will be given priority sequence. This brings the total to 113,816 acres that have received comfort letters with first priority in the area of interest in proximity to Goldsource Mines Inc.’s discovery.

• July 2: HRC reports the latest diamond drill results from its Kenge target. The results form part of the company’s ongoing 20,000m+ drill program at the SMP Gold Project in Tanzania.  Highlights include 2.2 grams per tonne gold over 27.4m and 15.1 grams per tonne gold over 1.2m.  The company also says that it has added a third diamond drill rig to the program.
• July 21: HRC reports its best results to date from the SMP Gold Project in Tanzania.  Highlights include 3.3 grams per tonne gold over 52.2m from the Porcupine target.

• July 8: MAG announces assay results for 10 recent diamond drill holes at its 100% owned Cinco de Mayo property in northern Chihuahua State, Mexico.  The best new intercept is Hole 08-39, which yielded 612 grams per tonne silver, 11.59% lead and 13.20% zinc over 3.46m.
• July 16: MAG, on behalf of Minera Juanicipio SA (a joint venture between Fresnillo plc and MAG), announces that Hole GE from the Valdecañas Vein intersected two veins separated by 10m of altered and veined wall rock.  The upper gold rich vein yielded 123 grams per tonne silver, 4.89 grams per tonne gold, 1.24% lead and 4.92% zinc over 7.38m (true width).  The lower silver rich vein returned 1,179 grams per tonne silver, 1.98 grams per tonne gold, 3.01% lead and 2.21% zinc over 4.71m (true width).
• July 28: MAG reports on behalf of Minera Juanicipio SA new assay results from the Valdecañas Vein for Holes OF and QF.  Hole QF returns 578 grams per tonne grams per tonne silver, 3.85 grams per tonne gold, 5.55% lead and 6.36% zinc over 6.20m (true width).  Hole OF returns 224 grams per tonne silver, 1.77 grams per tonne gold, 0.92% lead and 2.63% zinc over 4.71m (true width).

MAX Resource (MXR)

• July 10: MXR announces that drilling has begun at its Ravin molybdenum/tungsten property in Lander County, Nevada.  The Ravin property is comprised of 162 claims located 20 miles north of the town of Austin in Central Nevada and approximately 50 miles west of General Moly Inc.'s Mount Hope molybdenum mine, which is scheduled to begin production in late 2010.
• July 22: MXR says that it has initiated drilling on the Howell gold project in southeastern British Columbia.  The Howell project is comprised of 4,376 hectares located 1 hour by gravel road south of the town of Sparwood.

NaiKun Wind Energy Group (NKW)

• July 8: NKW provides an update on key activities being undertaken to advance development of its massive wind farm off British Columbia’s north coast.  As part of the development program and to meet B.C. Hydro’s bid submission date of November 25, NaiKun is undertaking the following activities: Advancing discussions with leading offshore wind turbine manufacturers regarding supply and maintenance of turbines for Phase 1 and future phases; Analysing wind data, ocean currents and patterns from the meteorological station located at the project site in Hecate Strait (data from the meteorological station continues to confirm the world class strength of the wind resource and the economic viability of the project); Advancing geophysical seabed surveys at the project site and transmission corridors; Continuing work necessary to support the environmental assessment of the project, Advancing transmission studies and related proposals with Siemens Canada Limited, Power Transmission and Distribution Division; Finalizing the engineering team for the project.

Northern Lion Gold (NL)

• July 8: NL reports results from the Preguica prospect at the company's 100% owned Moura Project in southern Portugal.  Highlights include 7.0% zinc, 0.9% lead and 36.0 grams per tonne silver over 11.5m.

Prophecy Resource (PCY)

• July 8: PCY announces that it has completed six diamond drill holes (1,449m) at its Okeover copper-molybdenum project located on the south coast of British Columbia.  Five of the six holes were completed as step-outs to the south and west of the existing resource area at the North Lake Zone (86.8 million tonnes grading 0.31% copper and 0.14% MoS2, calculated by N.C. Carter PhD, P.Eng, in 2006). The sixth and final hole was drilled from a site located 3,000m to the south of the North Lake Zone.
• July 28: PCY reports results from its 1,449m diamond drill program at the Okeover copper/molybdenum project.  Highlights include Hole OK-08-03, which intersected 0.33% copper and 0.003% molybdenum over 45.5m.

Puget Ventures (PVS)

• July 8: PVS announces that it has entered into a Letter of Intent to acquire 100% of the Werner Lake Mineral Belt Properties (approximately 1,700 hectares) in the Kenora Mining Division of the Province of Ontario.  The Werner Lake properties contain six mineralized zones with formally reported mineral resources: the Norpax deposit, West Cobalt deposit, Werner Lake Minesite Cobalt deposit, Eastern Shallows Cobalt deposit and Big Zone deposit.  Both the West Cobalt deposit and the Werner Lake Minesite have experienced past production, along with the Gordon Lake mine.  All have continued exploration potential and potential for historic resource expansion.

West Timmins Mining (WTM)

• July 8: WTM announces that it has acquired, by staking, over 325,000 hectares of highly prospective ground along the major regional structural zone that links the company’s Universo Gold Project and the recent Camino Rojo gold discovery in Zacatecas State, Mexico. The Universo Expansion Concession covers virtually all of the ground between these two mineralization centres.

For more information on companies mentioned in The Contact Comment, please visit the Web sites listed below or call 604-689-7422/1-877-689-7411.