Observing extremes

It seems that commodity prices, currencies and certain assets can only move in the existing “straight line”, or so the herd believes.

There is probably merit in developing some well founded contrarian views.

I am hearing that “this time it’s different” but all I can say is that assets that are cyclical, are always cyclical.

Some short-term trends have swung

S&P lowers U.S. government long-term credit rating to negative and the US Dollar rallies….

Not all market reactions seem logical.

US Dollar Index, Euro, VIX, S&P 500, Copper, US Transports, Nasdaq, CRB Index & Philly Gold/Silver Index – have all reversed their recent short-term trends.

Existing trends in spot Gold, Silver & Oil are still intact.

Who wants to be a crop farmer?

Not many young folks want to be farmers, especially wheat farmers.

Although susceptible to the ebbs and flows of markets, livestock and grain prices have been rising lately and the positive case (especially for soft commodities) remains intact with the simple understanding that food demand is rising while supply flounders.

There is another supply and demand story – the world is not producing as many farmers as it once did, yet we probably need more farmers than ever before. Kids don’t grow up wishing to herd cattle or harvest fields.

Instead of opening a retail shop, paying $100,000 of rent, hiring 4 staff members, spending money on branding and websites and then buying $40,000 of inventory (I hope it’s not perishable) and try to sell your wares amongst the competition of the other 40 shops on your strip – For a similar amount, you could buy seed, fertiliser, lease a 3,000 acre (avg. plot is about 20,000 acres) wheat farm and some equipment and reap larger margins!!

If your average yield is 1.3 tons of wheat per acre, you reap 4,000 tons of wheat from your farm – selling price is $330 per ton less sowing, harvesting and labour costs of $180 per ton = $150 * 4,000 tons = $600,000.

There is always a market for your product or alternatively you can hedge your crop with a future delivery contract or store it in a silo to be sold at a later date.

Unlike ugg boots, stretch jeans or the Collingwood Football Club – Wheat never goes out of style.

Ya gotta know how to tax ’em

I have attached a link to an interesting editorial from the Weekend Australian.

http://www.theaustralian.com.au/national-affairs/commentary/its-madness-to-sacrifice-ourselves-for-nothing/story-e6frgd0x-1226036215554

Cost ! It all comes down to cost.

It’s a bit rich for western countries to criticise the newly industrialised nations of China and India for their carbon dioxide emissions, for the West has been a dirty polluter for over a 120 years.

These guys have only got going in the past 20 years and we’re crying foul. As they modernise, their huge populations won’t help how their viewed as their per capita usage will also increase.

To reduce emissions, perhaps western leaders should refrain from courting China and India’s consumers and government’s from buying their country’s exports?

I believe many folks support renewable energies and I think this theme has longevity but it all comes down to cost. It needs to be cheap enough for all of us to install solar panels on our rooftops.

Like it or not, in many economies, coal is “it” for mainstream power generation. It is plentiful and cheap. It’s that simple. In previous posts I have discussed the importance of being a low-cost producer.

When making investment decisions, simplicity and fact weighs more than hope, subsidies and policy from governments (barely clinching to power) who are focused on the next election cycle.

Government likes an industry that it knows how to tax. Government knows how to tax alcohol, tobacco, petroleum, financial services, real estate transactions, minerals and commodities.

I haven’t seen any government endorsing, let alone subsidising, the proliferation of the electric car, because they don’t know how to tax the electricity being used to recharge the car while parked in a garage.

So when governments figure out how to tax the sun, wind and water, there will be increased hope for the renewable energy industry.

The growing merits of private equity – Part 1

Private Equity is getting a bad rap again with the recent demise of some fashion and book retailers, while reports quoted representatives blaming every aspect from online shopping to slack consumer demand.

Every excuse was cited other than these buyers paying too much for the asset or using too much debt or leverage.

I hope this doesn’t taint the image of private equity, as investing in this asset class is more common than many realise. There are thousands of owners of private equity around the world. They are found amongst those who own the equity in the businesses that operate in our communities and cities ranging from the corner store, landscape gardener to the family run chocolate factory.

There are obvious differences between private and public equity. Whether it’s the liquidity of its shares, transparency of the accounts and valuations or accountability of strategy and management; which is typically reflected in the price paid for the business or asset.

I like the fact that these owners (who are often majority shareholders) can ignore the quarterly and half-yearly news, analyst, investor and time cycle.

What a brilliant concept!! Actually being able to run and operate a business with a longer term view and not have to pamper to the whim and scrutiny of thousands of shareholders or broking firm analysts.

I think that there are too many companies (especially) on the Australian Stock Exchange that shouldn’t be publicly listed.

The motivations for a public listing can vary from providing an interim liquidity win for founding shareholders, seeking more and new equity capital or a result of lending conditions not allowing them to obtain normal bank financing.

I would like to think that the failed efforts of some private equity groups doesn’t ruin the landscape for  smaller businesses who require various sources of capital and financing.

Australia needs significantly lower company taxes

Image by .nele via Flickr

I’m hoping to re-read the books that I have in my library written by Clayton Christensen.

Does uranium power have a future?

Tokyo Electric (Tepco) has 188 power stations

Hydro                                                 160                            9GW                                                                                                                 Thermal (Oil, Coal, LNG)              25                           38GW                                                                                                                 Nuclear                                                  3 (17 reactors)   17GW                                                                                                             Total                                                  188                            64GW

3 nuclear plants produce 26% of the company’s generation capacity.

This is the reason why China won’t stop building its proposed nuclear power plants. Nuclear generates an incredible amount of power.

We know that it’s costly to build nuclear power plants and construction takes years but once operational, the cost of nuclear electricity production is low and it emits minimal greenhouse gases.

Today, the media is salivating about the prospect of reporting about the “grand-daddy” of all events. The nuclear melt-down easily outranks an earthquake, tsunami, aeroplane crash or shark attack.

As financial analysts tout coal being the “winner” as a result of this disaster, electricity prices will most likely continue their rise higher.

Don’t worry if Australia never has nuclear power. The pollies just won’t ever “get it”. Even though uranium is quite ubiquitous on earth, it is estimated that Australia has 30% of the known recoverable resources.

Currently, the world has ~ 440 nuclear reactors which (along with nuclear powered naval vessels) requires approx. 180 million pounds of uranium each year, while the world uranium production is near 90 million pounds……

Japanese investment opportunities

My bullet points and thoughts include:

• Minimise and balance the “noise” about Japan.
• When investing in Japan, perspective required between Japan’s national debt and macro fiscal problems and individual companies that are domiciled there.
• Always analyse the business in its own right and remain true on knowing the business and not speculate.
• Too early to jump into Japanese ideas, mainly because we aren’t sure about the accuracy of various info.
• Only interested buying if there is big discount to the net assets.

• Businesses such as mobile telco, NTT DoCoMo (9437 JP) has always been a good free cash flow and valuation idea, that could become very attractive if we see further market declines.

• Global brands such as Shimano, Daiwa, Yakult, Kikkoman and Toyota could be interesting buying if further declines are seen.

• While Tokyo Electric share price (owner of the Fukoshima nuclear power plant) has dropped 46% in price in 2 days and is trading at same price seen in 1984, it doesn’t appear cheap enough due to the debt that it carries.

• Fukoshima accounts for 10% of its power generation capabilities – beyond balance sheet risk, concerns similar to BP when oil rig sunk in Gulf of Mexico is liability and insurance.

• In fact, alternative opportunities may appear in uranium stocks in Australia or Canada or even nuclear power generation businesses in Europe or the United States such as E.On, Fortum, EDF or Excelon.

Does such a disaster actually kickstart Japan out of 20 years of stagnation?

weak sellers meet strong owners

I’m watching the capitulation, the running for the exits and the indiscriminate dumping of stock.

In the 3 business days, either side of the moment when Transocean’s BP operated rig sank (on April 22, 2010);

• BP’s stock saw 26% of its shares outstanding traded and stock fell 5% (stock fell 30% in the following 2 months as oil spewed and congressional hearings continued)
• Transocean (owner of the rig) saw twice its shares on issue traded and its stock fell 9% from $92 to $84. From late April to late July 2010, 300% of its total shares changed hands. During this 2 month period, it’s share price halved and its market capitalisation was reduced by $12 billion.

Irrespective of a company’s market capitalisation, there should be merit in monitoring the amount of shares turned over in a security, especially when its price is declining.

Providing that a company’s prospects hasn’t materially changed nor its business has become impaired as a result of recent news, this is often when stock changes from weak owners over to strong owners.

All you need is USD

Some tips from a friend who was visiting Cairo recently, when riots and protests broke out.

When you find yourself in a “trouble spot” somewhere in the world….

• Follow the Americans as their government seems to be the most passionate in extricating their citizens from conflict zones.
• Gold, travellers cheques and most currencies aren’t desired.
• Carry cash as ATM’s and Banks may not operate.
• In the absence of your own government’s help, always carry a few thousand U.S. Dollars to pay a charter pilot to fly you to Istanbul.

In his experience, no other currency mattered (except maybe for a EUR 500 note), yet the currency markets are bearish towards the U.S. Dollar.

It seems that when the s**t hits the fan, it’s not gold that is the world’s “safe haven” currency, but instead it remains the U.S. Dollar.

Perhaps the USD is in a longer term decline due to economic policy, but as history has suggested, the country or empire that spends the most on its military, maintains the world’s reserve currency and irrespective of which political party is in charge, I can’t see the spending trend reversing.