The Cycling Cycle Has Peaked

Shimano Deore XT Schaltwerk hinten (am Mountai...

The Tour de France turned 100 years old and the past 3 years hasn’t seen a continental European winner.

There are cycling shops everywhere now selling accessories that cover your toes. And since when should bikes cost $6,000?

Too many middle aged men are wearing lycra and hobbling around coffee shops in cleats.

A plethora of local cycling events have popped up.
Heck, everyone knows what peloton means !

Newspapers feature cameos with business executives asking them about their favourite weekend routes.

The stock price of Shimano has nearly tripled and Giant’s has quadrupled over the past few years.

And there is no shortage of cycling touring holidays and charitable events involving the riding of bicycles.

I’m not saying that people will stop riding their bikes or that the sport will cease to exist but popularity usually wanes once its reaches a plausible saturation peak but especially when the hoard of “late adopters” embrace it.

I nearly bought an expensive bike and lycra yesterday, but I stopped myself. If I was an owner of a specialist bicycle store I would probably sell and look for the next trend.

Do you remember how marathon running, tennis, golf & yoga all become very popular aided by technical improvement in the equipment used?

Maybe it’s golf’s turn again?

The Coming Slaughter of the Yield Pigs

Dollar in Piggy Bank

Major Australian banks have again raised billions of dollars by issuing debt.

In some instances, the issuer of the debt isn’t the parent company and in cases where it is, investors should wonder why do the most creditworthy banks in the world need to offer 300 basis points (or greater) above their benchmark rate, in order to attract investors?

Perhaps it’s because the debt is perpetual, its pays non-cumulative distributions, its unsecured and subordinated

Other questions to ask include; what is the credit rating of the debt, is if the credit rating of the debt is different to the issuer, when does the debt mature, can it be “called” or “converted”, are distributions franked, am I being paid fairly or enough for the risk I am taking or perhaps simply, does this investment benefit you or are the odds stacked towards the “house”.

I also question whether I should buy it at “par” rather than a discount.

Sadly, many Australian retail investors don’t possess the required skill and knowledge to analyse debt investments.

In turn, they often aren’t receiving objective advice,. Instead, they are often being “sold” the investment rather than being advised whether it’s appropriate for their portfolio.

There has been plenty of debt on offer, so I ask myself, why should I buy something that has ample supply?

The genius behind the banks decision is to raise capital when they don’t particularly need it and they do so when their costs (or the rates they offer) are cheap.

Australian interest rates are now at record lows with the current Reserve Bank rate sitting at 2.5%.

With the pendulum at an extreme, there is greater probability that interest rates triple in the next 10 years before they move to 1%.

Are these investors buying something at the wrong end of the cycle?

Corn on 3 year lows

English: Very First Corn Flakes Package: http:...

Very First Corn Flakes Package

Due to an expected record U.S. harvest, the price of corn has fallen to levels last seen in 2010 and at prices also seen in 2008.

What a contrast when compared to the spike in prices during the 2012 drought.

The price of corn has now fallen (on a weekly basis) at least 2 standard deviations below its mean on a weekly and monthly basis which covers the past 20 years.

When I look at its price on a quarterly basis, corn have reverted to its rolling mean over a 40 year period.

Supply must have increased significantly but our work suggests that demand remains steady, if not slightly higher, especially when accounting for animal feed usage.

The decline in price over the past 12 months has helped the share prices of companies such as Gruma (Mexican tortilla maker), Pepsi and Kellogg, while share prices of other beverage companies, namely Coca Cola have lagged their peers and index considerably.

Did you know that corn is used as a sweetening alternative to sugar in many drinks and many foods in the form of High Fructose Corn Syrup or HFCS.

If we look to buy some actual corn itself, its current price is $4.74 per (generic) contract renders it oversold, whilst support may be found 7-9% lower surrounding the $4.30 level but let’s not split husks over it.

Further reading: Litchfield, Ruth (2008). High Fructose Corn Syrup—How sweet it is. Ames, IA: Iowa State University Extension and Outreach. Retrieved 1 March 2013.

Buy a container of coffee beans

The price of arabica coffee has fallen to 4 year lows. (Are you paying less for your coffee lately?)

While the demand for coffee has remained steady for the past decade, only recently has supply increase, thus explaining the fall in the price of the commodity.

Compare this to the 1,000 cups that each Norwegian or Finn drinks, each year, which is equivalent to about 10 kilograms (kgs) of coffee.

Although Scandinavians love their coffee, the largest coffee market in the world is the United States of America, where it’s averaged that each person consumes 4 kgs per person, each year.

Roasted coffee beans Español: Granos de café t...So where is the upside?

The tea-loving Chinese only drink an average of four cups of coffee, per person, per year.
Just imagine if the Chinese taste buds change as Starbucks and Espresso bars start popping up around the place?

Or perhaps a wider group of Americans increase their coffee intake.
If that story doesn’t pan out, recent studies suggest that drinking coffee can halve the risk of suicide. As mental illness becomes prevalent and should the economy deteriorate again, it’s plausible that drinking more coffee could be added to a doctors prescriptions.

Although that advice won’t help the growing insomniac population, which is a future blog post topic.

So, with prices being low, it’s not a bad idea to go and buy a shipping container full of raw, green Arabica Coffee and keep them for a while.

“Green” coffee beans that are stored in a dry environment can last for up to 10 years.
Furthermore, stored beans are then considered “aged beans”, which over time lower their acidity and increase their body.

Just An Idea!

A Suez Crisis and higher Natural Gas

In Egypt….

two Presidents have been removed from power,
human rights are being violated,
christians are being suppressed and
people are being killed whilst protesting

What if the Muslim Brotherhood (an Iranian proxy) takes power in the world’s most populous Arab nation which borders Israel and straddles the Suez Canal?

Will this make the world nervous?

It’s possible that we see Western intervention to correct matters and protect their billions of dollars spent on military aid over the decades.

Oil prices will probably rise further but I’ll speculate that Natural Gas prices will rise more so.

The price of Natural Gas have been falling for years but I think this will reverse.

When oil becomes more expensive, I think demand for cheaper alternatives such as Natural Gas will be sought and oil won’t be the only fuel source that buyers will settle for.

Furthermore, I expect gas projects (including American shale) will not come on-stream as quickly as expected, due to the rising cost of capital and overall cost overruns.

It is rare that when a commodity is in high demand that it stays cheap for too long.

Michael Price speaks at London Value Investor Conference 2013

The numbers say it all

Heard a radio story yesterday that was interviewing a knitwear manufacturer in Melbourne, Australia.
At his factories peak production several year ago, it employed 70 workers and now he employs 20 people.
Why?
To knit and assemble a jumper (sweater for North American readers) in his Australian factory, excluding the cost of the raw material, the cost is between $30 & $35.
In China, the cost of manufacturing the same garment is between $7 and $8, while it’ll cost you a $1 in Cambodia or Bangladesh.
In a globalised world of free trade, it’s difficult to argue against the numbers.
Import Tariffs anyone?

Western Australia – don’t become California

Coat of arms of Western Australia

Coat of arms of Western Australia

How do I put this…..Western Australia, your hubris will kill you.

Not only is government at fault but business is as well.

West Australians seem to enjoy bragging how expensive things are in their state as if it is a badge of success. Their trade off is the nice weather, surf and beaches. Luckily, you can be broke and still be able to enjoy them.

Landlords in Karratha are charging extraordinary rent for ordinary homes in a town that is 1,500 km from Perth. In fact some small houses, cost over $5,000 per month to rent which is the same as renting a 2 bedroom apartment in Lower Manhattan or a 4 bedroom 150 sq. metre fully furnished condo in Singapore.

The cost of living in Western Australia remains much higher than in other parts of Australia, especially when it comes to food & fuel.

Beyond our state border, a recent Deutsche Bank survey has found that Australia, as a whole is one of the most expensive countries to live in.

Yes, I know that there are benefits to living in Australia, but the rising costs of the basic necessities is a concern. Don’t get me started on paying $10.50 for a pint of beer in a pub!

There shouldn’t be a “premium” to pay for almost everything, simply for living in Western Australia.

I’ll let you in, on a small secret, not everybody in W.A. earns $190,000 per year to operate an oil rig.

The risk that Western Australia has is that people can start to leave the state just as easily as they came here.

Not paying for advice will cost you more

An article that appeared in The Australian newspaper, dated June 8-9, 2013, mentioned the findings of a survey conducted by research group, CoreData which illustrates their respondents investment position.

Their survey found the group of “mass-affluent” participants are holding almost twice the amount of cash than those catergorised as high net worth.

Commonly, “mass affluent” investors are considered to have a minimum of $50,000 to invest, up to $500,000, while a net worth investor is one who has more than $500,000 of investible assets.

The reasons for the “mass affluents” higher cash allocation were cited that they “don’t like volatility, they’e not sure what to do and” and generally, they are self-directed investors.

The article and survey surmised that these investors have remained paralysed in cash whilst asset prices have risen over the past 3 years.

In other words, they don’t seek or haven’t sought professional investment advice.

Has the advent of the “do-it-yourself” online investor been positive?

Why do so many unsophisticated and often financially illiterate investors choose to not pay for advice when they try to manage and investing their money?

I’m not sure if they’re saving money by not paying for advice?

Perhaps their reluctance to engage professional help is that have are being sold products (see “solutions”) rather than receiving advice.

Inversely, corporations, governments and experienced, wealthy investors often seek and pay for advice from various professionals (be it structural, strategic, financial or legal) prior to making investing decisions?

This group wouldn’t accept the notion of being “sold to”.

It’s time for smaller investors to demand that they receive advice for their money and not “solutions” and “products”.

 

 

UnafFORDable cars

Ford Motor Company of Australia stamping plant...

The Ford Australia boss announce the closure of its Australian assembly plants by 2016 citing reasons that included high costs and a strong Australian dollar.

He also said that the cost of producing a car in Australia is twice that of Europe’s and four times more than vehicles produced in Asia.

There lies the real problem and answer. Whether its wages, parts or taxes, Australia is not competitive at building cars, so why is government so insistent on subsidising such a loss making industry?

I see little reason to buy an Australian built vehicle which provides that same utility as any other, yet costs more.

Countries such as Singapore & Finland function perfectly well without a car manufacturing sector while we are anchored to historic biases that don’t make financial sense.

But I need to ask…….if vehicles in Asia cost four times less to produce than a local car, why aren’t Toyota’s, Nissan’s, Hyundai’s & Honda’s sold in Australia priced at a quarter the price of an equivalently Aussie vehicle in its respective class?

Perhaps Ford Australia should “thank” the Australian Government for imposing such high import duties against these competitors which has allowed them to stay in business for the past couple decades.

This is an example of how protectionism in a free market capitalism economy does not work, over the long run.

We’ll talk about socialism another time.