Ending our addiction to oil – TED talk

September 17, 2012 Leave a comment

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Is Fortescue in trouble?

September 16, 2012 Leave a comment

Lately, Australian iron ore miner, Fortescue Metals (FMG), has seen increasing speculating whether it will breach loan covenants or require more capital due to the fall its stock pice has suffered as a result of the decline in the spot iron ore price.

Depending what index you happen to watch, iron ore has fallen 40%-50% in the past 6 weeks.

Keeping with this blog’s mantra, “Trying to Hear What Is Not Being Said – It doesn’t matter what the iron ore price does week-to-week. The multi-year and decade demand for iron ore is stronger than the supply pipeline, especially with the scarcity of capital and expanding project costs to extract and ship it.

Furthermore,  I don’t think that analysts fully take into account the iron ore reserves that FMG has. It seems they take the market capitalisation of $10 billion and look at its $8.5 billion of gross debt and start scaremongering. In fact, FMG has $2.3bn in cash, so it’s “net” debt is $6.2 billion.

Did you know that in the 2012 financial year, FMG had revenues of $6.7 billion and its EBITDA was$2.8bn? It’s net debt is less than 3 years worth of EBITDA, which is not a stretch considering its debt is priced at 600 basis points over the benchmark and is rated BB-.

FMG’s bonds aren’t trading at levels that indicate default or bankruptcy. I actually wish that they were trading at woefully large discounts as it would b a great investment opportunity. In fact, the upside for FMG’s debt is that their credit rating improves and their cost of borrowing drops and they subsequently re-finance.

I can’t say that FMG equity is dirt cheap but if you align yourself with its founder, owning the equity would be a more attractive than its “not quite cheap enough” debt.

Fortescue won’t fold or “go under”, irrespective of what ratings agencies have to say. In fact, Australia’s Labor government (who will most likely be re-elected in 2013) would be wise to stop bashing the iron ore miners and be prepared to shift their stance to being more supportive.

Imagine if Fortescue fails as a company? Directly and indirectly, FMG is responsible for (and has created) thousand of jobs. If government is bailing antiquated automobile manufacturers, it better get ready to support the iron ore industry.

Don’t they know that they would have a bunch of unhappy Chinese on their hands!

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We are cheering for the wrong guys

September 4, 2012 Leave a comment

Why does Australia and its financial press still celebrate and laud the mediocrity of our corporate leaders?

I’m referring specifically to the CEO’s & Chairmen of large public companies.

I’m not writing this to convince anybody with statistics but I think it is safe to believe that they are paid too much when compared to any metric that you wish to measure them against.

They aren’t company builders but stewards of the titles given to them after expensive recruitment searches. These companies have been in existence long before they were anointed and it doesn’t look like many CEO’s are leaving them in a better state than when they first arrived.

They don’t own many shares in the companies they work for and any share ownership is a result of generous grants rather than having bought the them with their own “after-tax” money, which is an extension of the financial syphoning that they manage so well.

More disturbing is that the same CEO’s and Chairmen seem to rotate from one organisation to another, whilst their poor performance and incompetence continues to be rewarded and revered.

Large Australian companies are littered with overpaid managers and tired, old Chairmen who have used phrases such as “moving forward”, “corporate governance” and “limited visibility” in order to stay on the gravy train. They take no risk with any of their own money.

The likes of Graham Turner from Flight Centre, Paul Bassat from Seek, Andrew Forrest of Fortescue and even Gerry Harvey should be celebrated more so than the bosses of banks, conglomerate and multi-nationals. After all, they built their companies from the ground up.

Entrepreneurs shouldn’t be sniggered at, as if they are mad. Australia needs to encourage a more positive culture of economic creation otherwise all we’ll end up doing is selling financial services and insurance.

We should be cheering for the owners and creators of small, private businesses where people risk their own money and lifestyle, every day.

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Global Pasta Consumption – Room for growth

September 2, 2012 Leave a comment

The table below is the result of a 2011 survey from the Int’l Pasta Organisation. Notably, Greece’s consumption of pasta increased from the previous year, as the country’s financial woes increased.

It was interesting to see such a low consumption from countries such as Australia and the United Kingdom.

C’mon Team GB, you can at least try to eat as much pasta as the French!

Rising food prices could mean cheaper pasta fills the hunger gap. This would be bullish for wheat farmers.

 

 

Source: Int’l Pasta Organisation

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Jeremy Grantham’s Top 10 Investing Rules

August 31, 2012 Leave a comment

1. Believe in history

“All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.”

2. ‘Neither a lender nor a borrower be’

“Leverage reduces the investor’s critical asset: patience. It encourages financial aggressiveness, recklessness and greed.”

3. Don’t put all of your treasure in one boat

“The more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”

4. Be patient and focus on the long term

“Wait for the good cards this will be your margin of safety.”

5. Recognize your advantages over the professionals

“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing.”

6. Try to contain natural optimism

“Optimism is a lousy investment strategy”

7. On rare occasions, try hard to be brave

“If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.”

8. Resist the crowd; cherish numbers only

“Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant. Do your own simple measurements of value or find a reliable source.”

9. In the end it’s quite simple. really

“[GMO] estimates are not about nuances or Ph.D.s. They are about ignoring the crowd, working out simple ratios and being patient.”

10. ‘This above all: To thine own self be true’

“It is utterly imperative that you know your limitations as well as your strengths and weaknesses. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.”

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My confusion about Japan

August 27, 2012 Leave a comment

 

If I “umm” and “ahh” long enough about something, my instinct tells me to stay away, especially when pondering about taking a trading position.

The longer that I look at Japanese politics and its economy, I can’t help conclude that’s it’s not a place to invest. I won’t fill this blog with stats in trying to prove my case. There is plenty of data covering Japan available for analysis.

Confusingly, Japan has suffered 20 years of deflation and at some point assets in that country should reach a point of being cheap. After all, it has iconic companies and brands that still have global marketshare and impact.

Yet, Japan has had 6 Prime Ministers in 6 years, it’s 10 year government bond offers a yield below 0.90% and it’s currency (Yen) is near its all-time high.

Why would you own these bonds and Yen?

“Umming” and “Ahhing” can help in telling you when to stay away but if the move in the pendulum is at such an extreme and fundamentals don’t warrant such a swoon, then rather than “watching”, a trade towards a reversion to the mean is worth a look.

What if the Yen weakened significantly and the yield on its 10 year bond tripled?

 

 

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Terrific presentation on Illicit Flow of Money Around the World

August 24, 2012 Leave a comment

Click the link below and look for follow-up presentations.
It’s time for the real “richest person in the world” to step forward.
I’m sure they live somewhere in South America, Africa or Central or even South-East Asia.

Illicit Financial Flows Around the World on Prezi

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China Needs To Spend Almost $8 Trillion To Cope With Massive Migration

August 23, 2012 Leave a comment

 

China Needs To Spend Almost $8 Trillion To Cope With Massive Migration Of Rural Peoples Into Cities

By Palash R. Ghosh – International Business Times

China needs to spend £5 trillion ($7.8 trillion) over the next two decades as an additional 200 million people are expected to move into the urban centers of the country, a new government report warned.

There are already up to 300 million migrant workers who have taken up residence (often illegally) in China’s metropolises. Many of these arrivals live in substandard housing and toil at low-paying, menial jobs.

The report, entitled “Blue Book of Cities in China” and released by the Chinese Academy of Social Science’s Institute for Urban and Environmental Studies, underlines the massive problems China faces as its population rapidly urbanizes.

Shan Jingjing, a researcher from the Institute for Urban and Environmental Studies, or IUE, told the Daily Telegraph newspaper of Britain that a gargantuan amount of money will be required to provide housing, social welfare and infrastructure projects for the new migrants.

“The rural population currently working in the cities has not turned into an urban population yet,” he said. “They don’t have the same social insurance, housing, education, public service and citizen rights as urban residents.”

The urbanization of China has been an extraordinary, perhaps unprecedented, phenomenon.

In 1949, when the Communists seized power in the country, 90 percent of the populace lived on farms and rural regions. As recently as 1982, only about one-fourth of the people lived in cities.

Now, the urban population has exceeded that of the rural for the first time in China’s history.

Dr. Peter Liotta, a professor of political science at Salve Regina University in Newport, R.I., says the urban portion of the population will continue to climb in tandem with economic growth.

“In the next decade, 70 percent of the China’s population will live in cities,” he said.

“By 2030, China will have 221 cities with populations exceeding 1 million residents each, and its total urban population will add 400 million new residents — more than the entire population of the United States then.”

Liotta noted that Chinese authorities have prepared well for the oncoming crush in its cities.

“China has been thinking strategically about how to handle this astounding increase in population and its accompanying need for capacity resilience and infrastructure support,” he noted.

“China has specific plans for building metro systems, highways and high-speed trains for its top 170 cities. In Beijing, for example, from 2004 to 2006 alone, spending on urban transportation increased over 50 percent. So, for these 170 ‘top’ Chinese cities that are a strategic priority, China will need 28,000 kilometers [17,000 miles] of metro rail lines and 5 billion square meters of paved road — and it is likely that China will achieve these goals.”

Still, China faces some huge challenges.

Liotta indicated that China now has five mega-cities: Chengdu (approaching 35 million residents), Chongqing, Shanghai, Beijing and Shenzen. Many of these cities are new creations.

“The mega-city of Shenzhen in southeastern China (across the straits from Hong Kong), for example, did not even exist prior to 1979 except as a simple fishing village,” he said.

“Today, its population is 14 million. The movement of peasant populations from the west to the mega-cities of eastern China represents the largest — and most rapid — migration in human history.”

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China – the contrarian

August 23, 2012 Leave a comment

Recently, we have seen Chinese manufacturing and production figures decline and statistics appearing about how many consecutive months they have been decline or below a certain figure denoting a contracting economy.

Streaks come to an end and trends do weaken and reverse.

China’s greater growth cycle is still in its infancy and even more so are its political and economic reforms.

When growth in a country slows, reforms then speed up.

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Trying to hear what is not being said – August 20, ’12

August 20, 2012 Leave a comment

The continued rise in nationalism – Chinese citizens protesting about Japan’s territorial claims over some distant islands.

South African police shoot and kill striking workers at platinum mine.

Russian could curb wheat exports due to expected weak crop harvest.

Australian Government 10 year bond is now yielding more than RBA’s cash rate. Yield Curve is back to normal.

ASX 200 and Shanghai Composite looking like creating their lows for 2012. IF they find their low now, then expect U.S. to find its base around October.

There is no debt crisis until interest rates start rising. Forget whether rates are cut 25bps, what would happen if interest rates double.

Currency markets lead equities, while I believe what credit tells me over equity.

Thai & Indonesia posting good growth numbers.

Rice supplies are tightening.

Sugar looks oversold on short-term basis.

Rubber is trading at 3 year lows.

 

 

 

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