Credit Markets are Broken and Loan Sharking is Legit

...and the proof is Prosper.com, which offers an online market place for person-person lending (loan sharking).
This is bizarre, as a borrower, you decide how much money you want, and the max you're going to pay for it. You write a semi plausible excuse as to why you can't/won't get money from the bank and punters bid to give you money at a rate up to the maximum the borrower specified, which they promise to pay back. It works a bit like pricing a bond issue at a bank. You call up all the investors and fill the book with their bids and shift the debt to the lowest bidders.

Aim Resources, AIM.AX

This stock is an old favourite and anytime it's below 20c, it's cheap. It's been there a few times in the last week, and represents great buying at these prices. This stock will get back above the 30c level at some stage in the next few months. It's just a matter of some positive news coming out of Perkoa (which is their major project). While the stock is much more mature now and was weighed down by the significant capital raising done at about 28c, it just goes to show that there are plenty of investor who think that 28c is cheap. I'm going to keep buying these up below 20 and wait until I can tip them out above 30.

FDL.AX - Blue Sky Ahead

FDL today revealed a potential 300m tonne plus deposit right next door to FMG. This is sort of size that MIS has and it has a market cap of $900m. FDL is about $60m at the moment and gaining rapidly. They also have a right to earn a 1% royalty from FMG on any JVs, which should fund further exploration activity. This is a very speculative trade, but it doesn't hurt to follow the weight of money that will surely pour into this trade.

Don't be a Fool of Randomness

There is too much noise in the world, and by noise I mean unfiltered meaningless news and data. A higher and higher percentage of what we read, see and hear comes straight from the event to you. Doesn't matter what the event is, we'll hear about it as it happens live and unfiltered and full of unintelligent garbage from the first reporter on the scene. Where am I going with this? What I am getting at is that in a small time frame, a snapshot of recent activity is meaningless, and I'll use the example provided by Nassim Taleb in his excellent book 'fooled by randomness'
Suppose you have a portfolio with an expected annual return of 15% above the risk free rate (very good), 10% volatility (very low). This is a high return, low volatility portfolio. The one we'd all like to have. It should be almost painless as it grinds its way higher with little or no large unexpected deviations, but the results of putting this portfolio through a monte-carlo simulation are very interesting. We'll see that only 1 year in 20 is a down year. The interesting thing is to look at a shorter and shorter time periods and see what the probability of success becomes;
1 year = 93%
1 quarter = 77%
1 month =67%
1 day = 54%
1 hour = 51.3%
1 minute = 50.17%
1 second = 50.02%
in a given day in front of the screen (8 hours) that's 241 happy minutes and 239 sad ones. So the moral of the story is that if the pain of a loss exceeds the joy of a victory (which believe me it does) then don't watch the stocks you own (and plan on owning for a long time) all day. It's an easy way to get stressed and sell too early and miss out on making money.

Messrs Rogers and Soros

"on the verge of a very serious economic correction"
-Soros
"I'm hoping to get all my assets out of U.S. dollars in the next few weeks or months"
-Rogers

Not exactly bullish sentiment from the co-founders of the Quantum fund.

The US economy is heading for recession and all the smart money has/is moving their cash out of USD assets. The recent dip in the AUD against the USD represented a great buying opportunity, and at 8900 it's still a buy. The US is due for a decent sized leg down, so it makes a lot of sense to position yourself for this. I am long AUD against the USD and I'm shorting the Dow. Don't forget that there are 3 Billion people in the sub continent and south east Asia and they are becoming a lot more independent of the US.

Dow Jones

Here's a simple trade. Short the Dow.
Why?

• More write downs from banks are on the way
• Several large companies (AMBAC, MBIA?) will be downgraded by rating agencies (S&P, Moodys, Fitch)
  
• Bernanke will get sick of dropping rates to spur the economy because it has a damaging inflationary effect. It can't keep happening. Inflation is much scarier than a dud economy, just ask Zimbabwe.
  
• Global investors will get sick of losing money to the devaluing USD and will pull their cash out and invest somewhere a little more compelling (at home.)
  

Babcock and Brown Power (BBP.AX) div yield of 9% (not bad for just turning up)

If you want a bit of safety I like Babcock and Brown Power (BBP.AX). Has a div yield of 9% (not bad for just turning up).
Very much exposed to peak electricity prices.

• People use more electricity through Plasma TV's and A/C (these things use heaps of elec)
• Going to be more black outs in Sydney this summer
• Going to be hotter, more A/C used
• These guys can charge whatever price they want cause their electricity isn't contracted. When there is a black out they can just choose what price they charge
• There hasn't been any money spent on electricity generation in Aus in 25years, yet the population has bee growing circa 3% and we are all using more electricity

Get on board at low $3!!

-Wizz Kid

Are the Monolines Going Broke? MBIA, AMBAC et al?

With all the hype surrounding 'sub prime' and US housing and multi billion dollar write downs from American Banks (and European, that's right UBS, not so smart now, Rocky made more personally than your entire Investment Bank last quarter, although admittedly, so did anyone who didn't lose billions of dollars, which is most of us.) people have forgotten that the whole game with mortgages and debt products is really about shifting risk. Who is willing to hold the hot potato? If I bundle up a big bunch of bad debts so that on average, most of them get paid and I flog the product to a pension fund as a high yield product. I'm really just shifting the bad credit risk from the bank that issued the loans to the unit holders in the pension fund. Where is this ramble going? Well in a long winded and not particularly pointed way, I'm having a crack at the these so called Monoline insurance companies, who package up lowly rated credit risks from various companies and 'wrap' it to AAA. So that the investors in the product, aren't buying BBB credit risk and yield, they're buying something like AAA risk for AA yield. Sounds good right? But this little trade forgets one of the fundamental laws of nature. It's damn tricky to get something for nothing. If you don't pay for AAA, you don't get AAA. So when a few trillion dollars worth of CDOs and AAA wrapped bonds turn out to be worth a little less than the paper they're written on, no one should be surprised. When MBIA writes down $20bn on some dodgy guarantees, you know they don't have a 'business model' or any sort of mathematically sensible risk control, they're just a bunch of 'positive carry' cowboys like the rest of them. The kids who took economics and business maths at school were all the brightest ones right....?

Banks Bad

Don't be long MBL.AX or BNB.AX, seriously, they've been good, great even, just not right now.
Have a look at the way all the Investment Banks have been getting smashed offshore. Night after night we read about it. This is just last night's action;

• Washington Mutual down more than 16% after management warned mortgage lending would decline to an 8-year low next year. Adding to woes, a further admission that as much as $1.3bln would need to set aside this quarter to cover bad loans.
• Morgan Stanley down around 5%
• Lehmans off 4.4%
• Goldmans down 3%
• Merrills both down 3%
• and JP Morgan 2.4% lower
• Fannie Mae down 10%
• and Freddie Mac more than 7% lower
• Capital One down 12%

If you are adding to your portfolio, don't add banks right now, there's more pain to come.

Time for a Punt!

It's Melbourne Cup time, and H.O.T's "Lock" for the cup this year is Zipping. Zipping has had a 9 day break after winning the Cathay Pacific Airways Cup at Moonee Valley. The win was a stunning come from behind, with Zipping demonstrating explosive speed on the final straight. Coupled with that, Zipping's solid performance in the cup last year is testament to the fact that the it can run the distance, and according to Zipping's trainer, he is much better prepared this year than last. All signs point to Zipping taking home the prize.
H.O.T's "dark horse" for the cup is Tungsten Strike. According to trainers, Tungsten is in the same form as when he romped home to a six-length win in the Listed March Stakes in England in August. At odds of Around $30 to $40, this seems to be one horse that has been overlooked by the betting public. Worth a punt.

Good Luck to All

China will end in tears part 2

PetroChina listed today in Shanghai. They have a quarter of the revenue of Exxon and a larger market cap and no particularly exciting prospects. This makes no sense. Lock in this value by going long Exxon and short PetroChina. If you can stay solvent longer than this bubble can remain irrational then you're in the money.

PetroChina's Value Tops $1 Trillion. This is crazy valuation. It is bigger than;

• The entire Russian stock market
• Exxon Mobil Corp and General Electric Co combined and
• The entire Chinese stock market in 2006!!!

The trade I suggest above is high risk, but you hedge out your oil price risk by being long short. You've just got to wait for the rug to be pulled out from under China.

The week ahead - Interest Rates, Child Care and Leverage, USD, Emerging Markets and other Hogwash

There are a few interesting items coming up on for the Aussie equity markets this week, including the reserve bank's decision on rates. At my latest mark, it was about 90%+ priced in. So it'll be interesting to see if this slows the market at all. My feeling is that it's got to start hurting some of the highly leveraged margin traders who are bidding the market higher, particularly in some of the index heavy weights.
Early Learning Services (ELS.AX) the soon-to-list child-care provider will follow in the footsteps of larger rival, ABC Learning . We've all seen the progression of ABS.AX and I'm sure there'll be plenty of investors looking to get in on this trade. The company, which owns seven child-care centres and has contracts to buy a further 44, will float on the Australian Stock Exchange next month.
Sixteen contracts for difference (CFDs) products, listed over Australia’s top companies, will debut on the Australian Securities Exchange (ASX.AX) today. Later in the month, the ASX will also launch two index CFDs, seven foreign exchange CFDs and one commodity CFD. These will include a product based on the Dow Jones Industrial Average. This will provide more unneeded leverage for the average punter. With so many of these products already available. (CFDs, Warrants, Minis, Options, Margin Lending etc etc.) The only people likely to be impacted by this are people like CMC Markets, with investors taking it easier option of purchasing ASX listed CFDs instead of the bespoke ones from third party providers.
Emerging market equities have out-performed major markets in recent months. It is as if emerging markets are the new safe haven from the US and other developed nations. This makes some sense , given the strong external accounts of many emerging countries. It is hard to imagine that emerging market growth could diverge from developed market growth for a long period of time.
Fiscal policies in China and other emerging Asian countries, have resulted in accelerating FX reserves growth. The result is a world that sees the glass half-full, and problems in the US as a local problem. However, as the diversion in market performance becomes clearer, the risk grows that something gives, and that may be a global equity market rout and global risk aversion trading. If the USD continues to fall out of bed, the risks that it falls dramatically in a single session continue to stack up. I would not be trading USD from the long side at any point, the risks are simply too great. A friend of mine recently predicted the USD to be buying 50 Euro cents within 18 months, and while he's mad, he might be right.

Emperor Update

Paradigm have just released a target price on Intrepid of C$0.50, which implies a share price of $0.13 vs $0.076 - a 75% premium!

Get to it. Se previous post for more info.

Opportunity Abounds Giralia and the AUD

With the market having a panic all because Citi bank had a bad day, it's a good opportunity to add to positions. People forget just how poor a measure of economic health the Dow Jones industrial average is. You have to remember this only has 30 stocks in it. When one of them (Citi) drops 7%, the Dow will tumble. Fundamentals remain unchanged and I for one am trying to pick up a few more GIR, although in the last 30 minutes they've really got a run on. On another note, the AUD got a fair hammering against the USD and I'm starting to think about getting long again. I'll let you know when I decide to pull the trigger.

Going for Gold - The Emperor's New Clothes

Gold continues to climb, closing in on US$800/oz, and it won't stop there. Here's another little tasty gold treat for all you punters out there:

Emperor Mines (EMP.AX) is a company that has undergone an amazing transformation in recent times. Not more than 6 months ago, the company was laden with debt and underperforming assets. Since then it has managed to sell it's Vatokoula mine, it's Porgera mine, and is soon to announce the sale of it's Tolukuma mine, leaving it debt free, with cash and investments of around $68m and a very valuable exploration program. Furthermore, it has now announced a friendly merger with Intrepid Mines, which has the Paulsens gold mine and the Casposo gold-silver development project.
The merger is the merchant banker's ideal "1+1=3" story. The combination of Emperor's cash and strong management team, plus Intrepid's quality assets in desperate need of cash and management, has the potential to really create value. Furthermore, being a laregley unhedged gold producer (at low cash costs), MergeCo will be very exposed to any upward movement in the gold price.
At a share price of around $0.07 to $0.09, the stock represents a real bargain. In addition to this the sale of Tolukuma will add another $0.015 to the share price, as this will be distibuted to shareholders before the merger.

Maurice's Rating (Take a swing)

Gold Gold Gold - ZAUWBA

We've been bullish on Gold for a long time and I think there's plenty more left in it yet. It might as well be $800USD an ounce after it's movement overnight, but this is something that we believe will be going north of $1000USD in the near future. We saw a good bounce overnight, particularly amongst American gold stocks, we'll see the same today in Oz. There's plenty of ways to play this including buying physical gold in Australia. ZAUWBA is a an exchange traded Australian Gold warrant, with the physical gold being housed in the Perth mint. You could of course just buy gold futures, which would give you a stack more leverage and a lot more potential upside or just buy Australian gold producers/prospectors.