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.