There must be a record

There must be a record for most time between posts. This is nearly a solid 10 months, so I must be up there.

So what to update?

1: Take Coalworks off the recommendation list. I said it was good at 25 cents. It sold for $1. Who made 4x their money?

2: Replace Coalworks with Cockatoo Coal. I'll have to do a write up on it later.

3: Re-Commit to posting regularly

4: Make more pithy recommendations.

 

The World Teeters

At some stage there will be a default in Greece. There are a number of ways this could happen. The most likely of these will involve a Greek retreat from the Euro, the reintegration of a local currency and the element of surprise (sort-of). Whatever the case, it will send another wave of shocks around the banking world and make consumers even more cautious, but more importantly, it will become a model for those who follow (the rest of the PIIGS).
The most interesting thing (for those who don’t have their capital tied up in these countries and who have limited exposure) is the practical day-to-day of what a default looks like. If Greece reinvents its currency overnight, it will make deposits in Euros in Greece worthless. Canny Greeks will have their hard earned stashed away in cash (or will be in the process of withdrawing it from the bank) and will be looking to physically take this cash somewhere else to deposit or exchange.
For an historical perspective take a look at the Hungarian hyperinflation of the pengő in 1946 and the Argentineans in 1999

AUDUSD - The Risk is on the Downside

This image is borrowed from IG Markets.

The AUD continues its remarkable run against the USD and seems unstoppable. There is a lot of good news for the AUD, relatively high interest rates, low inflation, a strong economy and near full employment. What will stop the AUD and what will see it repeat the precipitous plunge in mid-2008?

It's pretty simple and it all involves China.
1) A collapse in commodity prices
2) Popping of the Chinese Property Bubble
3) A slow down in the Chinese economy
4) Anything else really bad happening in China...

The fall from grace won't be a slow steady progression like the recent rise has been, it will be a drop much like the last one as all the carry traders unwind their positions and all the AUD bulls back out and run back to the good old USD.

Number of Deaths per TWh

This is the source

These are the facts.

Energy Source Death Rate (deaths per TWh)

Coal – world average 161 (26% of world energy, 50% of electricity)
Coal – China 278
Coal – USA 15
Oil 36 (36% of world energy)
Natural Gas 4 (21% of world energy)
Biofuel/Biomass 12
Peat 12
Solar (rooftop) 0.44 (less than 0.1% of world energy)
Wind 0.15 (less than 1% of world energy)
Hydro 0.10 (europe death rate, 2.2% of world energy)
Hydro - world including Banqiao) 1.4 (about 2500 TWh/yr and 171,000 Banqiao dead)
Nuclear 0.04 (5.9% of world energy)

Things go up and things go down

Investing is allocating risk. Investors look for a situation in which the risk outweighs the reward. That is the only sensible basis for making decisions.

No one can predict things like this or things like this and there's no point trying. Investor simply need to allocate their capital in a way that minimises the potential exposure to those types of events.

Apologies for the long break. I'll be back, I promise.

Choco-Tastic- Cornering the Market sort of works - sort of

Anthony Ward is buying Chocolate, a lot of it and well might he do so. Last time he did it he cleaned up 10s of millions of dollars. There will be a few shrill chocophiles distraught at the notion that their Yorkie bars will get more expensive but there's nothing to get too concerned about. Cornering a market is very difficult, not to mention illegal. John Ward is simply making an informed bet on the movement of a market and his purchases will do nothing to slow down Nestle, Frito-Lay and anyone else who presumably has long term off-takes for mega-tonnes of Cocoa from all over the globe.
The great fallacy with cornering a market is that you are hoovering up all the supply and can therefore cause a price rise and benefit from the abnormal price action. If your buying causes a shortfall, then so too will your selling cause an oversupply. There will be volatility along the way, but unless the supply-demand equilibrium as somehow fundamentally shifted (all chocophiles switch to rhubarb) then buying up of a large number of futures simply causes a short time blip in volatility and a long term nothing.
Every time someone has genuinely tried to corner the market they've done their dough.
Copper - Sumitomo
Silver - Hunt Brothers
You know it makes sense.

House Prices in Australia

Nearly every day in the Australian print media (Murdoch or Fairfax, the only 2 flavours) there will be an article claiming either 'House prices to go up 10% per annum forever' or 'house price crash imminent.' Presumably both of these statements are designed to attract the highest number of user comments as passionate home owners, property flippers and career renters weigh into the debate. Neither of these blitheringly stupid statements are correct. There are definitely parts of Australia where property prices could crash massively. Look at some of the resource towns, where prices are underpinned by one large mine/project. A shut of the mine will remove 90% of the reasons for living there (Ravensthorpe is a good example). New apartments in regional areas, massive MacMansions 50kms from Sydney, Melbourne, Brisbane selling for $1,000,000 are all vulnerable. Sensible investing in property is not as prone to correction. Good quality housing, close to public transports and major sources of stable employment or social utility (Hospitals, Universities etc) will not drop 40% because there will also be a demand for housing in these areas (both rental and purchase). If I own a house near a University that is currently renting for $600 a week (which I believe is worth about $600k based on the rental yield), I'm going to take some serious convincing that I should sell it for 40% less.
The value of any asset is not the possibility to sell it to someone else (capital gain) it is it's ability to produce income. Anything other than income based assessment of investment opportunities is speculating, which is very different to investing. At its worst speculating is like playing roulette or betting on horses, at its best it is like counting cards. Good for a while, if you're smart.

Stop Spending, Stop Spending, Stop Spending, Stop

What is it with governments and deficit spending? Do they not realise that at some stage someone has to pay back all the money they borrow? I know it sounds simple, but the thing is, it is simple. Sure you can print more money, and we've seen that with the USD depreciating 97% over the last 100 years (thanks daily reckoning), but if you want to encourage people to invest in your currency, in your country, then you need to provide a stable platform, and a large part of that stable platform is a currency, that is largely immune to the ravages of inflation.
We mock people who continually live their lives on their credit cards, continuously putting off fiscal responsibly in favour of living large now, yet we sit idly by and watch our state and federal governments do just that. It is ridiculous. Those of us who pay tax are essentially making the minimum payments on our credit cards each months so that our elected overlords can pork barrel this and that and take no real responsibility for their actions.
Stop spending all our money and running up the national credit card you idiots.

Why am I reminded of the time Homer Simpson had his legs stuck in quicksand and he elected to pull his legs out with his arms, and when his arms also became stuck, he attempted to pull his arms out with his face!

Nick Bolton, Inflation

Despite a barrage of negative and cynical articles, there is at least one thing that I know to be good and true. No they do not include Nicholas Bolton and his Vulture Fund but you can hardly blame him for wanting to profit from the mistakes of others. Brisconnections is/was a scam, a fraud and a rip off and anyone who bought equity in that was badly ripped off. We all know it is going to zero, the only difference between us and N.Bolton is that he decided to do something about it. If you are able to short Brisconnections at any price >$0.01, do it.
The thing that I know to be true is....drumroll, Australian inflation will rise, rise rise. St George bank is offering 8.00% term deposits for anyone who wants to put their cash away for 60 Months. What does that tell you? It tells you that the stimulus spending is having its desired effect, assuming the desired affect was to get inflation on the rise. If you spend lots of money and lend lots of money for cheap, that seems to grease the wheels. The big difference is that unlike the last time inflation rose (driven by some organic growth in the economy and a market with nearly full employment), this growth will be in an environment with rising unemployement and declining real wages...scary.

Where is America's Debt

Useful guide.

This can't be true...can it?

From the Daily Reckoning.

01/11/10 Stockholm, Sweden – Congo’s new economic stimulus package of distributing one AK-47 to each citizen certainly sounds — in a humanitarian sense — morally inferior to the various good-natured but ill-conceived measures applied by the US government.

Let us go then you and I

What are the brave and bold predictions for 2010? It's fairly straightforward really.

1: China will start slowing down. They have been growing like crazy (If you believe the official propaganda) for decades and it appears that they are building in some over capacity. The Global media is starting to pick up on this. Al Jazeera report on Ghost Cities
Does this remind anyone else of the Japanese government paving rivers in an effort to stimulate the economy.

2: Chinese slowdown will start to freak out the commodity bulls. This will cascade through all markets. The next big leg down in equity markets will be led by China.

3: Selling US debt will be the best trade you could make this year. There is basically no yield on T-Bonds. Inflation will rise. Yields will rise. The credit worthiness of the Fed is not in question, but their propensity for printing money will count against them.

4: USD to devalue further against the EUR, but to potentially to gain some ground against the commodity currencies (AUD, NOK, CAD, BRL)

5: Trading carbon credits or any sort of global alliance to fight climate change will become less important as governments in western countries concern themselves with fighting against rising unemployment and deteriorating economies

Finally some predictions for 2010:

“The problem is not solved. They're only making it worse. Countries that take the pain [let bankruptcies correct mistakes] move on. The U.S. is following the Japan model.” Jim Rogers, legendary investor

“The moment this fear of deflation turns into a fear of inflation … interest rates rise will in the long end … we are heading … into stagflation.” George Soros, chairman, Soros Fund Management LLC

The Only Thing That Makes Sense To Me

The only thing that seems to be going up with some sense and predictability is the population and by my thinking that means we need more food. Fertiliser makes more food. Ergo, buy MAK.ASX and POT.NYSE and put them away for 10 years. You know it makes sense.

Dust in the Wind

At some stage all the Zombie banks are going to come home to roost. In the immortal words of Kansas, all they are is dust in the wind. There is a lot of bad debt floating around in Zombie banks, that no one will be interested in purchasing or refinancing, even with the preponderance of cheap credit that is again flushing through the system. This is a different sort of cheap credit boom. It's cheap credit for the risk adverse. There is no doubt that we are in the middle of one of the greatest dead cat bounces in history. 60% run in 12 months, what a joke. If you haven't moved to a market neutral or slightly short position then you are dreaming. What's the assumption? Are forward p/e ratios of 18 too low? Too much cash, no where to put it, Treasury yields are zero to negative, Gold has gone crazy.
China has built up a ridiculous amount of over capacity and as the world turns to China to pull them out of the depths of depression, their economy will surely start to falter. 8% growth is unsustainable.

One of these things first

There's clearly another cheap credit bubble building across most asset classes. Debt is cheap and thanks to the intervention of governments readily available. There is/are massive carry trades pushing up the commodity currencies (AUD, NOK) and pushing down the much maligned USD. This carry trade will unwind and when it does, down goes Oil, Gold, Equity Markets and of course the AUD and NOK.

All asset classes have been picking up in the last 6-9 Months and it has been cause by cheap credit. Nearly every OECD economy is shrinking, so how can asset values be rising? It doesn't make any sense.

This house of cards will fall down again. Everyone has forgotten about the last time it happened and the next time will feel like the first. Unfortunately some of the master criminals of the last dance are still alive and kicking (S&P, Moodys and Fitch) and telling us precisely that nothing is wrong and it's time to leverage up and bet the farm.

Buy land with cash and sit on it.

What becomes of the broken blogger?

The MQG.AX short was a turkey. These clowns are the masters of pumping up their stocks. The satellite funds are currently in the process of buying out the Millstones that are their management contracts and the parent is back doing what they do. I'm still hearing all sorts of rumours that they've got >$10bn worth of re-fi in the non operating company to complete in the next 18 months, which should keep them busy. 

One thing I can't for the life of me figure out, is that at the height of the banking crisis, many banks created these so called 'bad' banks, where they stuffed their bad debts (CDOs, CDS etc). Where have these time bombs gone? and when they blow up, who gets hurt? Surely the shareholders (or the taxpayers) still own these walking disasters. It was a nice trick sweeping all the bad debt under the rug, but at some stage the corpse is going to start smelling, and then what?

Half Volley

MQG.AX has traded up very strongly in the last week and with their share purchase plan due to list tomorrow at $26.60, we should see this stock come under pressure. I've sold today at $37 in anticipation of picking them back up tomorrow at a decent discount. I'm quite confident with this trade, although last time I was short MQG.AX, ASIC in their infinite wisdom changed the rules of the game...

The XJO seems to be struggling to break through the 4000 level. It has flirted a few times with breaking through properly, but I think even the most bullish investors know that the stock market can't go up 20% a month every month and I'm sure everyone is familiar with bear market rallies. This is a bear market rally and if you are playing this market it makes a lot of sense to play it from the short side.

I am a long term commodity bull (soft and hard) because there are more and more people needing/wanting more and more things, but that's a 10 year play and I need a 10 day play, hence the short MQG.AX

you know it makes sense.

You know it makes sense

Sell Macquarie Bank into the rights issue. As of yesterday (25th of May) ASIC kindly allowed the shorting of Australian financials and we saw a healthy drop across most of the majors. I think the trade of the month has to be taking a short position in Macquarie Bank in anticipation of the rights issue which goes live on the 12th of June. Eligible investors will be allowed to purchase up to $15,000 worth of MQG.AX at $26.60 per share and I'm sure at the time of the offer, when Macquarie was trading at $33, most investors who took up the opportunity were doing so with a view to locking in a decent stag profit. MQG is hanging around the $31 level today and I think selling here with a view to buying back on or around the 12th of June at the $27 level is a smart trade.

Coalworks

Coalworks.AX is currently undertaking a Bankable Feasibility Study for their Oaklands North Project near Albury. They are trying to prove up a 750 million tonne thermal coal resource. Thermal coal is used to power coal fired power stations and if there's one thing that people need to turn the lights on it's thermal coal. As the Global warming hysteria dies down and people realise that coal is cheap cheap cheap compared to other forms of energy, Thermal coal will be the new new thing. It's just started running hard, from 18c to 25c today (as at 1320hrs), there are approximately 100million shares outstanding. You don't have to be great at maths to realise that 750 million tonnes of thermal coal is worth a little more than $20m....

Suncorp Break Up Story?

Suncorp has been much maligned for a long time now and it seems nobody can really figure out if it's a bank, an insurance company or an investment manager and the share price has been savaged as a result. If you ask me, and nobody usually does, this business will begin to make a lot of sense once it's broken up. Any of the big four wanting to beef up their QLD credentials would have a lot to gain from taking out the banking division and there must be an insurance company that wants to take some cyclone and flood risk.