"The best place to be is in commodities"

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January 11, 2010

Wise Man Say: You’re Better Off In Bulks

By Rob Davies
www.minesite.com/aus.html


Gold might be exciting, and the base metals more volatile, but for sheer cash flow in the mining business there’s no avoiding the bulk commodities of iron ore and coal.

According to analysis from RBS, annual global production of iron ore amounts to 2,167 million tonnes a year. China, adds RBS, imports about 620 million tonnes of that. Bear in mind that the FOB price for Australian lump was just over US$120 a tonne in 2009 and that fines averaged US$83 a tonne, and it becomes all too easy to visualise the huge cash flow this industry generates.

Those prices were over 90 per cent up on the previous year as China decided that its best strategy in the prevailing markets was to steamroller its way through the global financial crisis. So, instead of declining in 2009, Chinese steel production rose by about 25 per cent to between 560 million and 575 million tonnes.

That demand dragged prices up, in an industry that is already working flat out. And this tension is the reason analysts expect contract process to rise a further 10 per cent in 2010, although spot prices are forecast to drop by between 30 and 45 per cent. But that still points to prices comfortably above recent levels.

And that is just this year. The team at RBS is looking at a 20 per cent price rise in 2011 and then a 10 per cent increase in 2012, before the price finally weakens in 2013. No wonder so many junior miners are jumping on the iron ore gravy-train and not leaving it all to the majors. An 11 per cent jump in spot prices last week suggests that those forecasts look good.

Coal is the other bulk sector in the mining industry, although within the coal space the common subdivisions consist of thermal coal for power generation, and coking coal for steel making. Despite the best efforts of politicians to build windmills everywhere they are not wanted, coal still supplies the bulk of the world’s energy. The Carboniferous period lasted for 64 million years - it seems unlikely that man is about to unlock all that carbon in a couple of decades.

Once again China is in the driving seat, as it has gone from exporting 10 million tonnes of coal a month in 2003 to importing more than three times that for all types of coal in 2009. Total seaborne thermal coal volumes are estimated by RBS to have risen by six per cent in 2009 to 690 million tonnes.

The expectation is for further steady single digit percentage increases in the years to come. That volume increase in 2009 drove prices in Australia up from US$55 a tonne to US$125 a tonne. In 2010 though, prices are expected to fall back to US$69 a tonne before turning positive again in 2011.

Coking coal is closely tied to the steel market and we already know that looks good. A six per cent rise in export volumes in 2009 to 249 million tonnes will be followed by more subdued single digit growth from here on.

Consequently prices are forecast to drop sharply from US$308 a tonne in 2009 to US$128 a tonne in 2010. After that RBS sees prices jumping to US$185 a tonne in 2011 which is an increase from its previous forecast of US$150 a tonne.

Bulk commodities might be a little dull, but the cash flow they provide the industry is anything but. It’s no coincidence that the biggest miners are big in bulks.

 

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The Recovery We Could Have And The One We Do
Brian S. Wesbury and Robert Stein
Forbes.com / 01.12.10 /


In the past year, equity values have soared and a wide array of economic data has turned upward. But pessimism is still rampant. While different people worry about different things, conservatives focus on jobs and government policy.

Don't get us wrong. There is nothing "good" about a 10% unemployment rate. And, in our view, the health care bills being discussed in Congress would undermine the dynamism of the U.S. economy and hurt health care. Yes, in their desire to "change" America, many politicians want the U.S. to look more like France.

But none of these things will derail the V-shaped recovery. Nor are they good reasons to run for the hills, with your gold, guns and canned goods. It is times like these when it's important for politically conservative investors to not let their view of the way things ought to be cloud their view of what investment returns are going to be.

Even France has economic recoveries and even French companies make profits. While French stocks have trailed U.S. stocks this year, they are still up significantly from their lows. There is less dynamism in France, with far fewer entrepreneurs and less potential for success, but an economy still exists.

In a certain way, the U.S. is about to find out what the 1980s economy would have been like without the tax cuts enacted by President Reagan. The last time the jobless rate spiked to 10% and higher was during the brutal recessions of 1981-82. If high unemployment is a reason not to invest today, it was an even bigger reason not to invest back then. But staying out of the market--remaining pessimistic because of high unemployment--meant you missed out on at least a part of the bull market.

Back in the early 1980s, President Reagan cut marginal tax rates across the board and, at least for a few years, restrained the growth of government social spending. Now we have similar 10% unemployment and public policy is moving in the exact opposite direction, with higher taxes and bigger government.

But the recovery in 1983-84 was enormously powerful, with real GDP growing at a 6.6% annual rate. We are not going to experience such rapid growth. Instead, we're more likely to get about 4.5% over the next couple of years. So the shift in health care policy will have an impact, but it doesn't mean a recovery won't take hold at all. It also doesn't mean stocks that are undervalued relative to profits won't keep heading toward fair value.

If you're looking for the effect on the economy of the shift in policy, look to the long term. During every recovery in the 1970s the unemployment rate fell, but its low point was higher than in the previous recovery. This is happening again now. The unemployment rate fell to 3.9% in 1999, but just to 4.4% in 2007. Given the growth in government we have already seen, we'll be lucky to see 6% during the current recovery.

That's the price we will pay: not continued unemployment at 10% for as far as the eye can see, but good times ahead that never get quite as good as they ought to be. We don't expect clear sailing forever, but the seas look calm enough to enjoy for the time being.

Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Brian S. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.

 

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Is China the Next Enron ?
Thomas L. Friedman believes it is dangerous to sell short China.

http://www.nytimes.com/2010/01/13/opinion/13friedman.html?ref=opinion

 

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FRIDAY, JANUARY 15, 2010
UP AND DOWN WALL STREET

Government Bonds -- the New Junk?
RANDALL W. FORSYTH | Barron's | USA

That's gold's message, more than inflation.

FROM GREECE TO CALIFORNIA TO JAPAN, markets are beginning to worry about what traditionally is deemed a risk-free asset: government debt securities. And that arguably lies behind the rise in the price of gold.

In a provocative analysis, Standard & Poor's finds that gold is reflecting investor skittishness. And those concerns aren't just the usual ones typically associated with demand for the precious metal -- inflation -- but also concerns about the other safe harbor in times of trouble, supposedly risk-free government securities.

The traditional worry about excessive government debt is that it can be inflated away by central-bank money printing. The Federal Reserve can always buy Treasury securities without limit, forestalling any chance of default by the U.S. government. That, however, would involve an expansion of the central bank's balance sheet and, inevitably, produce Weimar-style hyperinflation.

But, at the risk of invoking the most dangerous term in finance and economics, there's something different this time. The governments about whose debts the markets most fret now cannot resort to the printing press.

These are the PIIGS of Europe -- Portugal, Italy, Ireland and Spain -- and most particularly the Hellenic Republic. As part of the European Monetary Union, their adoption of the euro has precluded their past easy out of devaluation.

Now, by contrast, the PIIGS are forced to conform to the monetary orthodoxy of the European Central Bank. And the ECB is doing its best to maintain the tradition of the German Bundesbank under its French president, Jean-Claude Trichet.

Greece, the PIIG whose finances are most suspect, won't get any "special treatment," Trichet vowed Thursday. He made that statement as the cost to insure Greek government debt against default soared even as Athens announced a plan to cut its deficit by 10 billion euros, or roughly $14.5 billion.

Meantime, the other sovereign debtor whose situation evinces real concern is the State of California, which is the seventh- or eighth-largest economy in the world, depending upon whose statistics you cite. As such, it vastly overshadows in importance other dicey sovereign debtors, such as the PIIGs. And like members of the EMU, California can't devalue to reduce its real debt burden.

According to CMA, a unit of the CME Group (CME) that provide data on credit derivatives, California is ranked as No. 10 of the Top 10 default candidates among sovereign debtors, right behind Greece. No. 1 and 2 are Argentina and Venezuela, whose bonds should be rated M for mierda. (That's Spanish I didn't learn in school but on the streets of Washington Heights. If you took French, the comparable term is merde.)

S&P cut its ratings on California general-obligation debt to single-A-minus earlier this week reflecting the Golden State's severe budget deficit projected at $19.9 billion. Moody's already rates California GOs a notch lower, at Baa1, while Fitch Ratings has the bonds two grades lower, at triple-B.

Remember that unlike the federal government, states and localities typically have to balance their budgets. But, senior Obama adviser David Axelrod told Bloomberg News that Washington can't solve all the problems of the states such as California's.

Writing in its Market Intellect research note, Michael Thompson, S&P's managing director of Market, Credit and Risk Strategies, and Robert Keiser, senior director of the unit, contend the strength of gold reflects concerns about sovereign debt and inflation. A move above $1200 an ounce, its peak touched last month before its retreat back to the $1100 range, would signal renewed worries on those scores.

If consumer-price inflation concerns recede, gold out to trade lower, according to Thompson and Keiser, possibly below $1,000 an ounce, which ought to rally government securities. They note global investors would "appear to be worried that subpar global growth is damaging sovereign fiscal stability and credit quality, which may lead governments to respond by inflating their way out of their current predicament." If so, they contend investors ought to keep a close watch on gold, measures of consumer-price inflation and sovereign-debt risk.

For now, the biggest sovereign debtor -- the U.S. Treasury -- is attracting strong demand for its debt, as shown by spirited bidding for its $84 billion of new notes and bonds this week. Of course, the U.S. is unique in being able to borrow in what is, for now, the world's main currency for transactions and as a store of wealth.

Other debtor governments that don't enjoy that privilege, such as Greece and California, are seeing their bonds bid lower in price and higher in yield. Concerns that heretofore risk-free bonds of governments no longer are risk-free may be reflected in the gold price.

But these debtor governments can't inflate away their debt burdens. So, their bonds have not-insignificant default risk. Given that, gold's rise may be seen as demand for an asset not subject to the vagaries of government borrowings.

 

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January 16, 2010

That Was The Week That Was ... In Australia

By Our Man in Oz
www.minesite.com/aus.html

Minews. Good morning Australia. It looks as if the most exciting event down your way last week was the cricket.

Oz. Almost correct, though watching Pakistani batsmen run themselves out is hardly cricket. At one stage yesterday they had a batsman on 28 who could also claim two wickets in the same innings, which in other circumstances might have been enough to earn him the title of the ultimate all-rounder. Shame the two wickets were of his team mates. Bit like a pair of own goals.

Minews. And have you had time to watch your stock market?

Oz. Yes, but when you have a week in which the all ordinaries slides lower by 0.25 per cent, the metals and mining index closes down by 0.29 per cent and the gold index falls by 0.74 per cent you can understand why watching self-inflicted run-outs in cricket is more exciting. In fact, watching the weather in Britain has been more exciting than our market, thought admittedly that’s from 20,000 kilometres away. How’s the global warming debate going up there?

Minews. That’s enough of the chit chat. Time for prices. There must have been some action?

Oz. There was. The best performers were in the iron ore sector, where speculation is growing that the next pricing agreement between miners and steel mills will deliver a price increase of around 20 per cent. Gold stocks, apart from a few eye-catching upward moves among the explorers, and a few sharp falls by some producers, were generally flat. Uranium explorers firmed, as did zinc, where there has been a flurry of corporate activity. Copper and nickel were mixed, while our handful of platinum plays delivered encouraging results thanks to the sharply higher platinum price.

Minews. Interesting that you noted events in platinum. The strength seems to be being driven by the creation of a new crop of exchange-traded funds specialising in the metal. We might have a look at that later. Let’s start with iron ore and coal, though, because bulks seem to be where the best profits are being made today.

Oz. Correct. As reported mid-week on Minesite, the bulks might be a little dull, but the cash flows are enormous. Best of the iron ore stocks last week was Iron Ore Holdings (IOH), one of the few smaller companies in the region to have successfully negotiated an infrastructure and off-take sales agreement with a major miner, in this case, Rio Tinto. Last week, IOH reported fresh success in the field, with more ore found at its Koodaideri and Boundary discoveries. Those results sent the stock up to a 12 month high of A$2.46 during Friday trade, before it eventually closed at A$2.40. At this time last year IOH was at A18 cents.

The discovery news continued when FerrAus (FRS) announced more ore at its Mirrin Mirrin prospect. That news that lifted FerrAus to a 12 month high too, in this case to A96 cents, before a late slide set in and the shares closed out the week at A91.5 cents. Other iron ore stocks to rise included Atlas Iron (AGO), which added A19 cents to A$2.34, Giralia (GIR) which gained A6 cents to A$1.75, Red Hill Iron (RHI), which added A20 cents to A$4.10m and BC Iron (BCI), which rose A3 cents to A$1.30. Meanwhile, Cazaly Resources (CAZ), that try-hard which has launched repeated raids on tenements held by other explorers, but without success so far, appears to be doing better on its own ground. The company released details of a positive feasibility study on its Parker Range project, a result which lifted the stock by A10.5 cents to A36.5 cents, and with one small brokerage tipping Cazaly as a A$1.00 stock.

Minews. Gold now, because it is so widely followed.

Oz. It was an odd week for gold. The price did little, and neither did its counterweight, the Australian dollar. The result was a bit of a stalemate. Among the producers, Kingsgate (KCN) did best, rising by A30 cents to A$9.52, while newest of producers, Focus Minerals (FML) added half a cent to A7.6 cents, which is not a bad result for a company with a very large number of shares on issue. The other new producer, Centamin Egypt (CNT) went the other way, despite announcing its first gold shipment, slipping A5 cents lower to A$2.25.

It was a similar picture right across the gold sector, some up, some down. Adamus (ADU) added A2 cents to A49.5 cents, after issuing a construction update on its Southern Ashanti project. Perseus (PRU), which is working in the same part of West Africa, fell A14 cents to A$1.91. Westgold (WGR) reported more strong drill results from its Tenant Creek project, and lost half a cent to A40 cents. Carrick Gold (CRK) raised a fresh A$18 million for its projects on the eastern outskirts of Kalgoorlie, and its shares rose by A16 cents to A$1.17. But Norton Goldfield (NGF), which is operating the old Paddington mine on the northern outskirts of the same town, fell A5 cents to A27 cents after reporting a boardroom bust-up which saw the chief executive head for the exit.

Minews. Base metals now, please.

Oz. Zinc has become the interesting metal in that complex, thanks largely to deals involving Blackthorn (BTR) and CBH (CBH), though these have had different results. Blackthorn investors welcomed the company’s tie-up with Glencore on the partly-built Perkoa mine, news which lifted the stock by A23.5 cents to A97.5 cents, although at one stage the stock did get to a 12 month high on Friday of A$1.02. CBH, which is making slow progress with a takeover proposal from Nyrstar, slipped A1 cent lower to A13.5 cents. Other zinc stocks were mixed. Perilya (PEM) added A8 cents to A76 cents, while Terramin (TZN) fell A3 cents to A88.5 cents. Interestingly, one of our old favourites, Mt Burgess (MTB) caught the eye of a few investors, adding A0.7 of a cent to A2.2 cents which, on a percentage basis, is quite a jump.

Minews. We might take a closer look at Mt Burgess next week. For now, let’s finish base metals, and move across to uranium and any specials.

Oz. Most copper and nickel stocks trended down, with one or two modest exceptions. Equinox (EQN) lost A26 cents to A$4.31. Exco (EXS) was A2 cents lighter at A22.5 cents, and Avalon (AVI) also fell A2 cents to A21 cents. Going up, just, Sandfire (SFR) and Citadel (CGG) both added A1 cent each to A$4.00 and A41 cents respectively. Among nickel stocks, Mincor (MCR) slipped A3 cents lower. Minara (MRE) lost A4 cents, and Independence (IGO) fell by A9 cents to A$4.75.

Minews. Uranium and specials to finish, please.

Oz. Two stand out performers among the uranium stocks were Mantra (MRU) and Manhattan (MHC). Mantra shot up by A66 cents to A$5.04, with most of that move coming on Friday. Manhattan added A21 cents to A$1.72. Extract (EXT) added A26 cents to A$8.55, but elsewhere it was down or flat. Paladin (PDN) fell by A26 cents to A$4.12. Uranex (UNX) lost A4.5 cents to A28.5 cents. And Deep Yellow (DYC), despite reporting a JORC-code compliant resource for projects in the Mt Isa region of Queensland, was steady at A32 cents.

Specials were led by the platinum stocks, as the platinum price jumped through the US$1,600 an ounce mark last week. Platinum Australia (PLA) added A19 cents to A$1.26, Nkwe Platinum (NKP) hit a 12 month high of A69.5 cent, before closing at A66 cents for a rise on the week of A11 cents. Zimplats rose by A47 cents to A$11.97, but did trade as high as A$12.20, also a 12 month high. Molybdenum stocks were also in the news. Moly Mines (MOL) added A7 cents to A$1.11, while a newcomer, Zamia Gold (ZGM) rose by A1.4 cents to A6.2 cents, but did trade up to A8 cents on Friday after reporting encouraging molybdenum assays from drilling at its Anthony project in Queensland.

Minews. Thanks Oz. You can go back to your cricket while we fret over our tour of South Africa and the hearing ability of Australian umpires.

Oz. Perhaps you can arrange some funding for the South African Broadcasting Corporation so it can buy the technology we use down here.

Minews. Goodbye.

 

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January 18, 2010

Metal Markets Are Increasingly Reliant On The Chinese Economy, For Better Or Worse

By Rob Davies
www.minesite.com/aus.html

Eugene Fama is one of the original proponents of the efficient market markets hypothesis. In a recent interview he claimed that it is impossible to identify a bubble in asset prices before they burst. Instinctively most market operators and observers would reject that concept and observe that it is patently obvious when something is overpriced or underpriced. Yet how many people actually predicted the collapse in equity, property and commodity prices in 2008?

After a dramatic recovery in these prices last year the subsequent performance to date of markets this year is starting to make it look as if the global financial crisis of 2008/9 was just a minor blip that was resolved by the ritual defenestration of a few investment banks.

That said, there can be few observers who view the addition of another US$126 billion to China’s reserves in the last quarter of 2009 simply with equanimity. That latest addition takes the total to US$2,399 billion.

And the giant sucking sound that is China’s appetite for natural resources continues unabated, as it consumes natural resources at a prodigious rate to feed its growth. Unfettered by any need to devotee vast amounts of capital into unproductive domestic property, because they can’t, China’s denizens can devote all their efforts and money into building artefacts, wealth, businesses and infrastructure. All of which require metal.

Although base metal prices have drifted down a touch since the start of the year, the prices of all the main metals remain at attractive levels, especially for producers with a dollar cost base.

It’s possible to guage the tightness of the current market by making reference to the 38 per cent price cut recently negotiated by BHP Billiton for copper treatment costs, as smelters in China and Japan compete for scarce supplies of concentrate.

Rumours from Pakistan that it may cancel the exploration agreement for the massive Reko Diq copper project, which contains 4,100 million tonnes of 0.5% copper, only add to concerns over future sources of supply.

It is a combination of issues like those outlined above that has hepled push metal prices up from marginal cash costs to the marginal full costs of production. You need copper prices at last week’s close of US$7,453 a tonne to make new projects in risky areas viable.

While copper has the tightest fundamentals, other metals are also trading at prices closer to the full marginal cost of production than to marginal cash costs. Aluminium at US$2,293 a tonne is too cheap for European countries to produce at a profit but it is a viable price for steady production from the new plants in the Gulf that can exploit cheap electricity.

Nickel may have a lot of shut in capacity, but a price of US$18,345 a tonne is not too bad for many miners. Toledo Mining’s Reg Eccles was one nickel mining executive this week who expressed a general satisfaction with the prevailing price, even though there’ll need to be a price at some stage for him to restart his company’s direct shipping operations. And the same logic applies to lead at US$2,450 and zinc at US$2,492 a tonne.

The metal markets are now massively reliant on Chinese demand. If anything happened to slow the 10 per cent growth in the Chinese economy, the metal markets would be the first to feel it. Whether that growth is sustainable has been the subject of much debate lately, and no-one has yet produced a conclusive argument on either side.

Professor Fama says it is impossible to determine if China is a bubble economy, and that therefore no one can predict if it will collapse. On that basis we should all stop worrying and just enjoy the ride. Until it stops, that is. But, as Scarlett O’Hara said, “Tomorro is another day…”

 

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THE INTELLIGENT INVESTOR / WSJ / USA / JANUARY 16, 2010
"Why Many Investors Keep Fooling Themselves"
By JASON ZWEIG

What are we smoking, and when will we stop?

A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years.

Robert Veres, editor of the Inside Information financial-planning newsletter, recently asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes, what I call a "net-net-net" return. Several dozen leading financial advisers responded. Although some didn't subtract taxes, the average answer was 6%. A few went as high as 9%.

We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points.

So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%.

All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%.

The faith in fancifully high returns isn't just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that cannot last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement.

Even the biggest investors are too optimistic. David Salem is president of the Investment Fund for Foundations, which manages $8 billion for more than 700 nonprofits. Mr. Salem periodically asks trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then he asks them what minimal rate of return, after inflation and all fees, they would accept in such a swap.

In Mr. Salem's latest survey, the average response was 7.4%. One-sixth of his participants refused to swap for any return lower than 10%.

The first time Mr. Salem surveyed his group, in the fall of 2007, one person wanted 22%, a return that, over 50 years, would turn $100,000 into $2.1 billion.

Does that investor really think he can get 22% on his own? Apparently so, or he would have agreed to the swap at a lower rate.

I asked several investing experts what guaranteed net-net-net return they would accept to swap out their own assets. William Bernstein of Efficient Frontier Advisors would take 4%. Laurence Siegel, a consultant and former head of investment research at the Ford Foundation: 3%. John C. Bogle, founder of the Vanguard Group of mutual funds: 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.

Meanwhile, I asked Mr. Salem, who says he would swap at 5%, to see if he could get anyone on Wall Street to call his bluff. In exchange for a basket of 51% global stocks, 26% bonds, 13% cash and 5% each in commodities and real estate””much like a portfolio Mr. Salem oversees””the institutional trading desk at one major investment bank was willing to offer a guaranteed rate, after fees and inflation, of 1%.

All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you'll take it, right now, upfront. In fact, tell him you'll take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You've just offered him the functional equivalent of what Wall Street calls a total-return swap.

Unless he's a fool or a crook, he probably will decline your offer. If he's honest, he should admit that he can't get sufficient returns to honor the swap.

So make him explain what rate he would be willing to pay if he actually had to execute a total return swap with you. That's the number you both should use to estimate the returns on your portfolio.

 

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A long-term look at inflation... in one picture

http://dshort.com/inflation/inflation-since-1872.html?inflation-1872-present

 

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Stocks May Suffer ‘Severe Correction’ This Year, Zulauf Says
By Meera Bhatia

Jan. 14 (Bloomberg) -- Stocks may suffer a “severe correction” this year as a recovery in global economic growth fades, according to Felix Zulauf, owner and founder of Swiss fund manager Zulauf Asset Management AG.

“The snap back in the stock market will probably peak this spring and then we go into a correction into the fall,” Zulauf, born in 1950, said in an interview in Oslo today after speaking at a conference organized by Skagen Funds. “It could be a severe correction, it could be 20 percent to 25 percent.”

Economies are recovering after governments around the world committed trillions of dollars on measures to revive growth after worst the recession since World War II. The rebound may be fragile with unemployment rising in Europe and expected to average 10 percent in the U.S., according to economic surveys.

Any “hint” of governments cutting the major stimulus programs will “weaken” markets, Zulauf, who founded the Zug- based company in 1990, said. The first stocks to suffer will be the “emerging markets” and the “natural resource theme.”

The MSCI World Index of 23 developed stock markets has gained 3.2 percent this year, adding to last year’s 27 percent surge. The index plunged 42 percent in 2008.

Bond yields will probably rise in the first half of the year because of the “snap back” in growth, Zulauf said. There will be more fiscal “problems” in the government bond markets, which will widen the difference in yield between “good borrowers and bad borrowers,” he said.

“I don’t know how long the fiscal crisis will go on this year,” he said. “It will only be the second step in a fiscal crisis of many more to come.”


http://www.bloomberg.com/apps/news?pid=20601085&sid=asAiwCctxgqo

 

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Boom and Busts
Steve H. Hanke | Globe Asia, issue of January 2010

Before the great depression got underway, members of the Austrian school of economics developed a theory of business cycles. For the Austrians, things go wrong when a central bank sets short-term interest rates at artificially low levels. Such rates fuel credit booms.

In consequence, businesses overestimate the value of longlived investments and an investment-led boom ensues – where a plethora of investment dollars is locked up into excessively long-lived and capital-intensive projects.

Investment-led booms sow the seeds of their own destruction.The booms end in busts. These are punctuated by bankruptcies and a landscape littered with malinvestments made during the credit booms. Many of these malinvestments never see the light of day.

The accompanying chart depicts how, given the length of a project's life, a decline in the discount rate pumps up the present value of a capital project.

An artificially low interest rate alters the evaluation of projects – with longer-term, more capital-intensive projects becoming more attractive relative to shorter-term, less capital-intensive ones.



[To read more and view all the charts, please click on the link below]

http://www.cato.org/pub_display.php...ign=Feed: CatoRecentOpeds (Cato Recent Op-eds)

 

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January 23, 2010

That Was The Week That Was ... In Australia

By Our Man in Oz
www.minesite.com/aus.html

Minews. Good morning Australia. A tough week?

Oz. Yes, but weren’t we all expecting 2010 to be worse than 2009 as artificial government stimulus spending ended and the time came to pay back the borrowed money? The big worry in your market seems to have been the effect on banks. Down this way we have big worries too, as there is talk of a new form of resource rent tax, which looks like whacking the iron ore, coal and gold miners for six.

Minews. Is a new resource tax being seriously considered?

Oz. It seems to be, as is the introduction of a fresh levy on banks that used a government deposit guarantee scheme. Seasoned observers of the market see these events as being as natural as night following day, but there are always some investors who believe that a good time can continue forever. Last week was a wake-up call for anyone who expected the government to not tighten the tax screws, which is why fallers on the market easily outnumbered risers, and why the key indices were all down. The all ordinaries fell by 3.2 per cent, the metals and mining dropped by 5.8 per cent and the gold index slumped by 7.6 per cent. What’s more, there is unlikely to be a recovery next week because European and North American markets kept falling after we had closed.

Minews. Time for prices now, perhaps starting with whatever good news you can muster.

Oz. That’s a hard ask, but if you look closely you can find a few stocks that are still attracting interest, mainly thanks to deals or discoveries. In the deals department the best performer was Northern Iron (NFE), the Norwegian-focused iron ore producer, which has secured additional funding from the manganese specialist, OM Holdings (OMH). On the market, Northern Iron rose by A11 cents to A$1.41, while OM slipped A14 cents lower to A$1.89. Investors seemed to be concerned that OM’s move was more to do with defending itself against the acquisitive Ukrainian, Gennadiy Bogolyubov, than any demonstration of a genuine interest in iron.

Another deal of interest involved a stock we’ve never mentioned before, Orocobre (ORE). Orocobre hit the headlines after announcing a joint venture with a division of Toyota Motors of Japan. Toyota will come in with Orocobre on the development of a lithium project in Argentina. Investors loved it, pushing Orocobre up by A74 cents to A$2.10, a price which is 10 times the A21 cents the stock was trading at a year ago. Interestingly, and ominously, the Toyota deal put the wind up the small band of Australian lithium stocks, perhaps because the news sent out a reminder to the market that even if lithium in batteries for electric cars is the next big thing, there is no shortage of the stuff. Galaxy (GXY) one of the local leaders, fell A10 cents to A$1.33, and Reed Resources (RDR) slipped half a cent lower to A80 cents.

Elsewhere, Ironclad Mining (IFE) reported progress at its Wilcherry Hill project in South Australia. It added A26 cents to A$1.31, while Trafford Resources (TRF), a partner in the development, managed a modest gain of A2 cents to A$1.02. Meanwhile, over at Magnetic Resources (MAU), there was increased interest in the company’s radical exploration approach of looking for iron ore deposits along railway lines rather than in the middle of nowhere. Last week, Magnetic rose by A14 cents to A54 cents, but did get as high as A59 cents in early trade on Friday.

Minews. And that’s the best of the week?

Oz. Pretty much so. From now on it’s a call of the fallen, or flat. As good a place to start as any is the iron ore space, as that is the sector most likely to be hurt by a new form of resource tax. Atlas Iron (AGO), one of the stronger emerging producers, fell A20 cents to A$2.14. Fortescue (FMG), the self-proclaimed third force in Australian iron ore, dropped by A57 cents to A$4.81. Mt Gibson (MGX) copped a double whammy, the possibility of the new tax combining a cyclone on the coast which shut operations at its Koolan Island mine to shave A22 cents off the value of its shares, which fell to A$1.58. Other movers included Gindalbie (GBG), down A15 cents to A$1.07, Brockman (BRM) down A11 cents to A$2.60, BC Iron (BCI), down A12 cents to A$1.18, and the speculator’s favourite, Iron Ore Holdings (IOH), down A11 cents to A$2.31.

Minews. Gold next, please.

Oz. Plenty of digging required to find winners among the gold stocks. Ampella (AMX) was one of the few, adding A6 cents after revealing a maiden 1.2 million ounce resource on its Batie West project in Burkina Faso. This company is currently being pushed hard in London by junior resource broker Fairfax. Meanwhile, Carbine Resources (CRB), which has developed a close working relationship with Ampella, also rose, by A1.5 cents to A15 cents. Chalice (CHN), which continues to get strong results from its projects in Eritrea, put on A5 cents to A48.5 cents, and Medusa (MML) added A1 cent to A$3.34 thanks to rising production at its Co-O mine in the Philippines. Allied (ALD) also added A1 cent to A30.5 cents, while New Zealand goldminer, OceanaGold (OGC) put on A6 cents to A$1.91.

After that it was largely downhill. Kingsgate (KCN) was in favour early in the week, trading as high as A$10.02 after a strong production report, but faded to end down A12 cents at A$9.40. Other movers included Adamus (ADU), down A6 cents to A43.5 cents, Perseus (PRU), down A12 cents to A$1.79, Troy (TRY), down A32 cents to A$2.13, Resolute (RSG), down A20 cents to A98.5 cents, and Silver Lake (SLR), down A8 cents to A$1.02.

Minews. Sobering stuff. Base metals, uranium, and that should do us this week.

Oz. Most base metal stocks were down. In the sector that was all, bar one. CBH (CBH) added A2 cents to A15.5 cents after announcing a fund-raising, courtesy of its biggest shareholder, Japan’s Toho Zinc. The deal is designed to beat off a takeover bid from the big refiner, Nyrstar, and, while it will raise A$67.5 million it now leaves Toho with a 31 per cent stake in CBH. The rest of the zinc sector was down. Perilya (PEM) lost A6 cents to A70 cents. Terramin (TZN) fell by A5.5 cents to A80 cents, and Mt Burgess (MTB) fell half a cent to A1.7 cents.

Copper stocks performed a similar trick, all down bar two. Jabiru (JML) and Tiger Resources (TGS) went against the trend with rises of A1 cent and A3 cents respectively. Jabiru closed at A43 cents after reporting strong production numbers from its Jaguar mine, and Tiger closed at A29 cents having reported exploration success at its projects in Congo. Elsewhere, Equinox (EQN) lost A39 cents to A$3.92, Citadel (CGG) fell by A1.5 cents to A39.5 cents, Sandfire (SFR) closed the week at A$3.75, off A25 cents, and Exco (EXS) shed A1.5 cents to A21 cents. Nickel stocks were down across the board. Notable fallers included, Mincor (MCR) off A18 cents at A$1.69, Minara (MRE) down A12.5 cents at A72 cents, and Independence (IGO) down by A21 cents to A$4.54.

Uranium had one winner, Forte (FTE), which continues to attract interest in its Mauritanian projects and rose a fractional half a cent to A19.5 cents. Manhattan (MHC) ran out of puff after an excellent few months, shedding A20 cents to A$1.52. Mantra (MRU) lost A9 cents to A$4.95. Paladin (PDN) fell by A19 cents to A$3.93, and Extract (EXT) dropped by A54 cents to A$8.01.

Minews. Any specials before we close?

Oz. Moly Mines (MOL) has returned to favour courtesy of a Chinese funding deal, but lost A11 cents over the week to A$1.00. Apart from that, nothing of note.

Minews. Thanks Oz.

 

[drillinto]

January 25, 2010

Obama’s Move Against The Banks May Take Some Of The Hot Money Out Of The Commodities Markets

By Rob Davies
www.minesite.com/aus.html

President Carter’s period in office is not fondly remembered by history. However, he did though do one thing that dramatically changed the course of it. In 1979 he appointed Paul Volcker as President of the US Federal Reserve, and this man’s subsequent actions in raising interest rates killed inflation and established the foundations for the bull market that lasted for the next thirty years. President Reagan thought him too conservative and replaced Volcker with Alan Greenspan in 1987 and we all know now the consequences of that decision.

After two decades in the wilderness President Obama has brought Mr Volcker back to the fore, and is endorsing his idea that banks should be split so that the boring utility bit, which is underwritten by the tax payer, is separated from the sexy trading bit that carries most of the risk.

Some banks are already making this change. Indeed RBS is in the throes of selling its Sempra commodities division. While there is no certainty that Mr Volcker’s proposals will be enacted, the idea certainly upset bank shares last week. A year ago bank shares would probably have risen on this sort of development, as investors would have rewarded banks for shedding risky business. The fact that bank shares declined on the news is further evidence that the market is now forgetting risk and is focussing on potential returns.

If legislation is passed along the lines that President Obama proposes, it could have the effect of taking some of the hot money out of the commodity market. Whether that is a good or a bad thing is harder to judge.

In theory speculative traders should be selling at the top and buying at the bottom and thus reducing volatility. More likely is that most of them are not much more than momentum players and simply jump on whichever bandwagon it is that’s passing. In that case they would be adding to volatility, so their absence may actually lead to a more orderly market.

Speculative trading will always exist and hedge funds and their ilk will doubtless continue to incur risk in order to trade metals. But at least shareholders in those funds will know the risks they are incurring. People who bought shares in RBS thinking its balance sheet was helping Mr and Mrs Pettigrew of 47 Acacia Avenue to refurnish their kitchen probably had no idea that the same balance sheet was also funding long positions in nickel at US$45,000.

But removing unwitting commodity speculators from the market is probably a good thing. That way the field is left clear for those that know what they are doing. Or at least are more aware of the risks.

That said, removing speculative capital from commodity markets would have the knock on effect of reducing the available pool of capital for producers to dip into to hedge against price volatility.

This is most often used to allow companies to fund new mines, or expand existing ones, by selling production forward. Over the last few years this has become an increasingly important way of financing new production. Any reduction in the availability of this source of capital could effectively increase the capital costs of new mines and projects, and have a direct impact on the marginal cost of production.

Mr Volcker’s proposals may not become reality. However, if they do, it surely cannot be a bad idea for industries to stick to things they know about. Let miners dig, hedge funds hedge and let banks let Mrs Pettigrew have a new kitchen.

 

[drillinto]

Political Economy
The True Meaning Of Inflation
John Tamny, 01.25.10, Forbes.com


Seeking to provide clarity as to the true meaning of inflation, the late Nobel Laureate Milton Friedman helpfully described it as "always and everywhere a monetary phenomenon." At first glance Friedman's definition is hard to improve on--from post-WWI Germany to the 1970s in the United States and modern-day Zimbabwe, inflation has always been a monetary symptom of collapsing currency values.

The problem, however, is that Friedman was actually defining something quite different. In the monetarist model that he practiced, money growth beyond a pre-set point was inflation. Friedman's point was that money quantities themselves always told the inflationary tale. But did they?

In truth, the Fed's monetary base grew the same in the 1970s as it did in the 1980s, with two completely different results. The dollar was weak in the 1970s, as evidenced by a skyrocketing gold price, whereas in the '80s the price of gold fell. It should be noted that Friedman, captive to money supply targets, warned of renewed inflationary pressures in the mid-1980s that were surely belied by a very strong dollar.

The Federal Reserve is empowered by Congress to keep inflation in check, but its definition is even more wanting than the monetarist view. According to the Fed's leading lights--including Chairman Ben Bernanke--inflation is a function of too much economic growth. This impoverishing definition is even easier to discredit than the monetarist description.

In an increasingly interconnected global economy, shortages of labor and manufacturing capacity in any one country cannot be inflationary. They can't because, as we've regularly seen with U.S. companies, they have always accessed the world's supply of labor and capacity when producing the goods we buy. Even if we assume--as the Fed seemingly does--that the U.S. economy is closed the Fed's definition still wouldn't pass the most basic of scrutiny.

Indeed, labor shortages in any one country are always solved by new labor force entrants seeking to achieve the higher pay created by shortages, by the certain migration of workers from weak to strong labor markets and--most notably--by technological innovations that reduce the need for human labor inputs. High capacity utilization is nothing more than a market signal suggesting more is needed. And because of robotics and other production innovations, capacity is hardly a static concept.

Then there are those theorists who simply use consumer prices as the truest, most market-driven measure of inflation. It's hard at first to argue with this approach since changes in the value of money often show up in prices, but the largely quiescent consumer-price figures during a weak-dollar decade also come up charitably short.

For one, producers can raise prices without actually increasing the nominal prices of the goods they sell. One easy example here would be Skippy peanut butter. The marketers for the product decided to indent the condiment's container in order to reduce its content by 9%. Forbes Chairman Steve Forbes has similarly noted that while Starbucks has held the line on the cost of the pastries it sells, it has reduced the size of each pastry.

For two, high prices usually mean that they'll soon fall. Flat-screen televisions used to cost over $10,000, but a visit to any electronics retailer today reveals that these prices have gone down considerably. High prices lead to competition on the sale of all sorts of goods (think personal computers), which invariably leads to price reductions regardless of whether the dollar is strengthening.

Finally, rising prices due to a strong demand for one consumer item are not a sign of inflation. If consumer demand for one good is driving its price up, demand for other products must be falling in ways that will drive the prices of other goods down. In short, if there's such a thing as a true price level, it cannot be altered by expensive goods anymore than cheap imports can drive it down.

So what is true inflation? It seems the answer resides in the price of gold. Used as a money measure for thousands of years, gold achieved its purely monetary role precisely because its role in the productive economy is so minuscule. As a result, nearly every ounce of gold ever mined is still with us, which means gold's real price is hard to alter thanks to a great deal of gold stock in existence relative to new discoveries.

When the price of gold moves, gold's price isn't moving; rather it is the value of the currencies in which it's priced that is changing. Gold is the objective indicator of inflation: When its price in any currency rises substantially, that means the unit of account is weakening and that we're inflating.

What does this mean for the economy? Broadly it means that when the dollar weakens such that the price of gold spikes, what is limited capital seeks safe-haven in hard, unproductive assets like gold, oil, art and property. Physical assets least vulnerable to monetary debasement win out over less tangible investments of the innovative or knowledge variety. In that sense it's no surprise that technology investments thrived in the '80s and '90s when the dollar was strong.

Getting back to inflation, rather than a measure of prices that change for various reasons that have nothing to do with currency policy, inflation is at its core the painful process by which capital flows to the hard assets of the earth and away from innovative, wage-creating industries. As individuals we don't so much hate inflation for the rising prices as much as we balk at it because our chances to capture good jobs and good wages are compromised for capital essentially hiding.

As the rising price of gold has revealed throughout the decade we've been inflating, no matter what the more quiescent government measures of consumer prices have been telling us. A weak dollar explains our economic unhappiness because a weak dollar is what has made capital disappear.

At this point the only question is which political party will pick up on inflation's true meaning. Money quantities, economic growth and consumer prices are decidedly poor measures of inflation, but the dollar's price in terms of gold is. Right now inflation is delivering pain throughout the economy as it always has through reduced investment in our economic future.

In short, inflation is about capital going on strike. And the political party that catches on to inflation's true meaning will thrive. The problem, however, at least for now, is that politicians and economists on both sides of the aisle are captive to false inflation definitions that have blinded them to the true inflation that is very much with us, and that weighs on the economy more than any other policy today.

 

[drillinto]

Guy Sorman
An Asian Century? Not So Fast
The first global century is more like it.
City Journal / 22 January 2010

Pundits are proclaiming the beginning of an Asian century. Many think that the next G20 meeting, which will take place in Seoul this autumn, represents a transfer of power from West to East, a decline of Western influence, and a geopolitical tectonic shift. Such a hyperbolic vision of history seems justified, at least on the surface, by a series of recent events. China, for instance, is said to have surpassed Germany’s exports and should thus be considered the leading global economic power. Actually, the statistic is irrelevant, because it considers as exports products that are merely assembled in China: the imports that make possible the assembly””and eventual exporting””should be deducted from the measure. Other observers have pointed to the South Korean company Korean Electric, which recently outbid Électricité de France to build three nuclear reactors in Abu Dhabi. Like the Chinese exports, though, this success should not be overstated. The South Koreans will build and manage American-made reactors, using technology from . . . Westinghouse.

Recent Asian breakthroughs do make for a contrast with the pervasive gloom in the West, where the economic crisis is far from over. Governments in the U.S. and Europe seem unable to understand why huge public expenses have failed to stimulate their economies. Neither the Obama administration nor the Nicolas Sarkozy and Gordon Brown governments grasp the fact that public spending and welfare statism may have broken the backs of would-be entrepreneurs. Asian governments didn’t make the same mistake. South Korea, for example, has simultaneously helped its poor and deregulated its labor market. Asia has used the crisis to reinforce free-market mechanisms.

But proclaiming the end of the West and the advent of the Asian century would be premature, to say the least. First, what do we mean by Asia? Perhaps South Korea, Japan, Vietnam, and the Eastern China seaboard share some common cultural characteristics. Central and Western China, however, remain mired in the medieval era; Indonesia belongs to an entirely different world; India, too, is wholly different from the rest of Asia. Asia knows no political unity: parts of it are democratic, other parts ruled by despots. There is no Asian economic system as such: China’s state-run capitalism doesn’t belong to the same category as Japanese and Korean private capitalism. India remains by and large an agricultural economy, dotted with an emerging small-business dynamism. Asia has no decision center, no coordinating institutions like NATO and the European Union.

For all its problems, moreover, the West is relatively at peace with itself; Asia is not. The continent is riddled with active conflicts around Pakistan and potential ones all around the China Sea. What guarantees border stability and open communication in Asia is NATO to the West and the Seventh American Fleet in the Pacific Ocean. If the U.S. Army and Navy were to leave, war would threaten the continent; at the very least, trade would suffer heavy disruptions. Asian economic dynamism would not survive the departure of the global cop. It’s hard to believe in an Asian century when Asian security depends on non-Asian security forces.

Another of Asia’s weaknesses has to do with its poor record on innovation. Chinese exports contain little added value beyond cheap manpower. China sells sophisticated objects like smartphones to the rest of the world, but these devices are invented in the West. Though Japan and South Korea are much more creative than China, they, too, mostly improve products and services initially conceived in the West. Asia’s lagging innovation is probably rooted in its brand of rote education: when they have the opportunity, Asian students flock to North American and European colleges. And the brain drain doesn’t run the other way: 80 percent of Chinese students in the United States never return to China.

Asia’s undoubted progress happens to be related to its conversion to Western values. Capitalism, democracy, individualism, equality of the sexes, and secularism are all Western notions, and they’ve been adopted in varying degrees in Asia. Reactions against Westernization have also set in, alongside efforts to promote so-called Asian values, both Buddhist and Confucian, such as the Harmony Principle. Such attempts are weakened, however, by their evident political intentions. It’s well known among Asia scholars that China and South Korea manipulate the Harmony Principle to prevent democracy and weaken workers’ rights, respectively. Such political mangling is regrettable: the classic Harmony Principle, which essentially tells us that personal happiness is rooted in a natural social order and that one cannot be happy alone, is a rich philosophical concept and deserves better than to reappear in Communist or despotic garb. One also regrets that not much is done in India to keep alive the philosophy and spirit of Mahatma Gandhi, one of the very few twentieth-century universal thinkers who rose from Asia.

Though the prophecy of an Asian century is premature, that doesn’t mean that Western domination won’t eventually subside. Despite its universities, cultural values, entertainment industry, and strong military, the West may not maintain its edge forever. Still, we should note that whenever we compare the relative power of West versus East, we may be clinging to an obsolete vocabulary. Our criteria themselves may belong to the past. Today, geography is a poor framework: there is no such thing as a national economy any longer. All products and services are global. The more sophisticated a product or a service, the more its national identity tends to disappear. There are no Western or Eastern cell phones, to say nothing of financial derivatives. When China buys American Treasury bills, which nation is depending on which? Exchange generates interdependence. When Asia grows, the West doesn’t necessarily become poorer. From now on, we rise or fall together. There is no contradiction, either, between West and East when it comes to threats against our global security, like terrorism or nuclear rogue states. Barriers have broken down even in popular culture: Korean rock singers are all the rage in China. Are they Korean or American?

So forget the Asian century; we’re entering the first global century. Globalization is so new that we don’t yet fully understand what’s happening to us; we cling to old concepts and lack the language to describe an emerging new world. We can argue about whether it will be a better world; what’s certain is that it will be a very different one.

Guy Sorman, a City Journal contributing editor, is the author of numerous books, including Economics Does Not Lie.
Source > http://www.city-journal.org/2010/eon0122gs.html

 

[Andrew Forex]

I think the most interesting commodity is the gold. At least as far as I can observe it lately.

 

[drillinto]

Beware the 4 new asset bubbles
By Shawn Tully
January 25, 2010

NEW YORK (Fortune) -- Here we go again.

Less than two years after the housing market collapsed, the U.S. economy is threatened by a new bubble in asset prices. This time, four billowing balloons are hovering: two commodities -- gold and oil -- stocks, and government bonds.

Don't be fooled into thinking that last week's 5% drop in the S&P, and the recent sell-off in oil, remotely makes them fairly valued, let alone bargains. Equities and commodities, as well as Treasuries, which actually rallied as stocks dropped, still have a long way to fall. The reason: They've already seen huge run-ups that put their prices far above their historic averages, and far above the levels justified by fundamentals.

Two examples: Most companies can't possibly grow earnings fast enough to support their lofty valuations, and oil and gold are so expensive that we'll see what high prices always bring, a surge in new supply. That makes a price-pounding glut inevitable.

Since the start of 2009, oil has returned to the danger zone by jumping 63% to $75 a barrel, and gold has risen more than 20% to set astounding new records by climbing above $1,100 an ounce. After briefly returning to historically normal valuations in March, stocks are now selling at price-to-earnings multiples 40% above their historic range of 14, and 10-year Treasuries are so pricey that they yield 1.5% less than they did in 2007.

What's causing this resurgence of speculative fervor? One view blames the same policy that caused the real estate rampage -- incredibly low interest rates that are flooding the banks with cheap funds that, in theory, are available for loans. (The current Fed target rate is between 0 and 0.25%.)

"Investors can borrow at extremely low rates to buy assets," says Brian Wesbury, a monetary specialist at mutual fund manager First Trust. "So they're using cheap debt to bid up prices. The Fed's expansionary policies are making assets look a lot less risky than they really are."

Other prominent economists dispute that we're in bubble territory, at least right now. Allan Meltzer, the distinguished monetarist at Carnegie Mellon, argues that even though banks are loaded with cheap money, they aren't lending -- which is why we have a credit crunch. "I would be a lot more concerned if loan demand were higher," says Meltzer.

The one asset that definitely isn't bubbling is housing. There, prices have fallen to a level where new buyers buy a house for the same total monthly cost as rental. That's gravity operating.

So how do you spot a bubble? My view is that we're now seeing the same signs that exposed the frenzy in real estate: prices flying far above their historic averages, measured either in inflation-adjusted dollars (commodities) or as a ratio of the income they produce (stocks and Treasuries). Watch for gravity to take over, just as it did in housing.

Treasuries

The rate on the 10-year Treasury is now a mere 3.6%, well below the 5.5% rate that it averaged between 1993 and 2007, a period where inflation ran at an annual 3% clip, meaning that the "real rate" after inflation, stood at about 2.5%.

So let's assume that future inflation also averages 3%, about where it stood in the second half of 2009. At today's prices, Treasuries are offering a real yield of just 0.6% -- 1.9 points below our 14-year average.

But as the economy recovers and the threat of inflation causes the Fed to tighten monetary policy by raising rates, the yield could rise to 5.5%, handing investors a big loss. Reminder: When yields rise, bond prices fall.

Yet even that scenario is optimistic. Given the huge deficits from the bailouts, it's likely that investors will want a far bigger cushion for expected inflation -- which suggests, says Wesbury, that the yield on 10-year bills could go over 6% in 2011.

Oil

At around $75 a barrel, oil may look like a bargain compared to the record of $147 in July 2008 (see editor's note). But we've simply moved from an immense bubble to a moderate one.

For oil, as in all commodity markets, the highest-cost unit that customers are willing to buy to "clear the market" sets the price. Indeed, prices can go far above cost for short periods, since it takes time for producers to drill new wells or because they hoard inventories.

So how much are oil companies paying to produce the world's most expensive barrels of oil? A good estimate is $55 to $60 a barrel. That's what it costs Anadarko Petroleum (APC, Fortune 500) to extract oil from deep wells in the Gulf of Mexico, according to Anadarko CEO Jim Hackett.

Hence, the world's highest-cost producers are now earning 30% to 40% margins. It won't last; to take advantage of the prices, oil companies will ramp up production, and that extra supply will cause prices to fall back into the $55 range, or even lower.

Gold

Investors are rushing to gold, because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar with a commodity that, they claim, has a fixed supply.

Since early 2009, the price has jumped to $1,100 an ounce from $875, triple its average price between 1990 and 2004. Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.

The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, "cash-for-gold" stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.

When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.

Stocks

Let's assume that investors want a 10% return from stocks (a 7% real return plus 3% gains from inflation). But at current prices, there is no way that the S&P can deliver those kind of gains in future years.

Here's why: Think of the S&P as one company that provides a total return in two components, a dividend yield and a capital gain. Together, the two should equal 10%. But the two are inversely correlated. The lower the dividend yield, the higher the earnings growth rate must be to get you to that 10%. When yields are extremely low, those growth rates become mathematically impossible.

Right now, the P/E multiple for the S&P is an extremely high 20, based on a formula developed by economist Robert Shiller that removes the constant gyrations that can under or overstate the ratio, and the dividend yield is just over 2%. So to hit that 10%, earnings must rise 8% -- assuming 3% inflation, 5% annually in real terms.

But earnings tend to track GDP, which rises about 3% a year over long periods, though far more slowly in a recession. So 3% real GDP growth isn't nearly enough to lift profits 5%. That implies that stock prices must drop sharply: A fallback to their historic P/E of around 14 would require a 29% correction, taking the S&P from its current level of 1,092 to around 770.

"Stocks will disappoint us if we buy them when they're expensive and delight us if we buy them when they're cheap," says Rob Arnott, chief of asset manager Research Affiliates. Now, they're extremely expensive, and destined to disappoint.


Source >> http://money.cnn.com/2010/01/25/news/economy/assets_bubbles.fortune/index.htm

 

[drillinto]

January 30, 2010

That Was The Week That Was ... In Australia


By Our Man in Oz
www.minesite.com/aus.html

Minews. Good morning Australia. The correction continued last week?

Oz. It certainly did. Finding a winner in last week’s sea of red ink was a major challenge. All sectors were down, even gold, which was a bit odd because the price of the metal actually rose about A$10 an ounce, thanks to a combination of a slightly stronger U.S. dollar gold price and a fall in the Australian dollar exchange rate. As it turned out Australian gold stocks lost quite a bit of ground taking the gold index on the ASX as a guide. This dropped by 6.7 per cent. However, it is worth noting that most of that big drop in the index was caused by weakness in the top two goldminers, Lihir (LGL) and Newcrest (NCM). Lihir plunged by A29 cents to A$2.77, as speculation continued over the sudden departure of its chief executive two weeks ago. Newcrest lost A$1.78, as it tumbled to A$31.53. Elsewhere among the gold stocks the damage was not quite as bad.

Minews. Let’s start with gold, and we’ll keep this week’s report quite quick because you’re probably in a hurry to catch a flight to Cape Town for the annual Indaba gabfest.

Oz. Off soon, and a short report might actually be a blessing, unless you like reading long lists of losing stocks. Gold’s a good place to start, because the moves there looked a bit odd. The 6.7 per cent fall in the gold index was greater than the 6.5 per cent decline in the overall metals and mining index, and roughly double the 3.8 per cent fall that afflicted the all ordinaries. And that in an environment in which the gold price was stronger! Taken together it seems that investors simply decided that after the strength gold companies have enjoyed in the past few weeks it was time for a correction, as we all wait to see clear signs of what lies ahead in 2010.

Minews. A big question. Let’s stick to some simpler. Gold prices, please.

Oz. As hinted earlier, smaller gold stocks seemed to do better than the big boys. Troy (TRY) for example, which we will probably take a look at soon, actually added A3 cents to A$2.16 over the week, and while it is down from a mid-January price of A$2.50, a small uptick on Thursday indicates that interest is returning to a company which is once again getting on with business. Another modest rise was posted by Ramelius (RMS), which announced an expanded exploration effort, and rose A1 cent to A53.5 cents. After that it was flat or down. Stocks that held their ground included Centamin (CNT) at A$2.02, Focus (FML) at A6.7 cents, Allied (ALD) at A30.5 cents, and Resolute (RSG) at A98.5 cents. Weaker companies included Silver Lake (SLR), whic lost A9.5 cents to A92.5 cents, Adamus (ADU), which was down A2 cents to A42.5 cents, Perseus, (PRU) which was down a sharp A22 cents to A$1.57, and Kingsgate (KCN), which fell A14 cents to A$9.26.

Minews. We get the picture. Lots of relatively small falls, no disasters. Let’s scurry along, iron ore next, please.

Oz. A similar picture, two rises and the rest down. Brockman (BRM) was the only well-known stock to swim against the tide, as it posted an increase of A15 cents to A$2.75 after releasing an optimistic quarterly report. Venus Resources(VNS), which comes from the same stable as one of last year’s success stories, United Minerals, added A3.5 cents to A63.5 cents, after filing a positive exploration report. After that the list looks like this: Fortescue (FMG), down A28 cents to A$4.53, Atlas (AGO), down A20 cents to A$1.94, Mt Gibson (MGX), down A18 cents to A$1.40, Grange (GRR), down A3 cents to A33.5 cents, and Gindalbie (GBG), down A12 cents to A95 cents. Territory (TTY) was also weaker, down A2.5 cents to A18.5 cents, despite reporting a return to profitability.

Minews. Base metals next, please.

Oz. Only one up, as far as can be seen. Blackthorn (BTR), which successfully introduced Glencore to the Perkoa zinc project two weeks ago, has now announced that BHP Billiton has opted to extend and expand the joint venture at its Mumbwa copper project in Zambia. That helped Blackthorn rise by A9.5 cents to A90 cents. After that the red ink prevailed. Among the copper stocks, Citadel (CGG) was down A3.5 cents to A36 cents, Sandfire (SFR) was down A5 cents to A$3.70, Equinox (EQN) was down A21 cents to A$3.73, OZ Minerals (OZL) was down A13 cents to A$1.06, and on the list goes. All nickel stocks lost ground. Mincor (MCR) fell A23 cents to A$1.64, Independence (IGO) fell A38 cents to A$4.16, and Mirabela (MBN) fell A27 cents to A$2.04. Zinc stocks, apart from Blackthorn, were all lower. Terramin (TZN) lost A5.5 cents to A76.5 cents. Perilya (PEM) fell A8.5 cents to A61.5 cents, and Ironbark (IBC), which reported encouraging results from its Citronen project in Greenland, slipped A2 cents lower to A44 cents.

Minews. Uranium, coal and any specials to finish.

Oz. We’ve saved the best for last. Three uranium stocks did rise, though two not by much. Mantra (MRU) reported excellent results from its Nyota project in Tanzania, and rose A81 cents to A$5.73, a closing price which was a shade below a 12 month high of A$5.81 reached during earlier Friday trade. The other uranium companies on the rise were Uranex (UNX), up A2.5 cents to A30.5 cents, and Manhattan (MHC), which added a lowly half a cent to A$1.53. Paladin (PDN) lost A29 cents to A$3.64, after reporting more problems at its African mines. Forte (FTE) slipped A1 cent lower to A18.5 cents, and Toro (TOE) lost A1 cent to A13.5 cents. Not much to report from coal sector, with all stocks down a few cents, and no specials of note.

Minews. Have fun at Indaba, and keep us posted, it’s the first big mining conference since the financial crisis officially ended, so a measure of the mood of the miners and bankers could be quite interesting.

 

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February 01, 2010

Indaba Starts With Optimism And With Trepidation, But One Thing’s Certain: Cape Town’s A Great Place To Hold A Conference

By Our Man in Oz, in Cape Town
www.minesite.com/aus.html

More delegates, but plenty of uncertainty as to how things are panning out. That’s a snapshot assessment of the first day at the annual Mining Indaba conference in Cape Town. The head count, according to organisers is around 4,000 delegates versus 3,800 last year, when miners and bankers stayed away in droves. This year, the first big mining conference to be held since the end of the global financial crisis, Indaba is expected to serve as a pointer as to how the mining sector will perform in 2010. And if comments from delegates at the Cape Town Convention Centre are a guide then both bankers and miners are delighted to have simply made it to the meeting, but no-one is expecting an overnight miracle.

Craig McGown, an Australian investment banker who is a regular at Indaba, believes bankers are taking the lead in the curious mating game that is played out behind the scenes at big resource-sector conferences. “The bankers need this year’s bonus, that’s why they’re keen to deal”, he said. “Miners are more cautious because they’re thinking about 10 years of revenue rather than a short-term fix.”

Day one at Indaba is not the official start of the event. That’s day two. Minesite’s man will not try and explain why the event has a sort of false start, but is reminded of a comment made about South Africa on his first visit in 1984: “Welcome to South Africa, where clocks run backwards and water flows uphill”.

Formal talks on day one all involved commodity forecasting, and delivered a steady stream of observations about rare metals, uranium, iron ore, gold and copper. Somewhat predictably most forecasts were optimistic about the outlook, though a clear message was that 2010 will be a year when supply issues dominate demand.

Having said that it is also worth pointing out that no-one could really take away a clear picture of what to expect over the next 12 months, as seen in this simple example from the talk by Kevin Norrish of Barclays Capital about the copper market. In a generally positive view of the copper market which centred on the central role of China, Norrish said the copper price could pass the US$8,000 per tonne mark in the first half of the year, as he showed a slide which had a peak copper price of US$7,800 per tonne. Nit picking? Perhaps, but when the words don’t match the table it leaves a degree of uncertainty, and adds to a belief that no-one really knows what lies ahead, as the world crawls out of the financial crisis.

David Hale, a prominent American forecaster of the future, made a series of underwhelming observations, pointing out with a flourish of hand waving that China will play a leading role in the world commodity sector “for decades to come.” Golly! Really? Hale also sang the praises of the US corporate sector for laying off a record eight million workers and said better times would return – another remark in the “we all know that category”. But the best was an observation that the world (especially Africa) needed nuclear power to solve its long-term power needs – at which point Minesite’s Man started to drift off.

Better news will come on day two at Indaba when companies get their time in the sun, and the forecasts fade as all forecasts do. That’s when companies such as Nkwe Platinum, Centamin Egypt and Peninsula Minerals get time at centre stage, and lesser-known companies such as Australian-listed Sabre Resources also get to catch the ear of casual observers and explain what they’re achieving on the exploration front. In Sabre’s case that involves a grass roots copper discovery close to the historic Tsumeb copper mine in Namibia – making it one of Africa’s the more interesting exploration stories. Keep an eye on Minesite for more about Sabre in the next few days.

If optimism tinged with uncertainty is the mood, so far, at Indaba then one aspect of the event is more certain. The location remains one of the great places in the world to hold a conference. The weather is fine, if slightly overcast, but with the temperature around 24 degrees it is easy to see why Indaba is a major attraction to snap-frozen London-based investment bankers. Even if the deals don’t flow, the beer does.

 

[drillinto]

Here is a very fine article on J. K. Galbraith.

The article is a bit too long for ASF.

Please click the link below to read it.

http://www.city-journal.org/2010/20_1_otbie-john-kenneth-galbraith.html

 

[drillinto]

February 03, 2010

Indaba Winds Down, Leaving Some Delegates Talking Of A Restart To The Super-Cycle, And Others Warning Of Choppy Waters Ahead

By Our Man in Oz, in Cape Town
www.minesite.com/aus.html


Day Three at the Mining Indaba in Cape Town, and the verdict is in: Success. Not outstanding, but at least according to veteran Australian stockbroker Hugh Wallace-Smith, worthy of a score of “six to seven out of 10”. Given what the mining world has been through over the past two years that’s a very positive rating. Not everyone agrees. They never do, and even Hugh had his own “only in Africa” story to tell which shaved a point or two off his rating. Over the past few years he has been following the story of ASX-listed Sundance Resources which owns the Mblam iron ore project in Cameroon, a promising but marginal prospect which needs, among other things, a 1,000 kilometre railway and a port. So, curious to hear first hand what’s afoot in Cameroon, Hugh popped along to a presentation from the Cameroon Minister for Mines – who duly failed to turn up. Africa, as seasoned investors know, always wins.

Pricing-in frustration is an impossible challenge, but Africa is definitely a place where frustration can almost be measured in dollars and cents. The trick for investors is to appreciate that a price has to be paid, and to make the appropriate allowance. It was with Hugh’s reality check in mind, and an enjoyable lunch provided by Melissa Sturgess, chief executive of ASX-listed and Aim-traded Nyota Minerals, behind him, that Minesite’s Man on the Cape embarked on his final survey of Indaba, finding that the dark continent (or the hopeless continent as The Economist dubbed it a few years ago) can throw up stories and investment opportunities worth pursuing.

Melissa’s company has one of those stories of substance to tell, though for a reason that her staff have failed to appreciate. The key asset in Nyota is the Tulu Kapi gold project in Ethiopia. With a JORC-code compliant resource of 690,000 ounces Tulu Kapi is on the way to development. Fresh drilling is likely to see the resource base expanded to one million ounces over the next year, or so, with the Ethiopian government keen to see production start as soon as possible. But what caught the ear of Minesite’s Man was a comment that the gold close to the project site was mined by Italian diggers in the 1930s. Surely, thought a casual observer, if Centamin Egypt could promote itself for a decade or two as the company mining the gold of the pharaohs then Nyota could promote itself as the company planning to mine the “gold of Il Duce”, as Benito Mussolini, Italy’s dictator of the 1930s, was known?

Names aside, Tulu Kapi is one of those projects that Africa throws up from time-to-time which have the potential to grow into something of substance. Centamin has certainly proved that with its Sukari mine which ranks as one of the best new gold developments of the past 20 years. Nyota could be onto something similar, operating in a country with an historic gold industry which got lost in the politics of the region. On the market, investors are starting to take a shine to Nyota, lifting the stock on Wednesday by nine per cent to A18 cents as the Tulu Kapi story was spread a little further.

It was while listening to Melissa, and her co-workers, that Minesite was able to take two additional readings of the mood of the meeting from London-based financiers. Clive Sinclair-Poulton from Beowulf Mining gave the event a high rating as a useful pointer to better conditions ahead for mining stocks. Brad George from Matrix Corporate echoed that view, but suggested that deals would remain elusive, largely because of differing views on asset values. Both men saw this year’s Indaba conference as an effective re-start of the commodities super-cycle which hit a speed bump in 2008 but which has decades to run.

Other companies that caught the eye at the conference, or on the cocktail circuit, included Resolute Mining, which continues to make headway with its Syama goldmine in Mali, and Nkwe Platinum which is approaching key decision points on its Garatau project in South Africa. Peter Sullivan from Resolute didn’t have much that was fresh to say, but Nkwe issued a nice resource upgrade on the day.

As a final thought, Indaba organisers might consider making an award for the most honest paper of the conference, with a clear leader being James Smither, an associate director of Control Risks, a risk assessment consultancy. It took a very youthful Mr Smither to point out that rising metal prices are not all good news because many African countries are poised to increase taxes and royalties, that piracy around the African coast is becoming a significant problem, that assets can be nationalised on a whim, and that Nigeria has rocketed up the “kidnapping table”, all comments which drew mid-speech applause from a jaundiced audience. Smither’s warning was “do your homework” and expect the unexpected. His remarks were aimed at miners. They also apply to investors.