Month: May 2012

By MoneyMorning.com.au

One of the buzzwords at this week’s Australian Petroleum Producer and Explorer Association (APPEA) conference is ‘Shale’.

And specifically, shale gas.

If you’re not familiar with it, shale gas is gas that’s trapped within deep shale rock formations. Until recently, it was almost impossible to recover this gas.

But technological advances mean natural gas companies can now access this gas. To the extent that it’s now revolutionizing the energy world right before your eyes.

The US Shale Gas Story

Nowhere has it had a bigger impact than in the United States. Less than 10 years ago, the US faced an energy crisis. Today they have more natural gas than they know what to do with.

Based on what I’ve heard this week at the ‘oil and gas show’, Australia has a chance to follow the same path. And that could be great news for you, if you get in early…

Shale gas already makes up 30% of the US gas supply. By the end of the decade, it could reach 50%.

The rapid success of shale gas exploration and production means cheap natural gas for the US. Really cheap!

Just four years ago, gas was USD$14 per million British thermal units (mmBtu). Last month, it fell below USD$2 mmBtu. This cheap energy can make life tough for the producers, but is a gift for the US economy.

The benefits go beyond affordable heating, transport, and more competitive manufacturing. It also creates jobs.

According to J. Michael Jaeger, the CEO of BHP Billiton Petroleum, ‘the unconventional energy sector has been responsible for 600,000 new jobs in recent years, and this is set to increase to 850,000.’

And by his estimates, the sector adds USD$100 billion to the US economy each year.

But this American energy revolution didn’t come easy.

In North America between 2008 and 2011, explorers drilled 15,000 shale gas wells. That takes a lot of investment, a lot of time and a lot of risk.

Abundant Shale Gas Basins

But, as you can see on the map below, you’ll find shale basins all over the world. Canada, Brazil, Argentina, South Africa, Europe, China, and of course…Australia.

But in the time the North Americans drilled 15,000 wells and ensured cheap gas for decades to come, how much progress has the rest of the world made?

Less than 100 wells drilled.

So Australia has a lot of catching up to do. But it’s making tracks.

The Australian Shale Gas Story – Still in Early Stages

The market has embraced the shale story. Aussie shale stocks like Buru Energy (ASX: BRU) have gone up eight–fold in the last two years.

It’s an exciting start, but there’s still a long way to go for the Aussie shale industry.

And the best time to get in is before the industry becomes mainstream…before local explorers have drilled 15,000 wells.

My old pal, Australian Wealth Gameplan editor, Dan Denning knows this. Dan first wrote about shale gas in 2005.

This is what he wrote at the time:

‘If the U.S. government is eventually going to pump billions of dollars into the development of the shale industry, with the goal of national energy independence, I want to figure out who’s going to benefit the most…

‘…I’d rather be ahead than behind on the shale curve.’

He was ahead of the curve. Back then, the US produced less than two billion cubic feet (bcf) of shale gas per day.

This year the US is set to produce nearly 25 bcf of shale gas per day.

And last year he tipped a handful of Aussie stocks that he thought would benefit from the Aussie shale gas story.

But the real billion–dollar–question is, can we recreate North America’s success with shale gas, here in Australia?

We have the potential, but there are some big differences between Australia and the US.

Shale Gas With an Oil Kicker?

Research and Consulting Service, Wood Mackenzie, asked this question at the conference this week. The good news is they reckon it can be done.

The bad news is a number of stars need to align first.

First, explorers need to do much more drilling to see if the geology is right, and whether it’s possible to produce natural gas commercially.

Then there’s the issue of support services. It’s still a new game here, and, unlike in other resources sectors, we don’t have all the players, expertise and equipment to get the job done.

Remote locations, and the wet season, add an extra challenge.

We also need to ask the question — does Australia even need shale gas?

We have plenty of conventional natural gas already. Then we have the Coal Seam Gas industry, which is still growing, and now meets 40% of East Coast Australia’s natural gas needs. And, as I mentioned yesterday, the LNG industry is already set to triple production in the next six years.

So where does shale gas fit in to the Australian energy mix?

As with everything, it depends on the production cost. If it’s cheap enough, Australia can enjoy even more affordable natural gas, and could turn it into another export revenue stream.

But shale gas isn’t the only opportunity. The real money–spinner could be in ‘shale oil‘.

Shale Oil – ‘Liquid Rich’

They call shale ‘liquids rich’ when it contains oil. Oil is more profitable, and easier to export. Finding it in Aussie shale plays could help kick–start the development of a profitable Aussie shale industry.

The biggest opportunities for shale oil are in the Canning, Cooper and Georgina basins. They each have ‘liquids’ potential, but so far no–one has struck shale oil yet, only shale gas.

There’s a lot of Australian shale exploration planned this year. Joint ventures between small Aussie companies and giant overseas firms are drilling the better–known ‘Canning basin’ in WA and ‘Cooper Basin’ in South East QLD.

Drilling and hydraulic fracturing (fracking) is also taking place in the Georgina Basin in the Northern Territory, Gippsland in Victoria, and Galilee Basin in Queensland.

Back when the US shale boom was at this early stage, land was cheap.

Today, US shale acreage valuations are through the roof. Early investors in the right projects scored big.

This is probably why you see big players like Mitsubishi (TYO: 8058), BG Group (LON: BG), ConocoPhillips (NYSE: COP) and Hess Corp. (NYSE: HES) moving in early on the Aussie shale gas story.

And ConocoPhillips for one says it wants more.

With big companies getting in at the ground floor — and with so much focus on the sector at Australia’s largest oil and gas conference — it already looks like the shale sector is set to be Australia’s next resources boom.

Dr. Alex Cowie
Editor, Diggers and Drillers

Related Articles

The Conference of the Year "After America" DVD

APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels

Why Europe Will Ditch Green Energy

Get in Early on Shale Gas

Article by Investment U

Keiner said the big buy now is in the gold mining stocks. There are small miners trading at PEs of 2. That’s cheap!

In focus this week: gold at $6,000 by 2015 and $2,100 by the end of this year, natural gas and oil producers, home builders are for real and the SITFA.

Jurg Keiner of Swiss Asia Capital Singapore said this week in a CNBC interview that gold could hit $2,100 this year and $6,000 by 2015, all due to money printing and more crises in banking and debt issues.

Keiner sighted the weakening of the western democracies and the inevitable money printing to try to spur growth that has to occur as the major reasons we will see a further run in gold.

The money printing will lead to weaker currencies, especially the dollar, which will further erode buying power, which is just another way of saying inflation.

Keiner described the dollar as being very weak and can only weaken further, which he says will add significantly to the gold trade. He sees no upside for the dollar and sighted the fact that the dollar has been unable to rally against the euro despite the horrible news that has been coming out of the EU for over a year.

The weak dollar combined with accelerated money printing is what Keiner believes will drive gold this year and for the next three.

Keiner said the big buy now is in the gold mining stocks. There are small miners trading at PEs of 2. That’s cheap!

Gold has and will continue to trade against the dollar and with inflation. Both look to be very good bets for the next few years. The recent sell-off is an opportunity.

Natural Gas and Energy

If you’re a regular viewer of this segment, the recent run-up in natural gas prices shouldn’t be a surprise. I’ve been talking about it here for the last few months.

Analysts I’ve been reading see $3 nat gas by the end of the summer and $6 by the end of the year.

Pushing prices now is the hope for a normal cooling season after a very warm winter, increased demand by LNG exporters, decreasing amounts of gas being injected into storage and increasing demand from electric utilities.

PIMCO, one of the best names in the industry, sees all gas and oil as the biggest plays in the market with huge upside.

They like pipelines, specifically Plains Pipeline, and other names we have heard before: Anadarko, EOG, Pioneer and Continental.

PIMCO is focusing on low cost-producing companies in the shale gas areas and describes what’s happening now in energy as revolutionary and is reshaping the whole U.S. economy.

According to Mark Keisel, manager of PIMCO’s five star-rated corporate bond fund, the United States could be energy independent in as little as 10 years.

The United States is currently the lowest-cost energy producer in the world. EOG, for example, can produce a barrel of oil for as little as $32 and sell it in the 90s and low 100s.

That’s how big the opportunities are in the current energy market. You have to be a part of this.

Natural gas and oil producers!

Home Builders

Here’s another industry I’ve been banging the table about for two years and it’s finally showing movement.

Recent numbers are pointing to a firm turn around in new home sales.

The S&P’s home builders’ index is up 43% this year and up a whopping 125% since the low last October. Home builders’ shares are 23% higher than last year and in the first quarter there were 337,000 homes sold compared to 299,000 last year. But the 337,000 number is below the same period for 2010, so there may still be reason for hesitation.

The Journal reported that the three large home builders, Beazer (NYSE: BZH), MDC Holdings (NYSE: MDC) and Standard Pacific (NYSE: SPF), reported selling 2,115 homes in the first quarter up from 1,556 last year and up form 1,912 in 2010. Net new orders were up, as well.

Share prices are up a lot, so look for some weakness before you jump in with both feet, but barring any serious dumping in the economic numbers, this industry should finally see a slow but solid climb out of the abyss.

And the SITFA

France gets the cheek smacker this week, again. They did in fact elect a socialist who says he will dump the plan to save the EU that Sarkozy struck with the Germans.

I’ve just returned from two weeks in France and had a front row seat for their presidential elections last Sunday. It was something to watch.

Based on the people I spoke to and what I saw at the Bastille, which was the gathering place for Hollande’s supporters, that’s the socialist who won, I wouldn’t bet on any real improvement in the EU situation, at least not from France’s end.

But the Journal’s Joseph Joffe thinks otherwise.

He said watch the new French president in the coming weeks. He’s betting he will take a page out of “Casablanca” and sputter: “I am shocked, shocked to find out about the mess Mr. Sarkozy has left.” Then he will blame Mrs. Merkel’s brutishness for forcing him to deliver a “blood, toil, tears and sweat” speech in which he breaks all his campaign promises.

Sounds like the “Blame Bush” strategy our own president has been using, hmm?

And Joffe’s position is consistent with a conversation I had the night before the election with two bankers from Society Generale.

First off, they were bankers who described themselves as socialists. How do you work in investment banking and claim to be a socialist? I’m stumped!

But here’s the killer. Both of these bankers agreed that Hollande’s ideas are too far left for France’s current situation, but they believed his ministers would force the reality of France’s situation into his decision making.

My question for them and Joffe from the Journal, what if they don’t? What happens if this life long, committed socialist runs amok and forces more spending and government hiring?

Stay tuned. It looks like the next few years are going to be a real hoot.

Article by Investment U

Article by Investment U

Is oil speculation truly a financial force for destruction, or has the Obama Administration just found a new scapegoat?

Every great leader I’ve known had one quality in common: a strong propensity to give credit to others when things go right and take personal responsibility when things go wrong.

Yet by that standard, Obama is no leader at all.

Nearly four years into his term, he still blames high unemployment and the state of the economy on his predecessor. He blames his trillion-dollar-plus deficit on the intransigence of his political opponents, even though his own party can’t even propose a budget. He insists that middle class Americans are suffering because “the one percent” – the folks who take risks, create jobs and experience economic success – are somehow denying opportunity to the rest of us. (I’m still waiting to hear how.) But this time he’s really outdone himself, blaming high oil prices on “greedy” traders and investors like us.

In a recent White House speech on April 17, Obama said, “We can’t afford a situation where speculators artificially manipulate the market by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.”

“Quick profit.” Man, that sounds ugly.

Of course, if you believe the federal government is hiding an alien space ship in Area 51, you may have stood and cheered his words. The rest of us were less impressed, including Terry Duffy, the Executive Chairman of CME Group, the world’s leading derivatives marketplace.

“People need to study their facts before criticizing speculators,” said Mr. Duffy. He points out that futures traders aren’t just exercising their freedom to take financial risk (and shoulder any resulting losses). They also increase liquidity, reduce spreads and, ironically, help the Treasury Department and American taxpayers save money on the cost of sovereign debt by allowing traders to hedge risk on Treasuries.

Of course, whenever oil prices surge, conspiracy theorists raise their heads again. Even though the facts regularly beat them down like so many whack-a-moles.

Four years ago, the Commodities Futures Trading Commission (CTFC) created a special task force to study whether speculation was responsible for the run-up in oil prices. It included experts from the Agriculture, Energy and Treasury Departments, the Federal Reserve, the Federal Trade Commission and the SEC.

Its conclusion? (Try to stifle that yawn.) That oil price increases were due to fundamental supply and demand factors.

I know it sounds humdrum to conspiracy theorists, but oil demand is what economists call “price inelastic.” People need to drive cars, heat homes, fly in airplanes and run factories. These things take oil. (Although an increasing shift to natural gas by utilities is already starting to undercut oil prices.)

The CTFC report found that growth in world oil demand – especially by China and other developing economies – was outstripping new production capacity. As a result, the market tightened and prices rose.

Moreover, the futures market is far less susceptible to bubbles than the stock or bond markets. That’s because, by contrast, the futures market is a “zero-sum game.” One investor’s gain is exactly equal to another investor’s loss.

Under the standard futures contract, one investor agrees to buy a commodity (say, 1,000 barrels of oil) at a future date for a given price, and another investor agrees to sell for the same price. If the price is up on the settlement date, the buyer wins. If it goes down, the seller reaps the profit. The loser pays the winner; actual commodities are rarely transferred.

Obama – forever in search of a new scapegoat – must surely know this. Then again, as someone who has never started a business, managed a company, taken a significant financial risk, or even held a job in the private sector, maybe he doesn’t.

Either way, demonizing speculators solves nothing. If Obama really wanted to help middle-class families by reducing oil prices, he could encourage production, conservation, or alternative fuels like natural gas.

Of course, that would mean telling the truth and taking responsibility. And those aren’t his strong suits.

Good Investing,

Alexander Green

Editor’s Note: Gas is one sector where Alex sees a contrarian opportunity right now. He recently recommended two gas companies in his premium trading service Insider Alert.

He was kind enough to share one of these recommendations with Investment U Plus subscribers in today’s edition. It’s a company with solid fundamentals, recent heavy insider buying and an 8% yield, to boot.

For more information on receiving this pick along with our experts’ recommendations in each daily issue of Investment U, click here.

Disclaimer: The views presented in today’s Investment U are solely those of the writer and do not necessarily represent the publication or publisher. As stringent supporters of an open marketplace of ideas, we encourage you to contribute your thoughts to the discussion in the comments section below.

Article by Investment U

Article by Investment U

The sudden resignation of the Dutch prime minister two weeks ago, coupled with the presidential elections in France and parliamentary elections in Greece, has everyone on edge that the European debt crisis will return with a vengeance.

Even though the European Union had its problems over the past few years, there were still some things about it that we could depend on…

The countries in the North are the good kids who follow all the EU rules. The PIGS down in the South act like pigs and are punished for living way beyond their means. And Germany and France have a Mommy/Daddy dynamic that keeps everyone in line.

Well, the times are changing. The changes aren’t the decrees of EU administrators, but for the most part, have a grass roots origin. People are voting in elections across the region, voicing their support or anger in response to austerity measures proposed or implemented. There will also be the need to create new coalitions to govern countries were the factions are nowhere near seeing eye to eye.

Over the past few weeks, there were three specific political events that will probably weigh on financial markets for the rest of the year and beyond.

The sudden resignation of the Dutch prime minister two weeks ago, coupled with the presidential elections in France and parliamentary elections in Greece, has everyone on edge that the European debt crisis will return with a vengeance.

Politicians and parties opposed to the austerity measures favored by Germany appear to be gaining momentum, advisers say. If new leaders reversed course and opposed the belt-tightening policies that were a condition for bailout funds, equity markets will suffer.

We need to take a look at three situations going on now that could be big headaches later…

The Netherlands: Another One Bites he Dust

Here’s the problem. Almost two weeks ago, Dutch Prime Minister Mark Rutte’s party was unable to reach an agreement on €14 billion in necessary budget cuts. They have to bring the country’s deficit to GDP ratio down to 3% in 2013 from the currently forecasted level of 4.6%.

Rutte submitted his letter of resignation to Queen Beatrix after entering into a governmental coalition with the extreme right-wing Freedom Party, led by Geert Wilders, which had refused to support the budget reduction.

And when you hear the rhetoric, don’t expect anyone from the Freedom Party to be won over anytime soon. According to Wilders, “The demands from Brussels are ridiculous. If we were to follow them then unemployment would only grow, and it is against the interests of my voters. We don’t want to see our pensioners sweating blood for the sake of a dictator in Brussels. We will not let our elderly people pay for the Greek swindlers,”

That doesn’t sound like “we’re close.”

Up to this point, one of the few remaining success stories in Europe has been the Netherlands.

This may come back to bite some of us because the uncertainty jeopardizes the Netherlands AAA rating. If the Dutch lose their rating, only German, Finish and Luxembourg debt would be top-rated.

So realistically, Germany would be left as the only true credible backer of the EU.

And due to its rating, many private money managers own Dutch debt as a hedge against the PIGS. A AAA rating allowed it to leverage a lot more. If Dutch sovereign debt tanks, you’ll see a lot more deleveraging of borrowed assets by hedge funds, banks and others.

France: Finance, Be Afraid, Be Very Afraid

Say “adios” to the Sarkozy administration in France. It’s the latest EU government to fall by the wayside – like Spain, Ireland, Italy, the UK, Portugal, Greece and the aforementioned the Netherlands – in the past two years.

French President Nicolas Sarkozy conceded defeat to socialist challenger François Hollande last weekend after polls closed in the final round of France’s presidential election.

Why is everyone on edge? Well, let’s briefly go over the platform Hollande ran on:

• He refuses to play Robin to Merkel’s Batman. All those agreements that Sarkozy helped broker to tame the sovereign debt crisis are now possibly back on the table for renegotiation.

• Imagine this, the socialist doesn’t like banks. He has openly attacked the City of London and Wall Street for causing the financial crisis. Mr. Hollande said in January, “My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

• He says he will raise the minimum wage, cancel scheduled spending cuts, hire back thousands of government workers and roll back the retirement age from 62 to 60.

• He also wants to increase government spending to sponsor large infrastructure projects – all in a bid to spur economic growth.

• And where is this money coming from? Hollande wants to tax France by means of shock and awe. Anyone making more than a million euros a year will see their tax rate go from 45 to 75 percent. That absolutely blows one’s mind.

• If you declare war on banks, you might as well raise their taxes too by around 15%. In addition, he wants to implement a financial transaction tax, which could hurt high frequency trading, wiping out a major profit center for some hedge funds and banks that operate in France.

And last but not least, during the last Presidential debate, Hollande noted his discontent with the one thing that’s holding the euro together– cheap funding from the European Central Bank. He scornfully said, “Banks get a loan from ECB at 1% and lend at 6%. I refuse.” He just declared war on the only thing keeping the EU together right now. The money the ECB is essentially printing is being lent to banks at this rate so they can buy sovereign debt that no one else wants.

Greece: Plenty of Parties, Not Much Fun

They can’t help themselves. Greeks finally got to voice their opinion about austerity last weekend through popular vote when the people voted for an array of anti-bailout parties on the far left and right.

PASOK and New Democracy, the two parties that have dominated Greek politics for the last 40 years, received a combined one-third of the vote. That’s half of what they got three years ago. The two parties won a combined 150 seats and that’s not enough to form a coalition government on their own.

What should have EU officials very nervous was the strong showing by Syriza, a coalition of radical left and green groups. These groups don’t take too kindly to bailout and austerity measures. Syriza attracted many disaffected PASOK voters and finished in second at 16.6% – its best showing ever.

Since New Democracy got the most votes, it has three days to find partners to form a government. If they can’t, then Syriza and PASOK will have opportunities to power grab. If none of the parties can bring about a workable coalition, Greece will have to hold elections again. That would mean even more instability in a country already tearing at the seams as the economic crisis continues to deepen.

A possible credit rating downgrade, a finance-wary President-elect, and more Greece instability have already begin to make the markets uncomfortable. And there are things which will probably come to pass because of it.

What Will Money Managers Do?

At the moment, some investors are taking some cautious steps to prepare for prolonged uncertainty.

Because the United States is expected to grow at a more stable pace than Europe, investors should buy more U.S. stocks than international stocks, says Ethan Anderson, Chief Investment Strategist with Rehmann Financial.

Paul Christopher, Chief International Advisor of Wells Fargo, is cutting back exposure to commodities like base metals and agriculture, which could see prices drop due to the weakness in the European economy.

In equities, he’s balancing aggressive sectors like industrial and material with defensive sectors like utilities. These are things to keep in mind going into very uncertain times in the global economy.

Good Investing,

Jason Jenkins

Article by Investment U

By TraderVox.com

Tradervox (Dublin) – The FOMC minutes were released yesterday showing that some members still think quantitative easing might be required is the economy loses momentum due to turmoil in Europe or due to the inability of lawmakers in US to reach consensus on the budget. As a result the dollar retreated from its four-month high against the euro as yen declined against 16 of the most traded currencies as speculation of Bank of Japan added stimulus next week rose. According to BOJ governor Masaaki Shirakawa, the central bank is keen on supporting growth in the country.

The turmoil in Greece and Europe as a whole has worsened as Greek political leaders failed to form a unity government. This is set to force Greece into another election with international bailout and it position in the 17-nation currency bloc at stake. The south pacific currencies have been able to shake off the recent decline as a result of the political turmoil in euro area. Some analysts have said that the recent decline of the dollar against the euro has been as a result of sentiments by some FOMC members that easing might be necessary if there is enough downside risk to the economy. Sentiments from the FOMC might force traders to pause there demand for the dollar causing it to stabilize.

There is also a growing concern about the BOJ’s intention to add stimulus next week which has caused traders to shy off from the yen. According to Bill Diviney and Masafumi Yamamuto, the escalating speculation of BOJ easing is one of the reasons the yen has weakened.

The greenback dropped against the euro by 0.2 percent to trade at $1.2739, ti had earlier climbed to $1.2681, which is the strongest it has been since January 17. The yen dropped by 0.1 percent to exchange at 102.25 yen per euro from yesterday’s close when it touched 101.91 yen which is the strongest since Feb 14.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

By TraderVox.com

Tradervox (Dublin) – The Canadian dollar has weakened to its lowest last seen in January after the European central bank indicated that it is going to reduce its lending to some banks in Greece to reduce its risk. Investors have taken this to mean that Greece might lose its position in euro zone which has caused risk aversion.

Earlier, the loonie had erased some of the losses it had experienced against the dollar after economic data showed positive economic outlook for North American region lending support to sentiments that Bank of Canada might increase interest rates. However, the crisis in Europe has led to a decline in crude oil prices which is the biggest export commodity from Canada hence forcing the nation’s currency to drop.

According to Lutz Karpowitz who is a senior Currency Strategist at Commerzbank in Frankfurt said that the current trend has been caused by the market’s inability to predict what will happen next in Europe. He also added that the lack of credibility in Greek banks has caused the Canadian dollar to decrease as it is a currency driven by risk. He, however, indicated that despite the current pressure, loonie’s downward trend is limited and it might recover in the coming weeks.

Technical data has shown that the Canadian dollar implied volatility for one month against the US dollar has increased to 9.35 percent which is the highest since January. It had earlier in April fallen to as low as 6.59 percent, its lowest level since June 2007. The 5-year average is at 12 percent giving some confidence to traders. Implied volatility data is used by trades to quote and set prices and it indicates the expected pace of currency swings.

The Canadian currency declined by 0.5 perccent against the US dollar to trade at C$1.0122. it had earlier touched its lowest level since January 25 of C$1.0133 per US dollar.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

By MoneyMorning.com.au

[Editor’s Note: Due to a technical issue, I can’t send you today’s Money Morning newsletter. I’m sorry for the inconvenience. Full service will resume tomorrow].
Cheers, Kris

We’ll be honest. This falling stock market has us licking our lips.

The S&P/ASX 200 has dropped 6.2% in two weeks.

And yesterday the index had its first 100-point fall since 3 October last year.

The ASX Emerging Companies index has done even worse. It has dropped 17.1% in seven weeks.

Good or Bad News for Small-Cap Investors?

That’s bad news if you hold small-cap shares, but great news if you want to buy beaten-down stocks on the cheap. It’s also why we suggest you only invest a small part of your portfolio in these high-risk punts.

You can make or lose a big chunk of your investment in a very short period of time.

In that case, you may wonder why you should invest in small-cap stocks at all, if the global economy is as bad as we say it is.

The answer is simple.

First, while we believe the global economy is going through a necessary bout of deleveraging that will ultimately lead to deflation. Central banks and governments will fight tooth and nail to prevent that.

They want inflation. And that likely means periods of rising asset prices…followed by periods of falling asset prices as the inflationary policies fail, and deflation takes hold again.

Second, despite market moves and the threat of recession (or depression) most firms carry on doing business. And most entrepreneurs carry on thinking of new ideas.

New ideas are what small-cap investing is all about.

It’s about entrepreneurs (and investors) seeing the chance to make a lot of money, regardless of what happens to the broader economy.

That’s why we say, if you’re after a punt, buy small-cap stocks now. You can take out a no-obligation trial to our small-cap newsletter, Australian Small-Cap Investigator now. Click here for details…

Buy Small-Cap Stocks at 2009 Bargain-Basement Prices

For some time we’ve told you to ditch your blue-chip growth stocks. Today the Aussie blue-chip index is at the same level as it was in July 2009. That’s almost three years with no growth.

And for long-term investors, we don’t see that changing.

But small-cap growth stocks are a different kettle of fish. Most of them don’t have any revenues and don’t earn a profit. These are the riskiest stocks on the market.

It means when trouble hits the economy, small-caps fall the most. But here’s the thing…if an oil stock finds oil, or a gas stock finds gas, or a technology stock develops a game-changing product, then these small-cap stocks can soar higher regardless of what happens in the market.

Bottom line, it could be that the world economy is entering the deflationary cycle that should have happened in 2009. Government stimulus programs and central bank money-printing only delayed the inevitable.

But don’t let that stop you investing in stocks, because you still need to grow your wealth. And when stocks are hit this hard and everyone is rushing to sell, this is often the best time to invest.

Just make sure you hold cash (plenty of it), reduce debt where you can, hold gold and silver for security, and stick with a few reliable dividend paying stocks for income.

What’s left over, use to snap up small-cap stocks panicking investors are selling at bargain-basement prices.

Cheers,
Kris.

Related Articles

The Conference of the Year “After America” DVD

APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels

Why Europe Will Ditch Green Energy

Why This is the Best Time to Buy Small-Cap Stocks Since March 2009

By MoneyMorning.com.au

[Editor’s Note: Due to a technical issue, I can’t send you today’s Money Morning newsletter. I’m sorry for the inconvenience. Full service will resume tomorrow].
Cheers, Kris

In today’s Money Morning, we’ll show a chart that could give you a sneak peek into the future.

When we showed it to our old pal, Sound Money. Sound Investments editor, Greg Canavan, he said, ‘That’s what outright deflation looks like. Savers’ purchasing power grows in terms of financial assets.’

In other words, the value of money rises as asset prices fall.

That’s deflation: The friend of prudent savers. The foe of over-leveraged borrowers…and banks.

In short, when deflation hits, make sure you’re a saver, not an over-leveraged borrower.

Deflation – A Sign of the Future

This chart is of the Athens Stock Exchange General Index. Based on yesterday’s close, the index is down 89.7% from the October 2007 peak.

It’s a clear warning sign of what can happen when investors lose faith in an economy. And when investors lose faith, they stop investing. When they stop investing, asset prices can take a big hit.

But what does this have to do with Australia and Aussie investors?

Well, perhaps investors have already stopped investing. Certainly Aussie mining giant, BHP Billiton [ASX: BHP] has had second thoughts. This from Bloomberg News:

‘BHP Billiton Ltd. (BHP), the world’s biggest mining company, will fall short of its $80 billion spending target for building mines and expanding assets over the next five years as it sees commodity prices declining.’

BHP – A Sign of Asset Price Deflation for Aussie Stocks?

Over the past year, BHP shares have fallen 25%, mainly due to investor concern about Chinese demand.

If BHP does ditch plans to spend $80 billion on new projects, it indicates investors were right to sell BHP.

So much for the resources boom that’s supposed to last another 50 years!

(By the way, although he’s too modest to say it, Slipstream Trader, Murray Dawes picked this market crash like a peach. For a flashback to see and hear why Murray saw this crash coming, check out the free weekly video update that was first broadcast last week. You can view the stock market update here…)

So if companies are cutting back on investments in their business, why should individual investors bother investing? Why wouldn’t they just keep most of their money in the bank?

That’s the problem. And so the deflationary cycle begins.

As we’ve said before, deflation isn’t a bad thing. It’s good for savers, and it’s good for wage earners. It’s just that in an over-leveraged economy that has gotten used to debt spurring growth, deflation can cause a whole bunch of problems…especially for banks.

But it’s not the Aussie banking sector that draws foreign investors. Australia is a very lopsided economy. Foreign investors come to Australia to invest in one thing…Aussie resources firms.

But they’ll only do that if they believe there’s a strong growth in demand for resources. So when the world’s biggest mining company says it won’t invest a planned $80 billion, investors take note and they withhold their dollars.

And without mining sector growth, that spells a lot of trouble for the entire Aussie economy. Especially those firms (and governments) that have banked on big spending from the miners and increased tax receipts.

Cheers,
Kris.

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Deflation: A Sneak Peak into the Future

By MoneyMorning.com.au

Sometime in the next few weeks we’re going to find out if Greece can afford to stay in the euro. We’re also going to find out if Spain and Italy can afford to leave the euro. Access to credit markets is the key issue. The stigma of default will lock a country out of capital markets. If you don’t have a plan to replace your currency and then devalue it, you’re doomed.

But first, the crisis in Greece didn’t come to a head over night but it can’t be far away. Rival political parties have been unable to form a government. New elections are scheduled for the second week in June. The financial has definitely become political. The people have run out of patience with unsound money and the world built on it.

All that said, the Greeks managed to make a €430 million payment to hold-out creditors last night. Nearly 97% of Greek creditors agreed to the restructuring of the country’s debt in March. That wiped off over €100 billion in Greek debt and resulted in 70% losses for some of the bondholders who accepted the deal. Not all of them did.

Yesterday, the bondholders who didn’t accept the deal got paid in full. There is still about €6 billion worth of debt owed to creditors who refused to participate in the restructuring. You can imagine that the Greek decision to pay the holdouts would anger the creditors who agreed to the deal. They look like schmucks now. Schmucks.

The Real Issue of a Greek Default

But in the current scheme of things, €430 million is chump change. The real issue is whether the Greeks are going to default on €150 billion worth of government debt. If those bonds are owned by foreign creditors – let’s call them other European banks – then the Greek crisis becomes a European crisis. We’ll come back to this issue of ‘containment’ shortly.

For the Greek people, the most alarming aspect of what’s going on is that their life savings are at serious risk of a massive, overnight, non-voluntary devaluation. There are a lot of words for the magical process of turning one thing into something else: alchemy, transmutation, and transubstantiation come to mind. But to the Greeks it’s going to look a lot like highway robbery.

You’ll go to bed one night with your life savings denominated in euros. You’ll wake up the next day with them denominated in drachma. And your euro savings will be automatically converted to drachma at an exchange rate not of your choosing. For example, your 1,000 euros will become 100 drachma…or even 10,000 drachma. The nominal amount won’t matter. What matters is that the devaluation strips you of 70% or 80% of your purchasing power.

Most people would avoid that kind of value destruction if they could. Maybe that explains why €700 million was withdrawn from Greek banks on Monday, according to remarks made by Greek President Karolos Papoulias and reported in the Wall Street Journal. The Journal reports that between €2 and €3 billion in deposits have been withdrawn from the Greek banking system each month for the past two years. January was a high point, with €5 billion.

A bank run by any other name would look as desperate. And who wouldn’t be desperate now?

Leaving the euro, devaluing the drachma, and defaulting on debt owed to foreign creditors are Greece’s best long-term economic survival strategy. But the unavoidable side-effect is to destroy the savings of the people, not to mention usher in a period of lower standards of living.

That won’t win you many votes. It may start a revolution.

And how do you prevent the Greek precedent from being imitated by the Spanish and the Italians? To be candid, we don’t think it matters much now. Greece can’t afford to stay in the euro. The Spanish and the Italians can’t afford to leave it.

The Future of Europe

The economies and banking systems of Spain and Italy are indispensable to Europe. If they leave the euro, there is no euro. The Greeks can leave, devalue, default and use a weaker currency to claw their way back to economic competitiveness. If the Spanish and Italians leave, they lose access to private capital, they lose access to the ECB and they take down Europe’s banking system. They can’t leave. More importantly, they can’t be allowed to leave.

This makes the task of the European Central Bank (ECB) much easier. It simply has to guarantee Greek debt owed to all non-Greek creditors. Or, it could simply buy that debt. This would solve the problem of anyone outside Greece taking losses on Greek debt.

This is what corporatism looks like, when the Big State and Big Finance become the Big Power in the economy. Losses cannot be tolerated. Any loss results in lower equity capital at a financial firm would require selling assets. Since everyone owns a piece of everyone else, and owes to everyone else, any major loss in one place results in losses everywhere.

Of course it’s absurd that Europe is moving toward this kind of ‘extreme socialism’. The people most responsible for the crisis are not accountable and the people who have saved get punished. The elite are enriched and everyone else is enslaved.

This is why the financial crisis could so quickly become a political and social crisis. When people don’t think they can get justice from the courts or the cops, and when they think that cheating is the only way to get ahead in a system, the political and financial order is on borrowed time. The clock is ticking.

Dan Denning
Editor, The Daily Reckoning Australia

Publisher’s Note: This article originally appeared in The Daily Reckoning Australia

Ed Note: Dan Denning is the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing. He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. If you like what you’ve read from Dan today, why not sign up to his free daily newsletter, The Daily Reckoning.

You’ll get an independent and critical perspective on the Australian and global markets. But it’s not the kind of stiff-necked analysis you read from most financial commentators, instead, the Daily Reckoning delivers you straight-forward, humorous and useful investment insights from Dan and a wide range of other Aussie and global analysts. To take out a free subscription to The Daily Reckoning, click here…

From the Archives…

What Newton Knew About House Prices …That the IMF Should
2012-05-11 – Kris Sayce

Why a Greek Exit From the Eurozone Could Be Great News For Markets
2012-05-10 – John Stepek

Why Europe Will Ditch Green Energy
2012-05-09 – Kris Sayce

Why It’s Time to Buy Gold
2012-05-08 – Dr. Alex Cowie

Why You Should Be Watching Japan’s Economy
2012-04-07 – Dan Denning

Why Greece Can’t Afford to Stay in the Euro

By MoneyMorning.com.au

Gold a bubble? No chance, says respected Swiss investor Marc Faber.

The reason that people think gold is a bubble, says Faber, is that its current price seems a lot higher than its 1999 price of $252. But despite the significant gains, gold is still not as widely owned as other assets were during past examples of bubbles.

“In 1989, everybody owned Japanese stocks. And in 2000, everybody owned tech stocks. That is the bubble, when the majority of market participants own an asset. I think there are more people that own Apple stock than gold.”

The increase in gold’s price is down to the huge increases in debt levels, not tech-boom-style irrational exuberance.

“We had an explosion of debt, not just government debt, but private sector debt, and an explosion of unfunded liabilities.”

This creates “a situation where maybe the price of gold should be much higher because the economic and financial conditions are worse than they were 12 years ago.” The hard times encourage indebted governments to print even more money, driving up the value of gold.

Gold Reserves?

Faber, who writes the Gloom, Boom and Doom newsletter, also thinks that the growing reserves of emerging market governments will also help the gold price in the long run. “International reserves accumulate principally at the hands of Asian central banks and central banks in emerging economies,” notes Faber. Right now those reserves are in dollars and euros but Faber thinks that will change.

“Even a central banker, with his just-below-average intelligence, will one day notice that maybe it’s not that desirable to be in the US dollar or Treasury bills that have essentially no yield. In other words, you have a negative real interest rate on these dollars.

“So they move money into gold. They should have done it a long time ago. But don’t expect too much from a central banker.”

James McKeigue
Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek

From the Archives…

What Newton Knew About House Prices …That the IMF Should
2012-05-11 – Kris Sayce

Why a Greek Exit From the Eurozone Could Be Great News For Markets
2012-05-10 – John Stepek

Why Europe Will Ditch Green Energy
2012-05-09 – Kris Sayce

Why It’s Time to Buy Gold
2012-05-08 – Dr. Alex Cowie

Why You Should Be Watching Japan’s Economy
2012-04-07 – Dan Denning

Marc Faber: Gold is No Bubble