Month: September 2011

News of a rogue trader is sending shares of Swiss bank UBS (UBS) down today. The firm said a trader in its investment bank made unauthorized trades, amounting to an estimated $2 billion loss.

17 Rare Earth Elements? The Number is Actually 52…

by David Fessler, Investment U Senior Analyst
Thursday, September 15, 2011

At least according to a new list published by the British Geological Survey (BGS). These include the standard list of 17 Rare Earth Elements, 97% of which are produced in China.

However, the list also includes other “technology metals” used in modern digital devices and things like solar panels, wind generators, and other green technologies, that are most at risk from supply disruption.

The scary part is the list comprises nearly half the elements in the entire periodic table. You can see the entire list here. The supply risk index runs from 1 (very low risk) to 10 (very high risk).

Check out the graph below, courtesy of the National Environmental Research Council (NERC).

The chart shows the frequency that a given country is the global leader in the production of a given element. Where do most of them come from? You guessed it: China.

Andrew Bloodworth, from the British Geological Survey, suggests that: “while we won’t run out of these metals any time soon, the risks to supply are mostly human.”

What he’s talking about are things like nationalism, geopolitical risks, mining accidents, and the length of time it takes from the discovery of a resource and production levels of extraction.

Houston, We Have a Problem: China Again

The concern of course, is that these are all materials that we’ve come to rely on for things we use every day. It’s no secret that China controls 97% of all Rare Earth Elements (REEs) production.

What isn’t widely known, however is that it dominates the global production of all 52 of the elements on the BGS list. BGS published the list to bring attention to the direness of the situation, in hopes policy makers will see the need to facilitate diversifying the sourcing of the more critical ones.

Antimony, for example, is used extensively in fireproofing. It’s deemed the element most “at risk” on the BGS list. It’s found and extracted mostly in China.

The good news is that there are plenty of locations around the globe outside of China where these important elements can be economically mined. Most notably they include Australia, southern Africa, the United States, and Brazil.

Developing mines in other countries takes away the monopolistic position China has in nearly 50% of these elements. Many of these are elements that even 10 years ago were of little interest to industry.

Enter the age of advanced digital devices, and more and more exotic materials are being sought out and integrated into manufacturing processes all over the world. Over 1 billion mobile phones are manufactured each year, and the pace of demand isn’t letting up. This puts additional pressure on the demand for many of the elements on the BGS list.

If not China, then Who?

Shortages and monopolies on supply create opportunity.  The good news is that there are plenty of exploration and production ramping up outside of China.

Companies like BHP Billiton Limited (NYSE:BHP), Vale (NYSE:VALE), and Rio Tinto plc (NYSE:RIO) are all huge mining conglomerates that produce many of the elements on the BGS list.

Rare Earth Elements production is being developed by Molycorp, Inc. (NYSE:MCP), Avalon Rare Metals Ltd. (AMEX:AVL), and Lynas Corporation Limited (PINK:LYSCY).

It’s a safe bet that an investment in companies producing any of the 52 elements on the BGS list stand to benefit, especially if it’s one of the 27 China is the dominant supplier of.

We’ve seen how China has gouged the rest of the world with regards to REE prices. It’s only a matter of time before China starts to raise prices on other elements it dominates as well.

Good Investing,

David Fessler

Article by Investment U

Mining Companies Driving Bullish Sentiment in Australia

by Justin Dove, Investment U Research
Thursday, September 15, 2011

As precious metal and rare earth prices remain high, so do the margins for mining companies. Thus, companies such as BHP Billiton (NYSE: BHP) and Lynas Corp. (OTC: LYSCF.PK) stand to spend plenty on increasing mining production.

Australia is a huge benefactor to this recent trend. Its rich natural resources and close proximity to China and other emerging economies helped it avoid the worst of the financial crisis. Mount Weld was even billed as the savior to China’s rare earths monopoly.

According to the latest Australian Bureau of Statistics Survey of Capital Expenditures, Australian Chief Financial Officers expected major growth in corporate expenditures in June. The numbers indicate fiscal 2012 capital expenditures should increase 24 percent more than the record investments made last year. That would equate to an infusion of AU$148.8 billion, or about US$155 billion, into the Australian economy over the next year.

Not Just Mining

The mining industry’s planned AU$82.1 billion capital expenditure (capex) makes up the majority at 55 percent. But while there wasn’t much growth over the past year in that sector, spending is starting to catch up in other areas. The manufacturing sector is expected to increase its capex by 10.5 percent.

Across all industries, spending on building and structures is expected to take the largest jump. Building and structures will reportedly increase almost 50 percent to AU$98.6 billion. If these expectations are accurate, the added investments in construction should help drive the broad economy.

So if all this increased money does come to fruition, who stands to benefit?

The Largest Australian Bank

The most immediate benefactor for U.S. investors to a rising Australian economy may be Westpac Banking Corporation (NYSE: WBK). As companies pump money into capital expenditures, parts of these investments will be through debt instruments.

Also, increased employment and a better economy stand to benefit Australian banks. Even if the numbers from June don’t hold up, Westpac may be at a low point, anyway. Greek and Eurozone fears have suppressed its stock despite low direct exposure to Greek debt.

But check out the fundamentals…

• Westpac has a P/E ratio of 8. Single-digit P/E ratios are usually standard with large banks, such as Barclays PLC (NYSE: BCS) and UBS (NYSE: UBS), these days. But once all the Eurozone fears die down, these P/E ratios should eventually return to the double digits.
• EPS is high for a bank at $12.42. Compare that with paltry figures from Barclays at $1.32 and UBS at $1.81. Goldman Sachs (NYSE: GS), which has a similar market cap to Westpac, is at $10.20, with a double-digit P/E.
• Westpac offers great dividends. The dividend yield is a whopping 8.10 percent. Since 2006, its biannual dividend has never been below $2. In May, it paid out $4.089 per share. Its second annual dividend is due in early November. There’s no telling if it’ll be able to match such a high dividend with all the economic troubles since May. But not many investments are paying out four percent annually right now, much less up to eight.

Forward-Looking Statements

These numbers from the ABS are merely projections based on a survey of CFOs. With all the changes in the global economy lately, things may have changed, as the statistics represent sentiment in June.

Considering gold and rare earths are continuing to boom, it’s likely miners haven’t slowed pace. But it’s probably wise to hold off on companies benefitting from a rise in Australian construction, such as James Hardie (NYSE: JHX), until further notice.

However, for contrarians not scared off by the Eurocrisis, Westpac may present a decent opportunity with the upside of a possible surge in the Australian economy.

Good Investing,

Justin Dove

Article by Investment U

The Danmarks Nationalbank held its key lending rate unchanged at 1.55% .  The Bank also cut the interest on certificates of deposit -10 basis points to 1.00%, the current account rate -10 basis points to 0.90%, and held the discount rate at 1.25%.  The Bank said in its press release: “The interest rate reduction follows Danmarks Nationalbank’s purchase of foreign exchange in the market. The short euro market rates have fallen and the spread to the equivalent Danish rates has tended to strengthen the Danish krone.”

Latvijas Banka kept its main monetary policy interest rate, the refinancing rate, unchanged at 3.50%, and held its other interest rates unchanged.  The Bank said:”In recent months the trend of abating inflation has become evident with only the raising of several tax rates preventing a more rapid drop in prices,”.  The Bank further noted that “domestic demand is growing slowly and represents no risk of rising prices; moreover it is becoming likely that economic growth in Latvia will be slower next year as demand in external markets drops because of the global debt crisis.”

Previously the Bank also kept monetary policy settings unchanged, leaving the refinancing rate at 3.50% at its July meeting.  The Bank of Latvia last reduced the refinancing rate by 50bps to 3.50% in March 2010.  Latvia reported annual inflation of 4.7% in August, compared to 4.3% in July, 5% in May, and 4.5% in April.  The Latvian economy expanded 5.6% on an annual basis in Q2, while GDP growth was reported as 3.5% in the previous quarter.  The Bank next meets on the 15th of November.

Sept. 15 (Bloomberg) — European Union Competition Commissioner Joaquin Almunia discusses the sovereign-debt crisis and the prospects for implementing the Greek bailout plan adopted in July. Almunia, who is also vice president of the European Commission, talks with Bloomberg’s Nicole Itano in Wroclaw, Poland.

The National Bank of Georgia maintained its benchmark refinancing interest rate unchanged at 7.50%.  The Bank said: “As expected, in the recent months inflation kept decreasing. This trend could possibly continue in future. According to the existing forecasts, the inflation by the end of the year will be within the target level.” The Bank further noted: “Recently the growth in economic activity has been stable. The decrease of the interest rates, decided on by the MPC at previous meetings has not yet been fully transmitted to economic activity. Accordingly, at this stage the committee decided to keep the policy rate unchanged.”

The Bank cut rates 25 basis points at its previous meeting; previously the Georgian central bank also cut the interest rate by 25bps to 7.75% in Jun, after holding steady in May (the bank last increased the rate by 50 basis points in February this year).  Georgia reported annual consumer price inflation of 7.2% in August, down from 8.5% in July, and 13.5% in April, and above the Bank’s inflation target of 6.0%; meanwhile the full-year government inflation forecast is 7%.  According IMF statistics, Georgia saw average annual inflation of 4.95% in 2010, with the full year figure at 5.04%, while the Georgian economy grew just 2%.

Sept. 15 (Bloomberg) — The European Central Bank said it will lend euro-area banks dollars in three separate three-month loans to ensure they have enough of the U.S. currency through the end of the year. Michael McKee reports on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

Sept. 15 (Bloomberg) — Juerg Kiener, chief investment officer at Swiss Asia Capital Ltd., talks about the global economy and his investment strategy. Kiener speaks in Hong Kong with Susan Li, Phillip Yin, Zeb Eckert and John Dawson on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)

Is Your Refrigerator Burning Too Much Coal?

by David Fessler, Investment U Senior Analyst
Thursday, September 15, 2011: Issue #1601

I’m talking metaphorically, of course. The answer is: It depends on how old it is.

I’ve written a number of articles on energy efficiency. Hands down, it’s simply the easiest, most cost-effective way to reduce our consumption of electricity. Period.

New power plants can be avoided, and no greenhouse gases or global warming to worry about, either. With 33 percent of the oldest coal plants set to retire over the next decade, it’s even more important that, as a nation, we become as energy efficient as we can.

What’s for Dinner?

Today, I’m going to focus on the one home appliance that just about every household in America has. Some have more than one. And that’s a refrigerator and/or freezer. We don’t often think of it in terms of energy use, but it’s running nearly all the time.

According to the Association of Home Appliance Manufacturers (AHAM), units produced in 2009 consumed about 450 kilowatt-hours per year, on average. That works out to about 5 percent of the average household’s annual energy usage.

While that’s like leaving 11 40-watt incandescents on all the time, it pales in comparison to what older units draw.

Even though they’re an average of 1.5 cubic feet larger, today’s units consume about 50 percent of the power those made in the 1990s consume, and they use just 35 percent of the energy.

My parents, who are in their late 80s, have an old Crosley in their basement that was made just after World War II. It’s still chugging along, but they refuse to part with it.

But the problem gets even worse. As units age, they use even more energy that they did when they were new. As you can see from the graph below, courtesy of the Energy Information Administration (EIA), there are still a lot of older units out there.

Residential energy surveys (RECs) conducted in 2005 and 2009 indicate that households are holding onto their refrigerators longer, and not replacing them with newer, more-efficient units. Fully 30 percent of all units still in use are from 1990 or older.

Sales of new refrigerators support that conclusion. The EIA’s graph of AHAM data shows that sales of new units peaked around 2005, and then plummeted along with the housing market, before rebounding slightly in 2010.

The decline is indicative of lower new home construction numbers, and consumers delaying expensive kitchen remodeling in existing homes.

According to data from Appliance Magazine, over 90 percent of new refrigerators are purchased to replace existing units. In a poor economy, however, that’s an expense that strapped homeowners aren’t willing to undertake. (If it’s not broke, don’t fix it.)

What does all this mean in terms of energy efficiency? If all 117.5 million U.S. households’ refrigerators were replaced with current models, the country could turn off most of those old coal-fired power plants and not miss a beat.

Buying At the Bottom or Value Trap?

So is there a way to position your portfolio to take advantage of the expected surge in refrigerator buying when the economy recovers?

The logical choice would be Whirlpool Corporation (NYSE: WHR). It’s one of the only appliance pure plays out there. Its stock has been hammered down over 40 percent since the beginning of the year.

The company’s results have held up remarkably well, in spite of the sagging U.S. economy. However, the real reason the company’s bottom line has a polish on it has nothing to do with the United States. It has everything to do with its second-largest customer, Brazil.

Since 2005, the company has used $800 million of value-added tax credits to dress up its bottom line. It has about $474 million of them left, and they could be used up as early as next year.

In my opinion, the stock could fall even further from here. But eventually, even without the tax credit, consumers will need a new refrigerator. (Even my parents.) At that point, Whirlpool will be a great play on the economic recovery. We’ll avoid having to burn a little coal in the process, too.

Good Investing,

David Fessler

Article by Investment U