Month: September 2011

By MoneyMorning.com.au

QR National [ASX: QRN] is the largest freight company in Australia, based on the tonnage carried. Last year the company hauled over 260 million tonnes of coal from mine to port.

So it was always going to be big news when the company went public. It was the second biggest public listing in Australia. Telstra was the biggest.

CEO of QR National, Lance Hockridge said in 2010, ‘Warren Buffett said when he bought out Burlington Northern that that was a bet on the future of the American economy. I’d say this is going to be a bet on the future of the Australian economy.’

Hockridge is ‘betting’ Australia’s economic future is commodity driven. And he knows someone will have to cart the stuff around.

Did the bet pay off?

Towards the end of last year, coal prices were moving higher. Even flooding and a cyclone didn’t cause the spot price to drop too low.

And now QR is ensuring it remains one of the largest haulers of coal for the future.

Just two weeks ago, QR National announced, it – along with several coal companies – will build a $900 million rail line to a proposed coal-export terminal, Wiggins Island at Gladstone. Work is set to begin in 2012.

The increased rail infrastructure will see the company carry an extra 27 million tonnes of coal per year. A 30% increase on what it carries now.

Which is just as well… because, in the short term, the debt problems in Europe and the US could cause the spot coal price to take a bit of a hit.

The debt problems dominating the Eurozone will have a flow-on effect on demand of coal.

How? It works like this…

Most of our coal goes to Northern Asia.

Click here to enlarge

Manufacturers like China, Taiwan and Japan rely on Europe and America to buy their goods. The bigger the drop in orders from the States and the Eurozone, the bigger the drop will be in the price of Aussie commodities.

In the short term, National Australia Bank (NAB) is warning of a sharp drop in coal prices.

‘NAB said coal and iron ore price had been resilient so far, but would drop by 20% by next July, citing risks that extra supply of iron ore and coal would outpace growth in demand,’ reported the Age.

As the crisis unfolds, the value of commodities like coal will decline. Could the price of thermal coal slip back to the post-GFC levels of USD$60 per tonne?

That would mean nearly a 50% fall.

But ANZ forecast in its “Earth, Fire, Wind and Water” commodities report that, in the long term, exports of our thermal and metallurgical coal will reach $75 billion dollars by 2015. Up from $55 billion in 2009.

The ANZ team projects combined coal exports could total $99 billion by 2030.

Throwing almost one billion dollars at rail infrastructure investment is a long term commitment.

A short term price decline in coal prices won’t stop Q R National from expanding.

If ANZ is right about the future growth of coal, QR National are positioning themselves to profit from long term growth.

Shae Smith
Editor, Money Morning

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From the Archives…

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2011-09-23 – Kris Sayce

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2011-09-22 – Kris Sayce

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2011-09-21 – Dr. Alex Cowie

Is This the Last Surprise in Bernanke’s Tool Box?
2011-09-20 – Kris Sayce

How to Maximise Your Returns in a Volatile Market
2011-09-19 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Coal Prices to Fall – But QR National Ready to Profit

Sept. 26 (Bloomberg) — James Bevan, chief investment officer of CCLA Investment Management Ltd., talks about investment strategy. He speaks with Owen Thomas on Bloomberg Television’s “On the Move.”

Is the Media or High-Frequency Trading Causing Volatility?

by Justin Dove, Investment U Research
Monday, September 26, 2011

According to an editorial by a high-frequency trading (HFT) firm’s CEO, increases in media coverage and access to the market are causing volatility, not HFT.

High-frequency trading has received a lot of attention over the last few months, as market volatility sharply increased.

The advantages of high frequency trading are undisputed. Traders with supercomputers have an obvious advantage with the speed at which they can operate. Dealing in milliseconds, the supercomputers can run circles around big-money institutional investors. This advantage is part of the reason these computers are used for 70 percent of trading.

The TABB Group estimates that annual aggregate HFT returns are in excess $21 billion. Volatility is great for high-frequency trading because it creates many more opportunities to profit by moving quickly in and out of positions. This conflict of interest makes it easy to blame HFT for volatility. They certainly benefit from it.

But are they really to blame?

A Compelling Argument Defending High-Frequency Trading (HFT)

Manoj Narang, Founder and CEO of Tradeworx, Inc., raises a compelling argument against the idea that high-frequency trading precipitates market volatility. In his editorial for The High Frequency Trading Review, he acknowledges that volatility of the S&P 500 increased since 2007. But he doesn’t feel HFT is to blame.

The foundation of his argument is a set of statistics, which compares the volatility in afterhours trading to the volatility during normal trading hours.

According to Narang, in the period of 2000 through 2006, the S&P 500 moved an average of 0.37 percent per day when the market was closed. Since 2007, afterhours trading increased 65 percent, pushing the average to 0.61 percent per day.

Narang suggests that the “abundance of news which has caused investors to panic” greatly increased since 2006.

Narang adds that volatility during trading hours only increased 12 percent since 2006. Narang feels that, logically, this can only lead to one conclusion – that increases in media exposure and access to the markets causes volatility, rather than HFT.

As Alexander Green recently pointed out, the news is certainly bleak considering that many companies are reporting solid earnings. And Marc Lichtenfeld recently explained why it’s in the best interest of the news to keep investors worried and glued to the financial media.

Two Sides to Every High-Frequency Story

But while Narang’s argument and statistics are compelling, let’s not forget he has skin in the game. He also provides no sources for his statistics. That’s not to say he may not be correct, but there’s no hard evidence to prove him right. Plus, there’s the fact that high-frequency trading uses algorithms that scour the news, which has led to foul-ups in the past. If it’s partially the media’s fault, wouldn’t high frequency trading play into the mania, too?

According to research by Yale Professor X. Frank Zhang, “HFT is positively correlated with stock price volatility.” He also found that the positive correlation is “especially strong for the top 3,000 stocks in market capitalization and stocks with high institutional holdings.” And that “the positive correlation between HFT and volatility is also stronger during periods of high market uncertainty.”

Eventually it will be up to the SEC to decide who is right, and it already subpoenaed HFT firms in relation to the Flash Crash of May 2010.

What Can Investors Do About High-Frequency Trading?

Obviously, things are getting volatile, but as Marc Lichtenfeld recently wrote, “If you can’t beat ‘em, join ‘em.”

In his article, Marc outlines great strategies for investors to use their own know-how and incorporate technology. Through free software from brokers and free stock-screeners on the web, investors can figure out systems that work for them.

Marc also offers his own expertise with a super-computing system called S.T.A.R.S. in his Oxford Systems Trader. In a backtest of his methods, Marc found that this system would have out-produced the S&P 500 by 1,568 percent over the last 10 years.

Regardless of how they choose to react, investors should certainly be aware of the competition that they face with high-frequency trading. It’s definitely not the same trading environment as it was just five years ago.

Good investing,

Justin Dove

Article by Investment U

Sept. 26 (Bloomberg) — Ralph Silva, an analyst at Silva Research Network, talks about the exit of Chief Executive Officer Oswald Gruebel from UBS AG after revealing a $2.3 billion loss from unauthorized trading less than two weeks ago. He speaks with Linzie Janis on Bloomberg Television’s “First Look.” (Source: Bloomberg)

The Bank of Israel cut its benchmark interest rate by 25 basis points to 3.00% from 3.25%.  The Bank said: “The decision to reduce the interest rate for October to 3 percent is based mainly on the negative turnaround in the global economy, is consistent with the return of inflation to within the target range of price stability, and is intended to support growth while preserving financial stability.”  Also noting: “The more severe global slowdown is reflected in a slowdown in the growth of real activity in Israel, and in particular in the weakness of goods exports.”

Previously the Bank held its monetary policy interest rate unchanged at its June, July, and August meetings, after increasing the interest rate by 25 basis points to 3.25% at its May meeting this year.  Israel recorded annual inflation of 3.4% in August and July, compared to 4.2% in June, 4.1% in May, and 4.0% in April and just above the Bank’s inflation target range of 1-3%.

Israel reported GDP growth of 4.8% (annualised) in the March quarter, and 3.3% in the June quarter. “The Bank of Israel has lowered its growth forecast for 2012 from 3.9% to 3.2%, and… the balance of risks is to the downside.”  The Israeli Shekel (ILS) has weakened about 4% against the US dollar this year, while the USDILS exchange rate last traded around 3.72

By The Sizemore Letter

I know better than to say “I told you so” (see “Gold: Has the Bubble Finally Burst?” from early last week).  The market gods tend to be jealous and vengeful and appear to take great pleasure in humbling the arrogant.  So I know better that to tempt them. 

Besides, even after last week’s bloodletting, gold is still one of the best-performing assets of 2011; the September selloff did little more than erase August’s parabolic surge.  And, in the interests of full disclosure, I’ve been on the record as a gold bear since it crossed the $1,200 mark (it was at about that point that the gold bull market entered the theater of the absurd with such novelties as ATM machines than dispense gold ingots).

Still, it would only be appropriate if last week’s action did mark the top.  The market gods may indeed have a twisted sense of humor, and Donald Trump’s high-profile blustery rant that immediately preceded the crash would have been a good opportunity for divine smite.   After Trump accepted $176,000 in gold bullion as a security deposit from a new tenant, he announced loudly that “It’s a sad day when a large property owner starts accepting gold instead of the dollar. … If I do this, other people are going to start doing it, and maybe we’ll see some changes.” (See “Trump’s New Gold Standard”)

Whether other people follow in The Donald’s footsteps and accept gold as collateral remains to be seen, but if they do they will no doubt require a few more ounces given the drop in price.

The question on everyone’s mind is “What now?”  Does the gold rout continue from here, or can gold bugs look forward to a nice bounce this week?

According to precious metals site kitco.com, the spot price of gold has continued its downward drift, falling to $1606 per ounce in Hong Kong early Monday trading ($GLD, $GC_F).  And while anything can happen once the larger American markets open, there is reason to believe that this correction has a way to go.

Gold’s parabolic rise in August prompted the CME Group to raise margins on its gold and silver futures contracts on Friday by 21.5% and 15.6%, respectively.  Given the recent price action and the uncertainty coming out of Europe, speculators are not likely to risk margin calls with aggressive bullish bets on the yellow metal at the moment.  Furthermore, with the end of the year fast approaching, portfolio managers who have profited handsomely from gold’s rise are more likely to take profits than to add to their positions.

But perhaps most damaging is the psychological angle.  Both market professionals and retail investors alike have been attracted to gold for its perceived status as a safe haven.  But after the wild ride that the price of gold has seen over the past month, its credibility as a haven is almost laughable.  What good is fire insurance that disappears the moment your house actually catches fire?

When global markets violently sold off last week, investors fled to the U.S. dollar and to U.S. Treasuries for safety.  Yes, that same fiat dollar that gold bugs love to hate and those same U.S. Treasuries that just got downgraded last month by Standard & Poor’s.  It appears that when the situation gets dire enough, ideology goes out the window.

These are all shorter-term concerns, of course.  But the long-term picture is even worse.  Let’s review some of the points that I’ve made over the past year:

1. The inflation that so many feared in the wake of Bernanke’s 2008 doubling of the monetary base never materialized.  And guess what—it’s not going to.  Anyone who cared to consult a history book would have seen that the bursting of property and credit bubbles are generally followed by deflation, not inflation.  This was certainly the case in post 1990 Japan, the best historical example we have.   Gold’s alleged value as an inflation hedge will be of little use in a decade of stagnant prices.
2. The dollar isn’t being replaced as the international reserve currency any time soon.  This is not some misty-eyed, patriotic support of my native land’s currency.   No, to the contrary.  America’s monetary policy is misguided, and the fiscal policy coming out of Congress and the White House is criminally incompetent and damaging.  But, to adapt Winston Churchill’s quote on democracy, “the dollar appears to be the worst currency…except for every other currency conceived.”  As grave as America’s problems are, they pale in comparison to those facing the Eurozone and Japan.  And no matter how much perennial presidential candidate Ron Paul might fancy it, there will be no return to a global gold standard.  Given currency supplies, a return to a gold standard would almost certainly mean massive deflation and high unemployment.  That is a political nonstarter, even in the age of the Tea Party.
3. Let us not forget that gold is not really an “investment” in the classic sense.  Unlike a stock, bond, rental property, piece of productive farmland or even a piece of artwork that can be lent out for viewing, gold produces no income, nor does it create anything of value.  It’s a shiny trinket.  And its value as a shiny trinket has been under attack for quite some time now.  Gold’s use for jewelry purposes has been nearly cut in half over the past decade, while its hoarding for “investment purposes” has risen by a factor of 65 (see “Gold Climax”).  Meanwhile, many high-quality, dividend-paying stocks—companies that will survive financial Armageddon—are trading at valuations not seen in decades.  (see “Wintel: The Buy of the Decade”)

Again, I’m not calling the top of the gold bubble.  I’ve been down that rabbit hole.  I’ve angered the market gods before, and they have punished me.

Still, the short-term case for gold is questionable at best, and the long-term case even worse. We might have seen the high-water mark in the price of gold for the next 30 years.  Or, this could simply be a much-needed correction in a much longer secular bull market.  Only time will tell.

But investors should use last week’s gold-price plunge to get a little perspective—and maybe a little humility too.  Gold is not a safe haven.  It’s not even an investment.  It’s a high-risk speculation that’s had a great run.  And that run, if it hasn’t already, will come to an end.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Sept. 26 (Bloomberg) — Willem-Mark Nabarro, head of European equities at Exane BNP Paribas, talks about the outlook for equity markets and his stock picks. He speaks from Singapore with Linzie Janis on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

What Albert Einstein Would Invest in Today

by Alexander Green, Investment U‘s Chief Investment Strategist
Monday, September 26, 2011: Issue #1608

Albert Einstein wasn’t famous as an investor. He was a genius who revolutionized theoretical physics. But if he were alive today, it’s pretty clear what he would be doing with his money. And you should be doing it, too.

Let me explain…

It’s a truism that when times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

This is exactly the opposite of what they should be doing, of course.

But today you have a great opportunity to both limit risk and generate superb returns in your stock portfolio with – stifle that yawn – stodgy, old dividend-paying stocks. These investments aren’t nearly as boring as you may think. And in the decade ahead, their returns are likely to be outstanding.

The Basics of Dividend-Paying Stocks

Let’s start with the basics. Dividend yields are a company’s annualized payment divided by its share price. When share prices fall – as they have over the last few months – yields rise. In fact, stocks have fallen so far – and bonds have risen so much – that the Dow currently yields 30 percent more than 10-year Treasuries.

It still astonishes me that investors are willing to lend money to the U.S. Treasury for the next 10 years at less than two percent. What a terrible bet, one that virtually guarantees a negative, real (i.e. after inflation) return over the next decade.

A far better bet is a diversified portfolio of dividend-paying stocks. Understand that, over the long run, stock market performance is tied to economic growth. And – news flash – the growth outlook in the developed world today isn’t exactly torrid.

Understand furthermore that over the eight decades through 2010, dividends contributed 44 percent of the stock market’s return, according to Fidelity Investments. Sometimes it was much more. During the 1970s, for example, dividends generated 71 percent of returns.

Dividend stocks today represent an unusual opportunity. U.S. corporations are sitting on $2 trillion in cash, a record amount. More S&P 500 companies have initiated or raised dividends this year through August than during the same period in any of the last seven years. And there’s plenty of room for more increases. Payments are less than one third of profits, a historic low.

If you’re a growth-oriented investor, you probably don’t think much about dividends. You’re interested in doubling or tripling your money. And with a bit of patience, you can.

The Historical Returns of Dividend-Paying Stocks

Analysts often talk about the lost decade, how stocks have essentially returned nothing since the market highs in the spring of 2000. But the story has been very different with dividend-paying stocks.

Over the past decade – with dividends reinvested:

• Oil producer Chevron Corp. has returned 200 percent.
• Altria Group, the U.S. tobacco giant, has returned more than 300 percent.
• Even musty old Con Edison – a utility that was born 23 years before Thomas Edison – has returned 130 percent over the period.

Today there are plenty of blue-chip stocks with decent (and growing) dividends attached. Consider Johnson & Johnson, Procter & Gamble, Exxon Mobil, AT&T, Merck, or Verizon.

Or, for a more diversified approach, plunk for a few shares of PowerShares Dividend Achievers Portfolio (NYSE: PFM), the Vanguard High Dividend Yield ETF (NYSE: VYM), or the WisdomTree Total Dividend Fund (NYSE: DTD).

Dividend stocks alone won’t generate a mouth-watering return. But dividends will rise over time – and surprising things happen when you reinvest them. Picture a snowball rolling down hill.

Albert Einstein understood this. As he observed, money compounding “is the most powerful force in the universe.”

Good Investing,

Alexander Green

Article by Investment U

Sept. 26 (Bloomberg) — Louise Cooper, an analyst at BGC Partners, discusses efforts by euro-zone leaders to stem the sovereign debt crisis. She talks with Owen Thomas on Bloomberg Television’s “On the Move.”

Sept. 26 (Bloomberg) — Kevin Gardiner, head of global investment strategy at Barclays Wealth, talks about volatility and his asset allocation for stocks, bonds and cash. He speaks with Francine Lacqua on Bloomberg Television’s “The Pulse.”