Month: November 2011

By MoneyMorning.com.au

Today we’re following on from yesterday’s Money Morning…

If you recall, we mentioned the call by Michael Pascoe and the Council of Small Business of Australia for the Australian Taxation Office to take over collection of private superannuation contributions.

Well, last week the Australian Prudential Regulation Authority (APRA) released a working paper. It’s titled, Risk and return of illiquid investments: A trade-off for superannuation funds offering transferable accounts.

The point of the paper was to calm fears that industry super funds could face a negative cash flow problem. That is, because they invest in big illiquid infrastructure assets, they may not be able to meet large cash withdrawals when investors retire.

After all, selling a road or a 50-storey building takes a lot longer than selling a few million dollars worth of blue-chip shares.

Because of that, some fear funds that invest in big infrastructure projects could freeze withdrawals. Much like what happened when mortgage funds froze withdrawals in 2008 during the economic meltdown.
Three years on, many mortgage funds are still frozen.

So, could the same happen with super funds that have invested heavily in infrastructure projects? We believe so, and we’ll explain why…

The reasoning in APRA’s white paper on infrastructure investments is flawed. The working paper makes the following conclusion:

“[The data] corroborates evidence from previous studies that holdings of illiquid investments can benefit superannuation funds by improving diversification and increasing risk-adjusted returns.”

We know all about “illiquid investments”. Some of the stocks we tip in Australian Small-Cap Investigator are illiquid. On any given day, only a handful of shares may trade.

But we tip them because they are tiny companies with a potentially big future. For instance, they may be exploring for a new resource or developing a new drug. Investors buy these stocks because they have the potential to go from 20 cents to a dollar… for a 400% return.

But these stocks are risky too. Because they could go from 20 cents to nothing… for a 100% loss!

That’s the payoff with bigger returns. You could make a big loss.

That’s where the APRA working paper makes a schoolboy error. In effect it claims illiquid assets provide a safe and higher risk-adjusted return than liquid investments.

In other words, higher returns for less risk.

History and experience tells us (and should tell you) that a higher potential return is riskier, not safer. Italian bonds give investors a higher yield. But that doesn’t make them safer than French bonds. It’s because Italian bonds are riskier.

Therefore, the supposed higher return from illiquid assets tells you those assets are riskier. And therefore (like small-cap stocks) only risk-happy investors should touch them.

But that’s not all. We question the valuations of these illiquid assets…

The APRA working paper notes:

“Trustees generally rely on third-party valuation experts to value illiquid investments, who should be independent of those who manage the investments.”

Yeah right. If the valuer wants to keep the client (without losing his or her job), they’ll make sure the asset is valued at the “right price” to keep the client happy.

A better way of judging real infrastructure valuations is to look at assets that are priced on a daily basis. Where the market decides the value, not a paid valuer.

Such as shares of Transurban Ltd [ASX: TCL] and MAP Group [ASX: MAP]:

For a long-term investor (such as someone saving for retirement), those returns are poor.

Sure, investors have picked up dividends along the way. But the actual value of these income earning stocks is little different to where they were four or ten years ago.

We can’t imagine too many valuers having the balls to tell a giant fund their prize asset has made no gain in ten years.

Or how about an old favourite of ours, the S&P/ASX 200 Listed Property Trust [ASX: SLF]. This is a stock we tipped in March 2009 and sold eight months later for a 24% gain (not a great result in all honesty).

The fund contains property stocks listed in the S&P/ASX 200 index. Here’s a chart of the share’s performance since 2006:

Again, how many valuers will tell their client their prize asset has dropped 80% in four years?

OK. This is an extreme example. But the point we’re making is this…

Right now a calculated scheme is under way to convince Aussie investors that infrastructure assets are the Golden Egg of investing… that not only do they offer great returns (because they’re illiquid!)… but they’re lower risk… because they’re illiquid!

And to top it all, you’re investing in something for the broader public good.

We’ve distrusted the infrastructure model (or Macquarie Model) for years. It means we missed out on gains when the market went crazy for them.

But that didn’t bother us. Because we knew the model was crooked. And more importantly, we knew most infrastructure assets (especially those marked as for the public good) are just plain bad investments.
Nothing we’ve seen over the years makes us change our mind. Trouble is, where in the past investors could choose whether to invest in infrastructure assets, soon you won’t have a choice.

Investors will be forced to hand over hard-earned retirement money just so bureaucrats and vested interests can build national monuments to bolster their own legacies. Monuments that may look good, and may even be useful to those who use them.

But that won’t be any comfort to the retirees who will fail to earn a single penny from them.

Cheers.
Kris.

Why You Should Avoid This Flawed Investment

The South African Reserve Bank [SARB] held its monetary policy interest rate, the repo rate, unchanged at 5.50%.  The Bank said: “The Committee assesses the risks to the inflation outlook to be on the upside mainly due to cost push pressures. The exchange rate is also seen to pose some upside risk to the outlook, while downside risks are seen to come from possible contagion effects from the European crisis and associated slow growth. The committee is aware of the dangers of a disorderly resolution of the crisis and the systemic implications for the global and domestic economy, and remains ready to act appropriately should the need arise.”

Previously the SARB also held the repo rate unchanged at its September meeting this year, the Bank last cut the repo rate by 50bps to 5.50% in November 2010.  South Africa reported annual inflation of 5.7% in September, 5.3% in August and July, 5% in June, 4.6% in May, and 4.2% in April this year, compared to its official inflation target range of 3-6%. 

Indonesia’s central bank, Bank Indonesia, dropped the BI reference rate 50 basis points to 6.00% from 6.50%.  Bank Indonesia Governor, Darmin Nasution, said: “The decision to decrease BI Rate has been taken in line with the decreasing trend in inflation pressures and also as Bank Indonesia efforts to narrow the interest rate term structure. This decision is also intended to reduce the impacts of worsening global economic prospect on Indonesian economy. Production and consumption indicators in developed countries continue to show a slowing down while global financial markets remain volatile albeit there was a rebound.”

At its October meeting, the Bank also cut the key monetary policy rate (the BI Rate) by 25 basis points to 6.50%.  Previously the Bank raised the BI rate by 25 basis points to the current 6.75% in February 2011.  Indonesia reported annual inflation of 4.61% in September, compared o 4.79% in August and July, 4.61% in June, 5.98% in May, 6.16% in April, and 6.65% in March, and just inside the inflation target of 5% +/-1% in 2011 (which changes to 4.5% +/-1% in 2012).  

Nasution said the Bank expects “inflation next year will be below 5%”.  Bank Indonesia has previously forecast GDP growth of 6.3-6.8% in 2011 and 6.4-6.9% in 2012 for the Indonesian economy, meanwhile Indonesia reported annual GDP growth of 6.5% in the June quarter this year.  

The Indonesian Rupiah (IDR) is about flat against the US dollar so far this year, and the USDIDR exchange rate last traded around 8,967.

The Bank of England (BoE) kept the Bank Rate at a record low stimulatory level of 0.50%, and kept its Asset Purchase Program (Quantitative Easing) unchanged at GBP 275 billion, after increasing it by 75 billion at its previous meeting.  On its asset purchase program, the Bank said: “The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review.”


The Bank also held the official Bank Rate unchanged at 0.50% at its October meeting this year; the rate has remained on hold since March 2009, when the Bank reduced the interest rate by 50 basis points to 0.50%.  The United Kingdom reported annual consumer price inflation of 5.2% in September, 4.5% in August, and 4.4% in July, and still above the Bank’s inflation target of 2.00%.  

The Bakken isn’t the Only Big Shale Oil Play

by David Fessler, Investment U Senior Analyst
Friday, November 11, 2011

A few days ago, I wrote about the incredible growth in the liquid portion of North Dakota’s Bakken formation.

If you want the short version, read on. The Bakken is an oil- and natural gas-rich formation covering a 200,000 square mile area encompassing parts of Montana, North Dakota and Saskatchewan. According to an April 2008 survey by the USGS, it’s estimated to contain as much as 4.3 billion barrels of recoverable reserves.

While initially drilling activity was slow and drill rigs were sparse, it eventually picked up. Rapid growth ensued starting in 2006, and continues to the present day.

The reason production saw such a rapid rise was the introduction of horizontal drilling and fracking, similar to what’s fueled the meteoric rise of other oil and natural gas shale plays.

The Eagle Ford Play: Another Spindletop for Texas?

The same thing is happening in the Eagle Ford in southern Texas. Initially, the play was developed for the natural gas it potentially contained, estimated to be about 150 trillion cubic feet.

But the real reason companies are flocking to the play is the potential oil it contains. According to the Eagle Ford Shale Blog, estimates of oil reserves are as high as 900 million barrels of oil equivalent.

That has companies moving rigs from the gas parts of the plays and other regions of the country to drill in the oil-rich part of the play. Take a look at the graphic below. You can see the Eagle Ford play is comprised of three “windows.” A dry gas window, a mixture of wet gas and condensate, and a section that’s mostly oil.

You can see most of the drilling just two years ago was occurring in the wet gas area of the play, with only a few wells drilled in the oil-rich part of the field. Now let’s take a look at a current view of drilling activity in the graph below.

You can clearly see that while there are more wells in the wet gas area, much of the current activity has shifted to the oil-rich section of the play. That will continue to be the case with the Eagle Ford, just as it has been with the Bakken.

As oil prices continue to rise and natural gas prices remain at near historic lows, companies are rapidly shifting their capital dollars to drill for oil.

Some are predicting that the development of the Eagle Ford could be the most significant economic development in the history of Texas. If the number of drilling permits being issued is any indication, those predictions could turn out to be correct.

The number jumped to 1,010 in 2010, up from just 94 in 2009, a 10-fold increase.

Who’s Active in the Eagle Ford?

The Eagle Ford players are essentially a who’s who in the energy business. Chesapeake Energy Corporation (NYSE: CHK) has the most acreage, at 600,000. Chesapeake sold a 33 percent share of its stake to CNOOC of China for $1.08 billion.

EOG Resources, Inc. (NYSE: EOG) is next, with 520,000. The third-largest player is Apache Corporation (NYSE: APA), with 450,000 acres.

Petrohawk Energy Corporation was one of the largest operators in the Eagle Ford. In July of this year, it was acquired by BHP Billiton Limited (NYSE: BHP).

Any of the top three players is a great way to invest in the Eagle Ford. Buy on big dips, and you will be rewarded in the long run.

Good investing,

David Fessler

Article by Investment U

Nov. 11 (Bloomberg) — Alastair McCaig, a trader at World Spreads Ltd., discusses the outlook for stocks. He talks from London with Owen Thomas on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

Nov. 11 (Bloomberg) — Thomas Harjes, senior European economist at Barclays Capital, discusses the sovereign-debt crisis and the European Central Bank’s purchase of government bonds. He talks from Frankfurt with Francine Lacqua on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

How to Take the “Sting” Out of Investing

by Dr. Mark Skousen, Investment U Contributing Editor
Friday, November 11, 2011: Issue #1641

“Stocks are the cheapest I’ve seen in my lifetime.” – Ron Baron

Last Friday, my wife and I attended the 20th Annual Baron Investment Conference. Normally Jo Ann has little interest in investing, but this one is unique – it’s held at the Opera House at Lincoln Center in New York City and offers live entertainment from the world’s top singers, comedians and performers – all free for shareholders. My wife, Entertainment Editor of Liberty Magazine, loves Broadway.

A record crowd of over 6,000 investors showed up, and latecomers were unable to get into the Opera House.

Founder and CEO Ron Baron didn’t disappoint with his choices this year. Hugh Jackman, the actor/singer, appears as the surprise luncheon performer. He danced, sang and cracked jokes for more than an hour, and announced he will play Jean Val Jean in the film version of Les Misérables next year.

And the big entertainment at the end of the day was award-winning singer/songwriter/actor Gordon Sumner, otherwise known as Sting, and the Police. They played all their classic numbers, such as “Fields of Gold” and “Shaping my Heart.” It was a rousing end to a great conference.

Sting is an appropriate symbol for what has happened to investors over the past 10 years, suffering from two major bear markets (’00 to ’03 and ’08 to ’09). And 2011 hasn’t been easy, either.

Baron Theme This Year: Go Long!

Founder and CEO Ron Baron chose a contrarian theme this year, “Go Long.”

He noted that interest rates on Treasuries are at the lowest level since World War II as panicky investors are pouring money into fixed income investments and gold.

Investor fear is creating a remarkable bargain opportunity for stocks, which are selling at only 12 times earnings now. “Stocks are the cheapest I’ve seen in my lifetime,” he told his audience.

Ron Baron is worth listening to. His Baron mutual funds were solid performers over the years. (For example, they started investing in Apple in 2005, and have several stocks that increased 10,000%, such as Charles Schwab & Co.) He is now a billionaire and a member of the Forbes 400 Richest Americans.

Baron fund managers generally ignore the global macro economy and focus strictly on buying solid growth companies. They are fundamentalists to the core. They hold stocks for five years or more, doing bottom-up research on individual growth companies that are undervalued and well managed. Their managers visit companies, interview executives, speak with employees and talk to competitors. They are traditional investors; they do not invest in gold and commodities.

Several of the Baron investment managers couldn’t help but expressed concern about Europe and other crises around the world.

“European banks need to restructure and recapitalize. Once they do that, Europe will be on its way to recovery,” said one manager.

Another fund manager predicted that the housing market would bottom in the next year. And Ron Baron said that the Federal Reserve is deliberating trying to reignite inflation, which would force people to invest in the stock market. He repeated his advice: “Go long!”

One attendee asked Ron Baron what advice he would give President Obama and Congress to get the economy going again. He’s not usually political, but his answer drew a lot of applause: “Resign.”

Baron has several top-rated funds, most of which are rated either five or four stars by Morningstar. I recommend the Baron Growth Fund (BGRFX), managed by Ron Baron himself. It has a four-star rating, and is beating the market again this year. You can buy the Baron Growth Fund directly or through a discount broker like Schwab.

I suggest you add it to your portfolio and attend next year’s Baron Investment Conference in New York City. But come early.

Good investing,

Mark Skousen

Article by Investment U

Nov. 11 (Bloomberg) — Giulio Martini, chief investment officer for currency strategies at AllianceBernstein LP, talks about the outlook for the euro. He speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Nov. 11 (Bloomberg) — Goohoon Kwon, co-head of Korea research at Goldman Sachs Group Inc. in Seoul, talks about the outlook for Bank of Korea monetary policy and the nation’s currency. South Korea’s central bank held off from raising borrowing costs for a fifth straight month as Europe’s deepening debt crisis and slowing domestic growth prompt the central bank to pause its fight against inflation. Kwon speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)