Month: January 2012

By MoneyMorning.com.au

“Land sales slowed sharply in China last year, according to a series of industry reports that highlight the deepening woes of debt-laden local governments that depend on land auctions as a crucial revenue source.” – Financial Times

The news isn’t getting any better is it?

In a moment we’ll show you why it’s still not too late to make a buck from China’s economic collapse using BHP. First, a refresher…

China’s Big Economic Problem

Falling land sales and falling land prices is a big problem for China.

Remember that much of China’s regional building program is paid for by selling bonds against land. It works something like this…

Chinese local governments sell bonds using land as collateral. The local government then uses the proceeds to build such things as sports stadiums, skyscrapers and swimming pools.

The bond buyers are assured they’ll get their money back because… well, property always goes up… and heck, look at the magnificent buildings… in the middle of nowhere!

Revenue that is generated from sporting events, leasing office space and swimming entry fees is used to pay the coupon on the bond. Eventually the bond is repaid when it reaches maturity (after say, 10 years).
Either the bonds are paid from the massive revenues made from these buildings (not likely). Or, as in all speculative Ponzi schemes, from the sale of other over-priced land.

In other words, China’s economy is built on two sets of foundations. Both equally as weak as the other: Western consumer credit (which we wrote about in yesterday’s Money Morning article The Sun Starts to Set on China’s Economy), and land speculation.

Both of which are certain to go bust.

So, how can you capitalise on this?

You could do a lot worse than keeping your eye on BHP Billiton.

BHP Tied to China’s Economy

So much of BHP’s revenue and profits rely on China’s economy. Its fortunes are completely linked to it. The chart below shows how close the link has been since mid-2008 (Shanghai Index – blue line; BHP share price – red line):

Click here to enlarge

News agency AAP reported last August, “Around 30 per cent of BHP’s business comes from China in the form of iron ore exports, a relationship which largely shapes Australia’s reliance on the Asian economic superpower.”

Dow Jones Newswires reported on Wednesday:

“Chinese copper smelters have settled copper processing fees from global miner BHP Billiton Ltd (BHP) at a lower level in 2012 compared with 2011…

“The processing fees, known as TC/RCs, were settled at $60.50 a metric ton for treatment charges and 6.05 cents a pound for refining charges, well below 2011 first-half TC/RCs of $72-$77/ton and 7.2-7.7 cents/lb as well as second-half TC/RCs of $90/ton and 9 cents/lb…”

Material companies that rely on Chinese trade turn down when the Chinese economy slows.

BHP has more than 30% of its business at risk on China. For the past four years, however, BHP shares have behaved as though 100% of its business is with China.

Simply because China’s influence on BHP reaches further than just the company’s direct trade…

It also relies on the trade between Rio Tinto and China… Brazil’s Cia Vale do Rio Doce and China… And Fortescue Metal and China.

Put another way, even though only 30% of BHP’s business is with China, the only thing that matters to investors is… that’s right, China.

BHP Our Stock of Choice

If you’re bearish on China’s economy like we are… you should probably be bearish on BHP… like we are.

But even though we’re convinced the Chinese economy will eventually collapse into a painful recession, we’re not saying it will happen right away. And it won’t mean BHP (or RIO and Fortescue) shares will fall in a straight line.

Experience tells us the market has a habit of grasping at straws and false hope. That’s where you’ll get short-term rallies even though the longer-term trend is down.

Yesterday, BHP shares closed down 1.1% at $35.82. Is that a significant level? We’re not sure.

Slipstream Trader, Murray Dawes loves shorting BHP.

But he got out of a short-term BHP trade a couple of days ago. The last we heard from him (he’s watching the market from Sydney this week, while your editor is keeping an eye on things from Gippsland) he’s waiting for the next chance to short BHP.

Our take on the chart is there’s a chance traders could push the share up by a dollar or so before it gets dumped again. BHP shares are volatile, as is most of the market, so anything could happen.

Cheers.
Kris.

Related Articles

The Sun Starts to Set on the Chinese Economy
2012-01-05 – Kris Sayce

The Chinese Economy and Australia: the Last of the Bubbles
2011-12-20 – Kris Sayce

The Other Side of Short Selling
2011-09-14 – Aaron Tyrrell

Why China’s Quicksand Economy Will Sink Australia
2011-11-24 – Kris Sayce

From the Archives…

2011: What We Got Right. What We Got Wrong.
2012-01-01 – Kris Sayce

Speculators v Spectators
2011-12-31 – Kris Sayce

The Great Australian Housing Shortage?
2011-12-22 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Why BHP Will Be the First Victim of China’s Economic Collapse

USDCHF is facing 0.9546 resistance, a break above this level will indicate that the uptrend from 0.8569 (Oct 27, 2011 low) has resumed, then further rise towards 1.0000 could be seen. Support is now at 0.9400, only breakdown below this level could indicate that lengthier consolidation of uptrend is underway.

Daily Forex Forecast

In trading on Thursday, non-precious metals & non-metallic mining shares were relative laggards, down on the day by about 2%. Helping drag down the group were shares of Globe Specialty Metals (GSM), down about 9.5% and shares of Avalon Rare Metals Common (AVL) off about 5.1% on the day.

Crude Reality: Why Consumers in the Northeast Will Pay More At the Pump

by David Fessler, Investment U Senior Analyst
Thursday, January 05, 2011

I suspect most folks who drive to their nearest Wawa to gas up don’t pay a whole lot of attention to the price they pay. Unless the leftmost digit changes. That usually gets their attention.

But if you live in the Northeastern United States, as I do, you might just see that leftmost digit change from a “3″ to a “4″ in the next six months. $4.00 a gallon gas? Again?

It all has to do with two problems the major oil companies are facing right now. One is new emission regulation regarding ultra low-sulfur diesel (ULSD) fuel standards. Right now, it’s in high demand for trucks. Soon most states in the Northeast will require it for home heating use, as well.

Many refineries aren’t equipped to make ULSD in the quantities required, or their refineries aren’t designed to produce it at all.

The second problem is the crack spread. “Crack spread” is a term used by the oil industry. It’s essentially the difference between the price of crude and the price of the products refined from it.

In other words, it’s the profit that oil refineries can expect to make by “cracking” the crude oil down into its many refined products, the majority of which are gasoline and diesel.

That all works fine if crude prices remain relatively stable. Add volatility into the mix, ULSD requirements and crude price spikes (like the one we’re experiencing now), and it’s a whole different ball game.

The Wheels Are in Motion Towards Higher Prices

Here’s the scenario: If refineries have to pay too much for crude, and it’s heavier oil of lower quality, it costs more to refine it into gasoline and ULSD. If profit margins erode too far for too long, oil companies simply shut down their refineries, especially the aging, inefficient ones.

That will lead to higher prices, as more gasoline and diesel will have to be imported via rail and truck from other parts of the country, primarily Gulf Coast refineries. The added cost of transporting the fuel will be tacked on immediately. We’ll also very likely experience supply glitches. That will lead to price spikes on top of the transport costs.

Well that’s exactly what’s happening all over the Northeast. The EIA, in a report released just before Christmas, predicted that 50% of the refining capacity in the Northeast would be shut down by next winter.

Here’s what the EIA said in the report:

“Reduced short-term product supply flexibility due to longer delivery times and potential transportation bottlenecks for sources outside the region could increase price volatility.

“An increase in demand for ULSD due to changing state regulations could exacerbate the issue.”

The reasons, as we’ve stated above, are higher crude prices and ULSD requirements that some of the refineries simply can’t meet with the equipment they have.

In September, Sunoco, Inc. (NYSE: SUN) said it would shut down its two remaining refineries on the East Coast by the middle of 2012. Both have had several money-losing quarters in a row.

Then this past December, it decided to shut its Marcus Hook, New Jersey plant six months early. It temporarily shifted some of the production lost to its giant Philadelphia refinery, but it too is scheduled to be closed by this coming July.

Right on the heels of Sunoco’s announced closings, ConocoPhillips (NYSE: COP) shut down its Trainer refinery in Philadelphia immediately.

Both companies have other facilities that will remain open, along with Hess Corporation’s (NYSE: HES) Port Reading, New Jersey facility.

Northeast customers will be competing for gas and diesel with customers in other parts of the country, and in other countries. Higher prices here will be the result.

From the EIA:

“Higher price differentials for wholesale products compared with the Gulf Coast and market abroad would have to occur to incentivize producers to send more products to the Northeast.”

I’ve been saying for over a year prices for gasoline and diesel would be on the rise. Get used to it. These refinery closings are just one more reason why those of us in the Northeast will be paying more.

Natural gas, anyone?

Good Investing,

David Fessler

Article by Investment U

Jan. 5 (Bloomberg) — Philipp Hildebrand said he plans to stay at the helm of the Swiss National Bank and that he didn’t abuse his position after a currency transaction by his wife. Andrea Catherwood reports on Bloomberg Television’s “Last Word.”

Jan. 5 (Bloomberg) — Ric Deverell, head of commodities research at Credit Suisse Group AG, talks about the outlook for global commodity markets and food prices. Deverell speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

Jan. 5 (Bloomberg) — Hannes Germann, a lawmaker in the upper house of parliament from the Swiss People’s Party, talks about Phillip Hildebrand’s tenure as head of the Swiss National Bank after his wife purchased dollars in August. Germann speaks from Zurich with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

The Banca Nationala a Romaniei reduced its key monetary policy interest rate by 25 basis points to 5.75% from 6.00%.  The Bank said: “The recovery of the Romanian economy has continued – underpinned by favourable dynamics of exports, as well as of industrial and farming output – whereas the growing uncertainties regarding global and European growth amid a worsened global risk appetite and heightened sovereign debt crisis in the euro zone are hindering the short-term outlook for the overall economic activity in Romania.”

Previously the Bank also cut the rate 25 basis points in November, prior to that its last move was a 25 basis point cut in May 2010.  Romania reported annual consumer price inflation of 3.44% in November, compared to previous readings of 3.45% in September, 4.25% in August, 4.85% in July, 7.9% in June, 8.4% in May and 8.3% in April 2011, and now within the Bank’s inflation target range of 3% plus or minus 1%.

By Paul Tracy, DividendOpportunities.com

The volatility has been unprecedented.

For years now we’ve seen the market rise one day… only to fall the next. Meanwhile, events considered to be “once in a generation” — credit crises, sovereign debt downgrades, and bailouts — are now happening with surprising frequency.

But the biggest surprise? There has still been a way to make money in the market without losing sleep… without “gambling” on speculative stocks… and without seeing stomach-churning volatility in your portfolio.

So what “miracle” investment has been able to do all that in a roller-coaster market? Dividend-paying stocks.

Even The Wall Street Journal is covering the trend. Their headline says it all…

And according to that article, in 2011 the 100 highest-yielding stocks in the S&P 500 were up an average of 3.7% — before dividend payouts — while the 100 lowest-yielders were down an average of 10%.

That performance is impressive, but buried deep within that same piece was the real reason to be excited about dividend payers — not just this year, but for decades to come.

“Such stocks could get an even longer-lasting lift as more baby boomers reach retirement age — and reduce their risk appetite. The first baby boomers turned 65 years old this year.”

Right now we’re seeing the first taste of what could be a tremendous time for dividend payers. Many investors, fed up with a wildly swinging market, are seeking shelter in more stable dividend payers.

At the same time, the baby boomers are starting to look toward dividend-paying stocks to supplement their retirement income… especially when Treasury bonds yield just 2% and CDs and savings accounts pay nearly 0%.

That’s pushing dividend payers up across the board…

You can see for yourself.

In the past year, shares of Philip Morris International (NYSE: PM) — which yield 4.0% — have returned more than 30%:

“Boring” phone company Verizon (NYSE: VZ) is dominating the market, thanks in part to its 5.0% yield:

Terra Nitrogen (NYSE: TNH) is up more than 70% in the past year and pays an 8.0%-plus dividend yield:

Now, I’m not saying every dividend stock beats the market. But I could find dozens — if not hundreds — more high-yielding stocks that are topping the S&P. I think the trend is clear — dividend payers are one of the best places to make money in this market.

It makes sense. After all, firms that pay steady (and increasing) dividends tend to be strong, stable companies that can weather rocky environments like we’re seeing right now. These are exactly the type of stocks investors flock to during times of uncertainty.

But even in good times these stocks still see plenty of buying interest. Their high yields all but guarantee that investors will be interested — especially in a period when rates on Treasuries, savings accounts, and CDs are historically low.

After all, why buy a Treasury bond yielding 2% when you can buy a high-yielder paying 8% AND beat the market?

[Note: If you haven’t already heard, we just released our newest report — Top 5 Income Stocks for 2012. These five select investments pay dividend yields of 7.5%… 8.8%… even 11.5%. For more details on this report and these investments, you can visit this link.]

All the best,

Paul Tracy
StreetAuthority Co-founder

P.S. — Don’t miss a single issue! Add our address, [email protected], to your Address Book or Safe List. For instructions, go here.

Disclosure: Paul Tracy owns shares of PM. StreetAuthority owns shares of PM as part of the company’s various “real money” portfolios. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio.

Jan. 5 (Bloomberg) — Philip Poole, head of investment strategy at HSBC Global Asset Management, talks about the outlook for emerging equity markets and his investment strategy. Poole speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)