Fed decision - what does it mean?

The Fed has said that it will freeze interest rates for 2 years. Whilst this can be considered a measure to give the market confidence; the question has to be asked, is the measure reasonable, or just another scam to suck in long suffering taxpayers and investors. Consider that 3 Fed governors rejected the idea. Three does not make a majority; but it strikes me as ludicrous that these governors would commit to such an arbitrary policy. This is all 'illusionary'. It strikes me as a rather desperate measure to commit to something that one has no necessary intention to keep. i.e. Ben Bernacke is not Santa. He is allowed to keep his promises. More worrisome is the fact that its not clear to me that the majority of other Fed governors have committed to the freeze.

In any respect, they are bankers. I would sooner believe in Santa than the promises of a Fed chair? Will the market buy this? I doubt it. This is why the doubt remains in the market. The market might be volatile if the Fed does not step in and clarify. Ben - Stop playing silly buggers with my money. Oh, its ok, I'm holding gold!

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Andrew Sheldon www.sheldonthinks.com

Market about to recover - Australian market leads

Here is a statistic for you. In the last 5 days some $4.5 trillion was wiped off the value of global equities. That is despite the value of all Italian debt being just $3 trillion. Of course, there is also the debt of the US, which would be another $14 trillion.

Of course a great deal of that debt is actually sensible and sustainable, i.e. Not requiring any bail out. We might then ask whether there is a need for equities to fall further. The answer is a resounding nope. Expect a recovery. The signs are there. The US Dow Jones index closed at its lows. I expect this will be its double-bottom, and the market will gap up tonight.

We might expect gold to fall, so people should shift from gold producers to explorers, as confidence rebuilds. Ready for another rally. Will it require more Fed stimulus? Yes, probably to give it some momentum or sustainability.

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Andrew Sheldon www.sheldonthinks.com

Gold stocks will shine!

Gold stocks are all the rage at the moment, and the Australian market makes a lot of sense for several reasons:

1. High levels of household indebtedness mean there are political reasons for the govt to keep the Overnight Cash Rate low

2. The subdued industrial demand for commodities means the currency is going to be weaker than otherwise would be the case; though not so bad to effect confidence.

3. Gold prices are $1750; probably have downside, but are otherwise going to $2400/oz

The question then is - what to buy?

There are of course high-priced gold producers, but can also look at explorers. Why? Gold explorers need confidence, and with confidence restored by the Fed, there is a good chance for another rally. This is all in accordance with our 5-year plan, i.e. A 'sideways' market, where you have to trade in & out, and otherwise simply hold gold or gold stocks otherwise.

When the Dow approaches previous highs, you sell the explorers, unless they are close to production, i.e. They have finance. You can keep doing that until gold approaches $2400/oz.

We recommend a number of explorers at our specs blog, and we offer a 2nd edition ebook to help you buy the right ones.

These are the perfect conditions for gold; low interest rates, subdued or negative growth and monetary debasement. Low confidence adds to its charm.

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Andrew Sheldon www.sheldonthinks.com

Equity market is vulnerable to a correction

The market is coming off significantly at present, and given that it has failed to breach previous resistance and there seems no prospect of support from the central banks, there is good reason to expect a significant correction. This has us looking for significant support levels:

1. The 10,550 level in the Dow Jones - we need to be watching for a breach of the uptrend since 2008.

2. The 4,000 level in the ASX-200 - there is a shorter support of 4300, which might be a more probable support if the Dow Jones breaks its uptrend.

The implication is that there will be good buying as the market confronts these vulnerabilities.

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Andrew Sheldon www.sheldonthinks.com

Japanese financial stimulus stifling

Ok, the Japanese government has its excuse for an economic meltdown. It was not their fault, it was the earthquake. They just never had a chance. The US of course has their excuse as well. Bad luck, and of course others. The Republicans will blame Clinton for easing restrictions on home lending, and the Democrats will blame Bush for allowing the problem to grow. Others will blame Greenspan. The Europeans will blame those 'shameless Southerners', the Greeks, Spanish and Italians for loving life. And of course taxpayers will sign, all too happy that they have the power to repress all bad news.

Nevermind that this current $0.5 trillion in stimulus is coming on top of a public debt which exceeds 200% of GDP. Nevermind that the Japanese savings cannot sustain this level of indebtedness. Someone will pay for this largesse. My guess it will be Japanese property holders; a lot with a 'shot' of currency debasement.

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Andrew Sheldon www.sheldonthinks.com

Dow Jones equities heading down

The S&P500 has broken support in the last 2 days....sadly I was not watching the market. Irrespective, I was well cashed up, since a number of stocks I like had announced issues, so it was of no consequence. Remaining in my holdings are some gold stocks. Rest assured however there will be some good trading rallies on the way down. Gold explorers, which I very much like, will come under threat because they are intangible, even at a time of high gold prices.

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Andrew Sheldon www.sheldonthinks.com

Coal prices not going to $400/tonne

Wood MacKenzie, coal industry consultants are forecasting hard coking coal prices to reach $400-500/tonne as a result of the flooding in Queensland. We previously wrote about the impact of flooding on Queensland's coal industry. I must admit I opened my mouth too soon, as I did not know the severity of the floods. The arguments however remain:

1. Power generators tend to stock up to 90 days supply for any shortages - that means there will be a great many consumers who are ok for 3 months. We might also expect cement companies and the like to sell their coal and for them to use other viable feedstock, since they have even more flexibility.

2. The prospect of high coal prices will ensure that engineering contractors give priority to restoration of exports. i.e. The fact that Rio Tinto and BHP are primarily affected, gives them the capacity to mobilise people within their companies, i.e. from iron ore (west coast) to coal (east coast) in a matter of days.

4. There will undoubtedly be sections of railway track which are effected, however its hard to believe 10km-sections have been washed from their foundations. Track is not like a bridge. Particulate matter is more likely to accumulate in front of, in between and behind track than pull it out. Even if bridges are uprooted, temporary trucking solutions are possible. This is more likely to protect the track rather than wash it away; albeit encasing the track and infrastructure in a lot of waste.

5. What might be categorised as 'thermal' coals for sale are not necessarily strictly thermal coals, but are likely to have some coking properties, which means they can be blended with hard coking coals in order to achieve sales.

6. Opportunists abound in the world, and there are none greater than the Chinese. Expect the Chinese producers to come up with 50Mt in the next 3 months. This will be thermal coal mind you, but Australian and Colombian premium ('semi-coking' in a crisis) coals will attract a premium.

7. Steelworks will adjust their coal ratios in order to take lower quality coal and this will result in reduced steel output. Just ask the Indians; they have been using dirt for coal for the last 50 years.

8. Australia is the largest coal exporter, however let us not forget the capacity of governments, particularly of China and India to internally regulate markets. i.e. These governments can take measures to direct resources into coal markets. i.e. If the Chinese govt (which owns a great deal of heavy industry and rules with immense punitive power) redirected coal from cement production to power production, consider the impact. China produces 1.5 billion tonnes of coal per year, compared to Australia's (I am guessing as I'm out of date) 240Mtpa. Now this is all coal...but I am sure that some Australian thermals will miraculously be going to coking markets...if only as part of a blend. With what you ask? Canadian coals, Australian exports which are unaffected; Australian shipments already in stockpiles around the world, etc. It is not hard to envision that trucks will be used to move coal around washed out railway sections...even if it does diminish the quality of the coal through rehandling.

9. Another consideration might well be the seasonable timing of the flooding. We are in the summer for Australia, so winter for Asia. This is thus not a time of great air conditioning demand, but significant heating demand. We have also to consider the fact that coal is base load and some countries have hydro pumpstorage capacity which they can run down, and then rebuild when coal stocks rebuild. Time of day electricity pricing might also be significant in some markets, though I'm outdated on these facets. I think Asia has been slow to adopt such practices....because they remain highly regulated or under-sophisticated power markets.

10. In times of need, might we also expect scrap metal prices to take off, and in the process taking some pressure off the need for raw materials, and therefore the volatile shipping freight demand. The greatest impact will probably felt in bulk carrier availability...but even then if prices ever reached $400/tonne, you could well expect Chinese barges to be towing coal to China from Queensland. I exaggerate of course, but we can reasonably expect freight charges to rise, and all manner of smaller carriers in the panamax class to be used to deliver coal when those facilities are back on track. No doubt those railways which are the worst effected will be recommissioned last. i.e. Some will hardly affect shipments I suspect.

In the meantime, coal mine pits will be dewatered (that might take a week), with another week for those pits to dry out, and tested for pit wall stability. Looking at the rainfall distribution from the following Bureau of Meteorology map, I don't think the problem is bad outside the Surat Basin.

At the end of the day, it is hardly a time of rapacious consumption...that we need coal prices to rise to $400-500/tonne. My expectation is that they might get up to $250/tonne in the spot market, but it will be such a short-lived phenomenon that it will scarcely make any difference to producers, and more probably the shipping companies will make all the money, and those profits will go a short way to offsetting their losses for all the ships at sea waiting for non-existent coal in the preceding month.

Nope...merely Queenslanders will need to work harder for a month or two, before they get back to their jet skis. Such is the legacy of capitalism....of course if we continue on our path towards fascism we will experience a different phenomenon....the 'flow-on' effect of natural disasters causing a crippling blow to services.

People like to make money in crises. Fear is the easiest way to motivate people. Its far more effective than greed. You get people in a place where they suspend their judgement and they are compelled to seek the most tangible, concrete reward...a report which will promise all the solutions. You kind of feel compelled to buy it just to make sure that you have your bases covered...as you are accountable. The media loves to promote crises as well, because it sells newspapers....and best of all, its like free advertising. I can imagine there are hoards of procurement managers around the world looking at buying the Wood MacKenzie report. I just question whether they will have any special insight. They will have to do a lot of research....and I can't imagine that they will have any greater insight than those coming to them in fear or greed. Why? Because none of them will be looking at the bigger picture...and all will instill their fears and any consultant is going to reflect those fears. After all, they will not be going out in the field, nor have the full context to make accurate judgements. My belief is that an accurate report will take 2 months to prepare and by then the problem will be almost over.

It is a crisis to be sure....I would just hate people to think much money is going to be made out of it. It lacks too many imperatives for a real crisis:

1. Scarcity

2. Lack of substitutes

3. Longevity

That is my 'not so humble' opinion, but then I find humility greatly overvalued. An excuse for poor analysis. I'm only human....all manner of injustices have been performed under such catch cries. My excuse is rather than I have greater objectives in mind than to merely make or save you money.

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Andrew Sheldon www.sheldonthinks.com

Correction to media reports - coal exports

If you read the press, you will hear that "Queensland (Australia) is losing up to A$100 million ($131 million) a day in coal exports because of the unprecedented floods". The reality is far less tragic, for a number of reasons:

1. Coal exporters and consumers have come to expect disruptions to coal supply. For this reason most coal consumers have 60-90 days of inventory capacity to meet their immediate needs. The implication is that, if we assume they each have an average of 70 days capacity utilisation, then the consumers have over 2 months to receive supplemental coal supplies in order to ensure normal power, steel or cement plant operation.

2. Coal producers have long and short term contracts, and those contractual obligations are set at market price, so there is no incentive to go elsewhere.

3. Coals from different mines vary in quality, so consumers do not like to disrupt supplies necessarily unless there is some commercial or supply reason to do so, otherwise they are creating technical/operational difficulties they don't need.

The implication is that Australia is not losing that amount of money; those exports are simply being deferred, though not without cost. So what costs can we expect? Well, ships are going to sit idle for 2 weeks, and for the next few months after, they will be fully booked rebalancing consumer stockpile inventories. Money will need to be expended by Queensland Rail to rehabilitate those sections of track damaged by the flood. These companies might need to employ people on overtime, however they will also have insurance to cover them for such events. The media reported that 100's of kilometres of track were destroyed...more likely just submersed....though there will be considerable damage where there is flow because saturated soil loses its cohesion, so track is more easily ripped up by flowing water.

The biggest loss is of course to agriculture and the destruction of property. It strikes me as silly that insurance companies only cover people for the effects of rain, and not flooding. I know that there has been this response before by insurance companies when houses on the South Coast of NSW were flooded. Is not the intent of insurance to protect a person from unforeseen events, and that the insurance companies are the ones to identify them, since it is a technical risk, which they are in the business of assessing. i.e. They are not fulfilling the spirit of their role. This is where you get ambivalent court rulings, because the law does not clearly establish whether a judge should rule:

1. With the letter of the law, i.e. The law is a dogma, held out of context. This is the basis of statutory law, and explains why bureaucrats are so unthinking in your dealings with them. Its the policy, and they have no power to interpret it 'in context'.

2. With the spirit of the law, i.e. The law is a philosophical construct, that it is based on principles, and those principles are held in context. This is the basis of common law, where judges make new law by applying the law to specific contexts.

If you appreciate that statutory law is being called upon to fill the 'perceived gaps' in common law, it will be apparent that we are being a more unthinking society because of such creeping dogmatism. This can continue until we finally march 'with pride in democracy' towards fascism. I would already argue that we are already there, but its a matter of degree. Some of you might want to wait until Comrade Rudd is marching with the band down Anzac Parade, but I just consider that a huge opportunity cost, more of a concern than our 'deferred' exports.

You can read more about these issues on my political blog or even my judicial website.

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Andrew Sheldon www.sheldonthinks.com

Gold outlook looks good

Here is a recent argument highlighting the upside of gold. People often look to gold as an inflation hedge. The reality however is that any tangible asset is a hedge against inflation, because whilst assets have a real value, paper is being debased in order to repay government debt, or private debt which governments are busily assuming.

Many tangible or physical assets have been falling or steady in recent times. These assets will eventually, or are already stabilising. Gold in contrast, has been a laggard because it offers no return on investment. This is why gold producers make a lot of sense. Unfortunately, because they make a lot of sense, they are already priced very high, so this takes off a great deal of the upside. I also don't like to carry the operating risk, as mines can under-perform, and there are other risks such as:

1. Governments adopting a gold tax or a mineral resource rent tax

2. Technical issues, say recoveries are bad, or grades overstated

3. Hedging issues

For these reasons, I actually prefer explorers of gold. A mineral explorer might only be capitalised at $10/oz, but once they prove up their resources, they will be valued closer to $100/oz. Add to that the spectre of takeovers or production, and you have realised a very appealing investment return. I discuss such stocks on my Speculators blog.

One of the big drivers of gold is going to be the current low interest rate environment. Governments are compelled not to raise interest rates because of the high debts, so they will be for years be trying to support property markets. They will be looking to non-rate ways of curtailing debt creation, i.e. Asking banks to only lend to solid investors. This is what happened in Japan. Its essentially fascism, but don't bother you pretty little minds about that...WikiLeaks Julian Assange is the only one who is going to be assassinated; all you common people are just going to be taxed. You will take care of the rest, as you engage in psychological repression in a vain attempt to pretend nothing is wrong. You will clammer after material evidence of your well-being to convince yourself. It is remarkable what humans will do to convince themselves that all is well. After telling my father there was going to be a financial crisis for 10 years, it was like trying to lance a boil, trying to get him to concede that I was right. Not that I needed his validation after 30 years of getting none, just I wanted to understand the nature of human delusion. Sadly, he has resumed the delusion. :)

Gold makes sense because it is a tangible and non-demand store of wealth. You might be scared to touch other precious metals like platinum and palladium because they have a strong demand component, but they have their own merits, i.e. These metals are used in battery and catalysts, so they have strong exposure to conventional petrol and electric cars. Those metals are also used in fuel cells, so the demand for these metals is good. There is no huge inventory of these metals, unlike gold. But that is part of the reason why the gold market is good. It is a large, liquid market. The reality is that the precious metals market is dwarfed by the stock market, the bond market, and the forex market. So rest assured there is going to be a bubble in precious metals. Also expect the currencies of precious metal producers to have an impact. i.e. South African platinum miners will struggle to remain profitable as their mines become uncompetitive as their currency takes off. You ought to be looking for South African producers who have unhedged precious metal positions, but fully hedged currency positions.

The argument is that 'quantitative easing' or printing money might cause inflation. The reality is that there is no question of that. In a recessed economy, such money cannot go into productive capacity because there is little demand; it can only go into assets. So one experiences a bidding way, as excess money pushes up asset prices. When asset prices are fully-priced, that money spills into debt repayment or consumption, and we get inflationary pressures. Only non-demand related assets like gold perform well, as well as property, once it forms a base. People with housing debts can struggle under interest repayments. We are not there yet, but in a few years inflationary pressures will build. It is not yet time to fix interest rates. I do not think we can get away with low interest rates like Japan because Japan had the fortunate position of loyal investors prepared to accept a 0.5% return on their Japanese bonds for years. Westerners would sell their mothers for a higher return, so this is going to bid up bond prices.

The situation is different however for countries like Australia, which are experiencing a commodities boom. The energy-precious metals boom is going to keep capital inflows strong. A strong currency will give the government some flexibility to absorb or retain relatively low interest rates. This will make Australia the flavour of the month. The question is what will happen to the manufacturing sector? Protectionism? By that point we might have a liberal government. Of well, they all sell out, when they ought to be reducing wages. Sadly, we do not have the same wage flexibility as Japan. It is sad because if we had their discretionary bonus system, we would be able to increase savings, but also allow businesses to easily withhold or cancel what is considered a right to a certain wage now. People would not be able to plan, i.e. people would not be able to develop ruinous levels of personal debts. That would be tragic. Commonsense would prevail.

"Adjusted for inflation, prices touched a high of about $2,423.8, according to figures from the World Gold Council".

Interestingly, this is the price that I got when I looked at the historical ratio of gold to the Dow Jones, which is a measure of tangible versus paper money. I am looking for a gold price of around $2,400/oz, so almost double the current price, but it will depend on future currency debasement. We might see even higher prices.

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Andrew Sheldon www.sheldonthinks.com

Some validation for mining executives

Among the very small number of you who read my blogs, will be the overwhelming majority of you who think I am too critical. Yes, for good reason. But alas, today I am out to offer some validation to ‘high flying’ corporate executives. I have been very critical of the mining industry for their poor decision making on the Resource Rent Tax and Emissions Trading issues. But my respect is hereby extended to the executives of uranium miners Paladin and Aquila who did not sell their souls for the sake of short term profits.

The executives of these companies, according to the SMH, “have rejected putting Australia's first climate change shareholder resolutions to their annual meetings”.

I must say, I would be more impressed if these and other executives used their ‘reporting opportunities’ to objectively challenge their counterparts...rather than just say its not a shareholder issue. This is nonsense. It’s a moral issue, and every person has moral agency or responsibility, at least anyone with active cognitive faculty.

These companies took these steps because “in September, The Climate Advocacy Fund, a joint initiative of The Climate Institute and Australian Ethical Investment, repudiated their failure to comply with its standards. i.e. “For failing to provide adequate information to share- holders about carbon footprints”.

The companies are perfectly free to repudiate these impositions by government; and to ignore any organisation which panders to the politick managers in order to have some power for themselves, or ‘economic relevance’. Carbon-linked funds is today’s scandal, but tomorrow’s forgotten issue.

Companies don't get much credit from the collectivists (socialists) despite being the organisations which facilitate the creation of wealth...the benefits of which we all enjoy. The flipside is that we have 'government-empowered' middlemen to parasitically canvas any agenda, legitimatised by illegitimate 'democratic' (aka 'tyranny of the majority', i.e. extortion) government, in order to gain some market relevance. So we want to credit these executives to the extent that they have justified it. We merely wish they could be more principled exponents of objectivities, rather than merely negotiating a legal minefield.

Nevertheless, where would we be without these 'practical people'. Determined to be a practical person someday myself...but only when its indeed practical to be myself..that is principled people! :)

Refer to our climate change blog for background on the climate issue and our Resource Rent Tax issue for my previous comments on the mining industry.

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Andrew Sheldon www.sheldonthinks.com