The "Gillard effect" is a global phenomenon

Judging by the latest difficulties Rio Tinto is having with the Mongolian government, one might conclude that the propensity for governments to expropriate more wealth from shareholders is becoming a more popular policy initiative. The Rudd/Gillard government of Australia can take the credit for their 'initiative' in leading the  mob mentality towards expropriation.
The clear undesirability of this policy is that it entails theft of property from shareholders. It must be conceded that a legitimate case can be made for the public taking a cut in the development of a project, and for the state to act as a conduit for that. The problem is that this initiative has to be undertaken at the start; before a company has commenced exploration and established terms. They cannot arbitrarily breach terms and retain any credibility. That would constitute theft, and governments are supposed to protect people from theft, not be systematic exponents of theft. Otherwise:
1. Governments are no better than thieves
2. Provide a moral sanction for thieves in the broader community

Investors in mining stocks, particularly those with world-class projects, and most particularly the largest companies in the world, who tend to be the object of such 'revision' of terms - they are the most vulnerable. They risk being exposed to a systematic threat of sweeping reform of royalties. I call this the 'Gillard effect' after Julia Gillard, although Kevin Rudd should probably taken more credit; not to forget the  petty academic who lives on government-extorted taxpayer funds, who actually dreamed up the theme. In fairness, it was Rudd & Gillard who executed it, but he gave it the moral sanction. As John Maynard Keynes proved, a government only needs one ambivalent or misguided academic to justify a systematic extortion racket.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Dow Jones - a great performer?

Reading the NZ Herald, you could be forgiven for thinking that the US economy has re-emerged 'transformed' from the global financial crisis. In the last few weeks, we heard that in the month of January, that the US deficit was positive for the first time in years. A seasonal aberration  however it did denote a positive trend. The problem with such news is that:
1. Asia is still growing and spending
2. Unites States is still saving, not spending, by paying down mortgages

The problem is two-fold:
1. Corporations are still strongly incentivised to take jobs offshore because emerging market wages are still very competitive
2. Once confidence returns, Americans will resume spending. This will create some 'domestic service' jobs, but it will also restore to some degree the spending which caused the problem in the first place.

The focus of this NZ Herald article however was the strength of the Dow Jones. The problem with the Dow Jones as a measure of financial well-being is:
1. The US has greatly depreciated in the time since it bottomed; and some of those economies to which it trades, have therefore been impacted. The USD has likely bottomed I would suggest to you. Its at an all-time low against the Philippine Peso.
2. The Dow has benefited from a significant amount of monetary stimulus by the Federal Reserve
3. Interest rates are very low - so of course equities will out-perform the bond market.

The issue is whether yields are attractive; whether the stimulus will be sustained. Investors apparently think it will be; or are they going to capitulate in coming days, and send the Dow crashing back down? Time will tell. There is no reason to say that Americans will not resume spending at some time. There is every reason to think that the softer currency and immigration will not effectively recapitalise the nation, that higher taxes a nd restored activity will result in a budget surplus as well as more jobs. The question is whether confidence has returned. We'll see.

Is the time to 'invest in stocks' destined to come after a doubling in the market? Apparently Robert Pavlik, chief market strategist at Banyan Partners, thinks so. We are told that these equity price gains can be sustained because earnings have risen drastically. Well, we need to factor in whether:
1. Those earnings came from consolidation gains - taking over the competition - remembering that corporations entered the recession cashed up
2. Higher prices due to weaker US
3. These earnings can be sustained if there is an increase in taxes

The implication is that now is a great time for American Filipinos to move their savings to the Philippines if they are looking to retiring there, or simply to paid off any investments in property there. The USD is I suggest going to be stronger from herein, or at least after that support is reached.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Significance of Dow Jones record high

Overnight the Dow Jones broke the previous 2008 high of 14,140 points (end of day data), rising to a new intra-day record of 14,278.87 points. This is positive news for long investors, however it is not yet a convincing break, so I'd not be surprised to see the index collapse back under 14,000 points. It is noteworthy that the S&P 500 index is still 2.2% below its all-time high. The important distinction is that the Dow Jones Industrial Average is constituted by just 28 stocks, so its hardly a representative sample of the US equity market. These 28 stocks are 'huge' enterprises to be sure, like GE, but it tends to ignore stocks like Facebook, which pertains is a representative for the 'new economy'. The other aspect is that the Dow Jones Industrial Average gives greater consideration to offshore activity. GE for instance is a global enterprise with greater exposure to Asian economic activity. This is 'exposure' which would be less pronounced in the S&P-500 Index. So, if we are looking for a proxy for global economic activity, then the S&P is a better measure.
For this reason, whilst I was confident of a 14,000 point break, after a discussion with a colleague, I am inclined to wonder how sustainable this 'bull' is. I am instead inclined to wait for a more compelling trend indicator, whether short term price action. The reason for the concern is:
1. The chart below
2. The promise of stimulus
3. The relatively small size of the emerging markets in terms of their contribution to economic activity.

Having said that, this could change with:
1. A preparedness by Westerners to resume spending. At the moment they are paying off debts or under-utilised on welfare. Stronger property prices, low interest rates can change that, but it needs spending to build confidence. This is the role of stimulus and low interest rates; but are people so confident? At the first hint of confidence, are Western governments going to be forced to raise interest rates. There is no risk of wage demands. Asian offshoring has scared unionism out of existence (for the next 2 decades).
2. Further stimulus.

The market is making tentative steps at this point...I think so should you.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Market outlook - Dow not going to break

I've been doing some reflection over the last few days. I had previously thought the Dow Jones was tentatively going to break 14,000 points, and that it would be a precursor to a rally. This view was underpin by some positive fundamentals inherent in the market. The problem is the negatives, which I see as these:
1. Market support - The Fed Reserve has been pumping a lot of liquidity into the market in the last few years to sustain the market - the market is fully valued, and I expect the Fed to ease that support, in an attempt to draw the market into more sideways movement.
2. Emerging markets - The strength in Asian markets rests upon expatriated earnings, passive foreigner investment funds, stronger construction and rapidly growing emerging service economies in their own right, but they are still dominated by 'food'. The Asian economies have their Gucci stores, but most still cannot afford these items. When they go shopping, its mostly to look, and mostly to eat, because that is all they can afford at this time. It will be different in a few years.
3. Dow Jones trend - The Dow Jones has historically been a trending market - see the log-linear chart below. This chart offers 115 years of history. So what can we garner from the current trend. There appears to be further evidence for consolidation for a number of years in the Dow before it is able to grow again. The question is why? Property markets in the US are already starting to recover, but everyone is still highly indebted, they are focused on rebuilding savings, and without really a substantive basis for upside, and perhaps some apprehensions about higher taxes, we are not going to see a rapid return of 'big spend' USA. So what if the US government increases taxes and gave the poor tax relief. The problem with that is that it would result in the sucking in of imports. The moral of this story is that this would be great 'stimulus' when the world is really to sustain it, because they are growing as well. Japan is talking stimulus, but perhaps they might wait before they do so. Perhaps its not going to be a sudden injection, but spread over a number of years. I don't expect Japanese stimulus however to result in a substantive rise in imports, and anyway, it would be offset by a competitive yen, so the net effect would be positive. Japan does not have a high reliance on imports because Japanese people consume products 'particularised' for Japan, i.e. Cute TVs and refrigerators.

4. Techically, the market action is telling me the Dow Jones is going to fall. See how the Dow has encountered strong resistance at 14,050 points. That was to be expected; its a major psychological hurdle to break 14,050 and previous 2007 high of 14,140 points as well. The issue for me was the break of the low of 15th Feb, followed by its failure last night to recover sufficiently to break above that low. It remains on a downtrend, and I am expecting a very convincing break of the 13,850 point level will occur tonight. In fact, I'm expecting a fall back to 13,650 points, with a nominal recovery. That will be a 230 point correction; before stabilisation. 

Source: Google Finance.

Lastly, I am not going to be a hero, so I was inclined to take golden profits - sold Gippsland for 1.4-1.5c, having bought for $0.08c. I believe this company is positioning for a capital raising around 1-1.2c. Its not the best climate to do this. The rest of my stocks are longer term - UCL and GBE. I also have a number of other stocks, and the rest is cash to buy on weakness. GBE has a buy-back provision in place, and has a lot of cash. UCL is just great exposure to great (2) projects.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outsourcing and offshoring

If I listen uncritically to these clowns at The Economist I might be forgiven for thinking that the Universe is about to tilt on its axis. Again? Well, I think not. Listen to this video post by The Economist and think about what they say. I acknowledge that there is some truth, and certainly value in what they say, if only by being wrong, but I'll offer the following rebuttal.


There are some problems with these arguments:
1. Guangzhou is expensive - there are still rural China and other countries like India, Pakistan, Bangladesh, Africa.
2. Just land costs can be a big factor for some companies in West
3. Western labour prices are cheap because they have not been used...so unskilled labour is cheaply priced in West compared to the runaway high cost of skilled labour.
4. The productivity upside in emerging markets is greater
5. Automation is not a new benefit - it will always be there.
6. There are strategic reasons why you invest in third world - accessing new growth markets
7. A great many components are still made in China...so don't you want to establish near your component source? If not your market for strategic reasons.
8. They take a case of a Lenovo plant to be built in USA - ignoring the fact that Lenovo will have many plants around the world, and its parts will mostly come from China/Taiwan/Malaysia. They ignore the strategic motivation for US basing for US customer customised assembly. This is not common, and true for high-value, customisable product.
9. The high cost of shipping is reason for localised production and the focus of global growth is towards Asia & emerging markets, not back to uncompetitive, cost-stripping developed countries, which have zero-population growth. If they greatly expand their immigration programs, this will make a difference. My guess though is that these Asian immigrants will buy much of their products from Asia on their annual trips there.

I acknowledge that this trend is occurring. I would however suggest that it will take 20 years rather than 2015 as they suggest. It is in fact in the service sector where this is happening the greatest. Now consider that Asians are increasingly being allowed to come to Western countries on a work visa if they are under 30yo. This is a great opportunity to develop language skills and cultural appreciation. Of course the appeal is lost if you end up speaking your native language in a souvenir shop. Certainly the ready access to global cable is not enough for people to speak English well. But its a big start on their parents. The biggest obstacle for the people in these cultures is values I would suggest....and the internet is transformational. The Philippines is a clear leader in this regard.


Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Equity market outlook and retirement

The Dow Jones Index is currently trading at 13,896 points. For some of you, this number is not so significant, and fair enough, but its important because you need to consider the implications for your future savings & investments. This point is just 100+ points short of the record Dow index level of 2008, when the market went into recession. There are of course analysts projecting trouble. Most however are not expecting a setback in the market.
I suggest the Dow Jones will struggle to break through the 14,000 level. I think it will be a tentative break, but ultimately the outlook for the US and the global market place is rather good. We have Japan about to embrace stimulus, we have a buoyant Asian market, reasonably buoyant commodity prices. Get ready for the next leg of this 'boom'. Not ready for a boom? Well, you will end up paying high prices if you wait for your apprehensions to be comforted. Anyway, the fundamentals for the global market place are very good. Care though that Western markets are struggling because:
1. Higher costs of living
2. Wage restraint for the low income earner

You therefore need to ensure you invest in the right stocks; thats stocks with resource exposure; Asian exposure, and indeed all emerging markets. Property in emerging markets makes sense, and you might do ok in Western property markets in the cities as well, as long as you buy in sought-after areas. There will be a lot of people who simply cannot afford to buy into the cities because of wage restraint. No problem, there will be plenty of emerging market retirees, whether doctors, professionals or their parents, as Western immigration standards relax for these people. Expect outer-city development as well as large cities get bigger.

I would suggest this is a great time to capitalise your homes for future retirement by investing in things like solar power, growing your own vegetables. There is no hurry; but there are incentives around to do these types of things, and in the next 20 years it will become more popular as emerging market labour rebalances its pricing with Western pricing. In the interim however, expect low-wage earners to struggle. This is why I say, capitalise your costs if you are retiring in the next 20 years because you will otherwise be impacted by higher food prices. You won't be able to absorb these costs with higher income, unless you work beyond the nominal retirement age.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Responsibility for market pricing and liquidity

Whose responsibility is market pricing? Whether you consider ASIC, the legislature or the Australian Stock Exchange to be responsible for market regulation, you would have to wonder why a company is able to persist with a 'market pricing regime' which undermines the capacity of shareholders to sell stock. I am talking of course of the situation in which Non-Liability companies (N.L.) are able to raise capital below their  par value infinitum, to the point of amassing issued capital in Australia in the billions, whilst retaining just 3,000-10,000 shareholders; often with just 100s of units after years of depreciation, and no incentive to sell because the value of the stock is less than the brokerage fee to sell them (i.e. $30). This problem is overcome by the provisions for companies to buy back small 'unmarketable' parcels of stock.

What is lacking however is an assurance that the company, ASIC or the ASX will ensure that there is a 'real market' in the stock. Consider the situation for two mining stocks that come to mind:

1. Republic Gold (RAU.ASX) - stock quotes as of 12th July

Buyers   11 83288497 0.1c

Sellers

Price         Quantity         Number

0.002 186536704 113

0.003 44261847 27

0.004 11897500 13

0.005 17970861 16

0.006 10167149 6

0.007 4831500         3

0.008 1300001         2

0.009 11740000 3

0.010 1750000         2

0.012 176338

Its fair to say that there is no real market in this stock. It is also fair to say that shareholders should not have to raise their price 100% in order to buy some stock, nor lower their price 100% in order to sell. The implication is that there is no 'liquidity' in this market, and no effort has been made by all concerned to ensure that liquidity. I personally know this stock, and I suggest there is no reason to expect a turnaround that is likely to lift it 500%, which might otherwise justify 'patience'. Irrespective, the current context justifies a recapitalisation of the stock. No director wants to do this because its a concession that you have failed to retain shareholder value. In fact however, exploration is risky, and some directors are better than others at finding good projects. 

Here is another example....

2. RAM Resources (RMR.ASX) - stock quotes as of 12th July

Buyers

14 13864126 0.002

52 117649338 0.001

Sellers

Price         Quantity         Number

0.003 6083332         13

0.004 17417700 7

0.005 2672000         4

0.006 4330423         3

0.007 5445163         2

0.008 80000         1

0.009 4000000         2

0.010 6266301         5

0.011 1608933         3

This stock is actually one of merit; but again, it is ridiculous that a stock is able to rise 50% in one day simply because there is no effective liquidity, or interim increments of unit price to justify the price rise. The simply solution is for this company's 955mil shares to be recapitalised from 0.2c with a 10x consolidation to 95.5mil shares around 2-3c. This is still a very cheap stock price, but at least it offers some liquidity. 

RAM Resources actually has an appealing project in Greenland for rare earths. This is a pristine natural landscape so you might wonder whether this project will be developed; though its mineral composition differs from the equally significant rare earth deposits of Greenland Minerals & Energy (GGG.ASX). China produces 80% of the world's rare earths; and yet industrial countries are being challenged to find new sources because China has adopted quotas to ensure security of supplies. It intends to cut output by 15% per annum. 

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Andrew Sheldon www.sheldonthinks.com

Summary: Market Outlook 2012-2014

The outlook is for higher food and energy commodity prices, strong NZD, a two-speed economy, with high oil prices, the strong NZD going to undermine economic activity. There is going to be an attack on North Korea and Iran within a year; however they will be short-lived occurrences, but they will hit market confidence, so sell your shares. The high oil prices is what will impact consumer confidence most.

The US and other central banks will then look to offer stimulus, so you can expect a recovery in 2014. Give it a year to turn around, so we are 2 years away still from the resumption of the China 'bull market' story. Clearly the time to get back into equities is a few months after those missile attacks on North Korean and Iranian facilities. In neither case do I expect ground troops.

I think gold prices will certainly do better in this period of 'uncertainty', however not as well as you would expect because there will be broad-based selling pressure. I do however not write-off gold; I think gold will hold up until that stimulus comes through, but expect gold to be sold off thereafter...such that I'd not be surprised to see it under $1000/oz by 2016, so forget about the gold explorers. But in late 2013, we might expect those base metal stocks, including explorers, to look really good, as well as rare earth stocks like Alkane Exploration. Too early now though. Its always best to go for those exotic elements in these times; as they are relatively under-priced. i.e. Vital Metals might have advanced its wolframite (tungsten) project by this time. China produces 80% of the world's tungsten, and this company has the Japanese government as a partner. This is because the Japanese government invests where security of supply constraints are posed. Another appealing exotic company is South Australian based Archer Exploration....not yet though. Wait for the military strikes.

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Andrew Sheldon www.sheldonthinks.com

The US market potentially set for recovery

I've been taking time off to focus on writing books lately, and develop new websites, mostly of a political nature. Seeing that the US has managed to create 230,000 jobs in the last money, and get its unemployment rate down to 8.3%, I am wondering if this is pre-election stimulus, or real jobs. Perhaps someone could look at the job numbers and tell me whether these jobs are bureaucrats or factory workers. If indeed these are factory workers, then we are likely to be seeing a global recovery. Back in 2008, I fully expected this recession to last 4-5 years. So we are in the 4th year, and the market tends to look 12-18 months ahead, so we might thus expect this market to bubble ahead; at least for another 15 years until India and China have fully absorbed their labour surpluses. This is of course the reason why inflation is under control.

I based my 4-5year recession outlook on the basis of a log-linear curve of the Dow Jones. I should reproduce it, so we can see where we sit. Really, its an arbitrary measure because there is no reason why governments cannot pre-empt such trends with stimulus...if only temporary.

So recognising this outlook, we are inclined at this point to get excited. Well, this is why I ask if these are real jobs. Please tell me, as I'm too business etching out a philosophical treatise for the time when society wants to discard representative democracy. I want to avoid some cheap form of populism. You will undoubtedly be rich, and you will be looking around for concrete measures to protect your assets, and you will undoubtedly be snubbing intellectuals like me; retorting "What good are ideas in a crisis!". I will of course respond "A great deal of good if you listen a decade earlier".

So back to the 'boom'. Is it real or not? Maybe I should just look to my trusty log-linear chart. I might have to make it a priority. I used to be so much more focused on such data.

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Andrew Sheldon www.sheldonthinks.com

EU fails to make resolution so far

It is hard to envisage the markets recovering unless the EU gets its debt obligations in sync. It is very hard to imagine that happening, so we might expect more volatility in the short term. Unless the US overshadows these events of course with more quantitative easing. Don't see this happening though; unless equity markets slide.

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Andrew Sheldon www.sheldonthinks.com