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"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes
Thursday, January 15, 2004
I’m spending a little time in Australia and I’ve had the chance to do a little reading as well as get a feel for the share market over here.
I read Adventure Capitalist by Jim Rogers which I would have to strongly recommend. He had a few thoughts on Western Australia during his 3 year drive around the world. He felt the place was very parochial. He also wrote that he was very surprised that he could not buy property in Darwin as he is a foreigner. I had the chance to meet him in Texas and I asked what his thoughts were on Australia. He said that there could be some short term up-tick as it is a commodity economy and he feels that we are in a commodity bull market. Most importantly though he doesn’t feel that Australia has good long term prospects.
I picked up another book on the history of the Perth stock market. The majority of business in W.A. is commodity based. Mining, Oil and farming are pretty much the only major businesses here. I was reading an interview with Australia’s top oil and mining analyst he had a couple of interesting things to say about mining stocks.
• Where the broad market has returned around 15% a year over ten years mining stocks have lost 5%. The great returns that miners make all get ploughed back into finding the next great reserve, shareholders rarely get to see any of the money.
• Mining stocks are easy to analyze by looking at reserves, applying a Net Present Value calculation using a 10 year average for the commodity (not spot prices)
• The best time to sell a mining stock is when it is about to start production, that is when the demand comes from larger investors
• It is very rare to find a mining or energy company with management who are dedicated to definite returns to shareholders; generally their egos make them use all profits in finding the next great find.
• By looking at management’s background you can often determine if they will sell out to a larger buyer or partner to actually set up and run the mine. If their experience is in exploration they are unlikely to take the mine through production themselves.
There is a lot of talk about the Australian Dollar here. The newspapers have a lot of stories about Nickel and the pain farmers are feeling as a result of the appreciation in the Australian Dollar versus the USD. Wheat farmers are almost at the point where they are breaking even producing wheat even after the massive increase in demand from China. Wheat has lost 40% over the last 18 months just due to the appreciation in the Dollar. This leads me to suspect that the commodity bull market has a long way to go. Commodity prices in the commodity economies such as Australia and Canada have not risen all that much (most of the rise has been due to the fall in the US dollar as the commodities are priced in US dollars).
The Australian Reserve Bank had been expected to raise interest rates at their next meeting but may not due to the strength in the Australian Dollar. Right now on 2% margin you can earn over 100% in a long Australian Dollar / Short US Dollar position. That is aside from capital appreciation. No one wants to take the other side of the trade right now. Once the US Federal reserve start to raise rates (which now looks like it could be a very long way off) then the currency markets will start to reverse but over the next 6 months the USD is just going to keep falling and Greenspan is almost certainly going to let it happen. Once rates do start to rise, he is well known for rapid and dramatic increases which will make the AUD/USD carry trade less attractive and eventually unattractive.
Disclaimer and Disclosure
Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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