Current readings

Primer on my investment outlook

Stephen Roach is bearish as usual

Insiders buying in Brandrill BDL BDLG

Bubble analysis from Prudent Bear

Dr. Doom Marc Faber's latest

Commodities secular bull again

Indian Nat Gas find laced with Political Bullshit

Interviews coming up

Primer on my investment outlook

Over the next few days I will post interviews with people around the world to get different opinions on asset markets. Keep coming back !

Overview of investment options and ideas

Primer on my investment outlook

Lets categorize different types of investments and their suitability. Different investments are real estate, stocks, commodities, cash, bonds and gold.
Note that I have kept gold in a separate bracket, as its primary use is in jewellery and investments. Its industrial uses are negligible and it is an alternative currency as an investment. Other monetary metals like silver, and even platinum, palladium, diamonds have substantial industrial uses.

1. Real Estate :- Over the past few years, the US Fed Reserve has kept real interest rates negative, and interest rates in Japan, Switzerland have been 0%. The Euro Central Bank has kept rates at 2%. These are generational low rates. As a result investors/speculators have run to other asset classes to seek higher yield. This has manifested itself more in real estate ALL OVER THE WORLD. I believe there is global real estate bubble worldwide, waiting to burst.

2. Stocks :- Stocks can be in companies related to Financials, Technology, Commodities and Manufacturing. I do not trust the accounting of any financial firms as a creative accountant can show virtually anything on the books. Also, financials are highly sensitive to interest rates and credit risk. I worked as a software engineer in the US and Australia. I hold 2 degrees, a Bachelors in Electronics and a Masters in Computer Science. From my experience in university and industry, the vast majority of Tech firms are valued at a Bullshit Premium, on a dream!! I would never buy a Tech firm unless I see low risk and substantial reward. The problem with Manufacturing is the implementation of Free Trade via the WTO. Any company is in danger of high competition and falling prices due to China and other Third World countries. The world is now flat, and margins/profits are at risk from high competition. Commodities stocks are highly sensitive to the Commodities price cycle. Also, commodities stocks carry more risk/reward than the underlying commodity due to operational risks. If you believe Commodities prices have topped, sell them. If you believe we are in a new era of a secular commodities bull, buy them. At least the assets and accounts of commodities stocks are harder to fake!!

3. Commodities :- There are various indices linked to the prices of commodities, the AIG Commodities Index, Rogers International Commodities Index, Reuters Commodities Index. These are linked to a basket of commodities and go up and down with the underlying prices. Also there is futures/options trading on the prices of nearly every commodity. Commodities are softs - grains/meat or metals - copper/silver/zinc. As an asset class, it is less volatile over a period of time than many people imagine IF you are not highly leveraged and forced to sell. Most commodities also display mean reversion to the trend price.

4. Cash :- This is an asset that no none wants, and perhaps its the best one to have. When everything, commodities, real estate, stocks, gold are booming simultanously, they can also crash simultaneously. And in an environment of rising interest rates, cash is not so bad. The AUD/NZD/ISK are currencies with good short term yields.

5. Bonds :- My favourite "safe" bond is the Icelandic govt bond. But I'd wait until the Icelandic Kroner falls down a bit. The ISK exchange rate seems to be in a bit of a bubble. I wouldnt buy corporate bonds in this environment or even govt. bonds as the interest rate outlook is uncertain. Remember, bond prices go down as interest rates go up.

6. Gold :- This is as asset that evokes strong emotions. A position of 5% of assets in Gold via the Gold ETF's is probably a good idea. Also, in the event of a global crash, gold prices might improve in the event of a movement of investment money. However, gold has minimal industrial use, and if investments dry up, the price can crash.

Position opened in Sydney Gas

Primer on my investment outlook

Bought 12% SGLG.AX 2006 Conv FV 0.60
@ 0.55

Again, the wonderful world of illiquid convertibles in Australia. During the recent weeks market decline, the Convertible declined as well. The Conv is due in 10 months. And it looks like a good return on investment.

Contrarian take on Oil

Primer on my investment outlook

Andy Xie of Morgan Stanley says :

China's oil imports declined by 1.2% YoY in the first five months of 2005. US oil inventory increased by 6.4% in the first quarter of 2005. However, oil prices averaged 46% higher in the five months of the year and 50% higher in the first quarter, on a YoY basis. How to bridge the gap between rising prices and weakening demand? The answer, I believe, is that there are too many oil traders engaging in oil price speculation. They will likely keep prices up until an oil market collapse. That day is not too far away, I believe.

Hmm! This would be a repeat of the early 1980's. However it does look as if a general slowdown is enveloping the world. Whether this develops into a recession or not, the ball is out on that opinion. Most of my energy positions are in natural gas, which may decline less than oil. Especially since supply/demand equations are more local until LNG picks up. The US has definitely a supply deficit of nat gas.

Sydney Gas 12% Conv below FV

Primer on my investment outlook

Here is an excerpt from an article today. I think I'll wait till the bleeding stops and then pick up a few convertibles. These are due in 04/06 anyway, and the company has enough funding to redeem them.

Investors vent Sydney Gas as shares dive 30pc

By IAN LOVETT

June 24, 2005

SYDNEY Gas shares were on the nose yesterday, crashing 30 per cent.

Shares in the troubled methane gas producer dived 20.5c, or 30.8 per cent, to a record low of 46c on heavy trade of 10.3 million shares.

Behind its dramatic fall is a tail of woe, kicked off by the departure at the start of the week of chief executive Bruce Butcher.

The company is also embroiled in a bitter battle with big-end-of-town new age environmentalists who are trying to stop it from extracting coal-seam methane gas near their McMansions on the Central Coast and Camden.

But what got the tongues wagging yesterday was talk it was spending money like a drunken sailor on big salaries and fancy offices.

Sydney Gas occupies an entire floor at 1 O'Connell Street, one of the CBD's better addresses, and its executive director, Domenic Martino, and Mr Butcher were each paid more than $1.5 million last year.

Problems in the future

Primer on my investment outlook

We live in a strange world. The imposition of negative real interest rates by the US Fed combined with increased leverage has increased the amount of liquidity around the world. This has resulted in increased consumption by the US consumer with a near total depletion of Household Savings Rates. China has gained due to investment monies building factories to provide consumable goods. The rest of Asia has gained exporting to China and to America. In summation, the reflation trade resulting in the increase in prices of commodities and financial assets over the last few years can be traced to the easy money policy at the fed.
Today, the Fed is still increasing interest rates. However, looking at the Bank Repos the Fed is still injecting money by buying bonds. Also, nearly every developed country besides the US and Canada, including the Eurozone, Australia, NZ are in a serious slowdown. Clearly, the commodities market can crash along the rest of financial assets. However, I do believe that this will be a cyclical slowdown within a larger secular bull market. Also, the crash in prices of real assets and stocks may well be a cyclical crash within a secular bear market.
Either way, I have tried to ensure a large margin of safety with my investments. The VIX cannot go much lower that 11 but can go much higher, upto 40, in the event of a crash. All my investment are in Convertibles issued by companies that provide a high yield because they trade below Face Value. I have taken care to ensure that the cash/asset position in these companies will ensure at least the return of the FV of the Convertibles.

Investment Themes

Primer on my investment outlook

Expanding on the these of a bull market in raw materials, I look to invest in mining/agri companies or equipment suppliers. Clearly prices of raw materials drive the prices of the first type and the flow of investment/IPO money drive the prices of the second type. I prefer mining service companies because these pick up later in the cycle.
My current investments are in
Antares Energy 10% w FV 2$
AZZG.AX @ 1.879
Brandrill 8.5% w FV 0.05$
BDLG.AX @ 0.031
Sherlock Bay Nickel 12% w FV 0.20$
SHNG.AX @ 0.138

To understand :-
Antares Energy 10% w FV 2$
AZZG.AX @ 1.879

means

Antares Energy 10% Convertibles with Face Value 2$ with Yahoo Sticker Symbol AZZG.AX bought 1.879 per unit.

And so on.

Investment Positions

Primer on my investment outlook

Right now, we see two conflicting trends across the investment world. The growth in liquidity across the world leading to monetary inflation primarily seen in financial assets and raw materials and the trend towards globalization leading to intense competition in services and manufacturing. Marc Faber and Jim Rogers are in the Inflationists camp while Mike Shedlock and Robert Prechter are in the Deflationists camp. I'm more inclined to a view that the next decade will see alternating periods of inflation and deflation. As interest rates move towards zero across most of the developed world, reflation and leverage will inflate demand leading to increase in prices of raw materials and financial assets. At the end of the reflation cycle, as central banks get concerned about inflation and increase interest rates we are more likely to see crashes in financial markets and prices of raw materials. If anything, I view the emergence of India and China as a big positive outcome for prices of raw materials.
As hundred of millions of people move from poverty to the middle class, they will buy 3 meals a day LONG LONG before they buy iPods. Food, basic materials and anything with supply inelasticity as a theme will be in a secular bull market.
Also, the emergence of hedge funds with leverage and large numbers of funds ready to write options have reduced the volatility premium. Volatility is the most undervalued asset around us. As the VIX approaches 10, I buy VBI (VIX futures) and sell on major declines.
To play on raw materials, I buy convertibles of companies listed on the ASX (Australian Stock Exchange) trading below redemption value. The yields are substantial and there is a small desire to sell when yields are available. I dont care about the outlook or price action, I simply buy when a company's assets are able to cover all its debts as well repayment of the convertible capital. I only buy mining/agriculture related companies.

First Entry

Primer on my investment outlook

This is going to be an attempt to log and explain my decisions on stock/money markets. I'll also be writing articles on macro pictures that may affect my investment decisions.