Wednesday, January 31, 2007

Solar powers business

Solar power got another much-needed boost recently when Wal-Mart announced that it would plan on adding solar equipment to a number of its U.S. stores.

The company has asked potential solar equipment suppliers to bid on initial projects and to include costs for possible build-out and expansion over the next five years. If the plans are carried out, it could make Wal-Mart America's largest user of solar power.

The Financial Times reports that a move to solar and other forms of renewable energy is taking place due to rising electricity costs and a desire to bolster corporate images:

The new US enthusiasm for solar power reflects both the impact of rising electricity bills, and concerns over reputational or brand identity issues.

Wal-Mart, for instance, says it wants its stores to be entirely powered by renewable energy, and has committed itself to reducing the greenhouse gas output from its existing global network by a fifth by 2012, while Staples has said it intends to get its emissions to 7 per cent below its 2001 levels by 2010.

This would be a great move for Wal-Mart and other big box retailers who are looking to win over some of the more environmentally conscious and higher-income shoppers who have tended to snub these stores.

But what makes these projects really interesting is their ability to overcome the problems of cost that have previously held them back.

Solar power development in the US has, in general, lagged behind Europe and Japan, where governments have been more active in encouraging it, and centralised power utilities have created initiatives such as buying back surplus power for use on the grid.

But potential users in the US are now benefiting from the emergence of a new approach to operating solar arrays. In a model developed by SunEdison, an energy services company specialising in solar power, the retailer pays for the electricity but not for the costly installation.

In 2005, SunEdison formed a $60m investment fund with Goldman Sachs and Hudson United Bank to finance the installation of 25 solar systems for Staples and Whole Foods, using the subsidies now provided by a growing number of US states to encourage the development of renewable power.

The model, says Mr Buckley at Staples, dramatically changed the attractiveness of solar power, offering companies the immediate benefit of power priced below current prices on a 20-year contract, with maintenance costs handled by the service provider.

"We looked at solar power in the past, and to own it and put it on the roof just didn't meet our standards for the internal rate of return on a capital project," he says. Under the power purchase approach, "there's no capital investment, no maintenance, and no associated costs . . . we know what our costs will be for that proportion of our load for that period of time."

Unfortunately, subsidies are still deemed necessary for getting some of these projects off the ground. Hopefully, the latest advancements in solar, combined with Wal-Mart's entry into the power business, will help drive costs lower.

Tuesday, January 30, 2007

Inflation and War Finance

I hope everyone will take a minute to read Ron Paul's latest article, "Inflation and War Finance", which is posted up at Safehaven.

Here's an excerpt:

Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular.

The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

The result of this arrangement is inflation. And inflation finances war.

Give the full article a read (it is brief), and pass it on to a few friends and associates.

Monday, January 29, 2007

Ill health: America's new cultural legacy

Fascinating article from Bloomberg that highlights the toll America's cultural hegemony has taken on the rest of the world. It seems that in some parts of the world, diabetes and heart disease are now among our leading exports.

From, "Fries, GIs, Beef Bring Diabetes to Japan's Isle of Centenarians":

Jan. 30 (Bloomberg) -- Tomomi Inose is overweight and diabetic. Her poor health is a result of six decades of U.S. influence on Okinawa. Until a generation ago, residents of Japan's southern island were the world's longest-lived.

Growing up in postwar Okinawa alongside the U.S. military's largest overseas bases, Inose developed a bigger appetite for American-style barbecue, hamburgers and sodas than the fish and vegetables that sustained prior generations.

``My body instinctively craves for succulent meat,'' Inose, 46, said during a visit to the hospital where her blood-sugar level is tested monthly to monitor the type-2 diabetes that's impaired her vision and increases her risk of heart disease.

The island that once boasted more centenarians than anywhere else in the world now has the highest prevalence of obesity in Japan, and life expectancy is falling rapidly. The government is concerned the deteriorating health of Okinawans may be a prelude to a nationwide crisis.

The article goes on to describe the change in diet and lifestyle that has taken place over the years in Okinawa. Since the end of World War II, many of the younger generations of Okinawans have abandoned the traditional diet and lifestyle habits of their elders, with perilous results. Those who kept to the traditional diet are healthier than their peers.

With an average life expectancy of 86 for women and 78 for men, Okinawa's elders have one-fifth the heart disease, a quarter of breast and prostate cancer and one-third the dementia of Americans of the same age group, according to the Okinawa Centenarian Study.

And another important lesson: just because you have the genes and the background, don't expect to live as long as your ancestors without the proper diet, lifestyle habits and exercise.

Sunday, January 28, 2007

Jukebox

Click, play, and enjoy.

Tupac Shakur feat. Snoop Dogg - "Amerikaz Most Wanted".

Madonna - "Lucky Star".

The Clash - "The Call Up".

CSS - "Let's Make Love and Listen to Death From Above".

Oasis - "Acquiesce".

Pulp - "Disco 2000".

Suede - "Trash".

Friday, January 26, 2007

How speculators exploit commodity markets

I use the word "exploit" because it was part of the original title of John Dizard's recent Financial Times article on speculators gaming the commodity markets.

Specifically, the charge put forth by Dizard's article is that locals on the exchange floors have been betting against commodity index funds by taking advantage of their need to roll contracts over in a timely and predictable manner. This, the article shows, costs money for investors in these types of funds. Says Dizard:

Speculators on the floors of commodities exchanges have been called many things, but sensitive, or solicitous of the interests of public investors, are not among them.

So it shouldn't be surprising that one of the ways they have of profiting from the passively investing public is called "date rape". In the pits, physical or electronic, that means betting against the certainty that commodity index investors' positions are rolled in a mechanistic manner every month, in known patterns on particular days. The phenomenon could be called index roll congestion, or some other euphemism, but as we noted, these are not people who worry about your feelings.

Are speculators unfairly squeezing investors, or are they simply acting out their part by exploiting (in the sense of taking advantage) a telegraphed signal from their counterparty?

Read, "How the speculators profit from investors in commodities", and this response letter, and decide.

The next article from FT's Jeremy Grant also falls in the area of "gaming the trade". His recent report, "Flame blame: how traders may distort energy costs", focuses on the idea that traders in the over-the-counter energy derivatives market are manipulating prices for energy through their low-visibility dealings.

In the following excerpt, Grant explains why American utility groups are upset over the influence OTC traders have on energy prices.

"Over-the-counter" markets have become a powerful feature of the way energy is traded globally - anything from petrol and petroleum futures or natural gas and gas futures to more complex derivatives such as energy swaps. Unlike on the New York Mercantile Exchange, the world's biggest market for oil and natural gas, OTC trading is not conducted in a pit where traders shout orders back and forth and the exchange reports their trades to the Commodity Futures Trading Commission (CFTC), the US regulator empowered to oversee on-exchange energy futures.

Instead, participants anywhere in the world negotiate specially tailored contracts with each other - linked by a telephone or computer screen connected to a special platform such as the Intercontinental Exchange, which operates a rapidly growing electronic crude oil futures trading business out of London.

Such ventures have become a popular forum for global trading and account for up to 75 per cent of energy trading in the US - larger than the energy derivatives markets on regular exchanges. Traders are investment banks or, increasingly, hedge funds. But - to the alarm of the Iowa utility group and others - OTC markets have been only lightly regulated since their emergence as a force in energy dealings. Regular exchanges such as Nymex are fully regulated.

Groups like the Iowa utilities and the public gas association are increasingly worried that this means the government is virtually blind to how the OTC markets are operating - and that the prices that consumers pay for energy could be artificially inflated by anonymous traders who operate in cyberspace.

These utility groups are hoping for more regulation over the OTC derivatives markets in the hope that "transparency" might be achieved.

Growth in the over-the-counter derivatives market has been staggering. The print edition of this article was accompanied by an interesting little graph showing the growth of OTC derivatives markets in relation to exchange-traded derivatives. If memory serves, the OTC derivatives market surpassed its exchange-listed counterpart in the early 1990s and has far outpaced it since.

Here is a (PDF file) table from the Bank For International Settlements that gives a snapshot of the OTC derivatives market as of June 2006. The notional amount of all contracts for this period was around 369.9 trillion dollars.

Thursday, January 25, 2007

Tocqueville's John Hathaway on gold

Earlier in the week, Dow Theory Letters writer Richard Russell reprinted some interesting remarks from John Hathaway of Tocqueville Asset Management on gold. I'd like to include some of those comments here.

From Hathaway's 2006 essay, "Trivial Pusuit?":

The idea that all “hard” assets provide a safe haven from depreciating currencies is a dangerous one. It might seem valid for a while based upon the power of common belief to generate capital flows, but it will inevitably fall apart during periods of severe economic distortion caused by monetary imbalances.

Efforts to trivialize gold’s monetary significance are a key to the present day money illusion, that more paper equals more prosperity. It is far more palatable to the political and economic establishment to explain away the strength in the price of gold as a consequence of growing Asian prosperity or the reflection of an extreme fringe of investment thought (as suggested by Greenspan) than to read it as a reflection of flawed economic policies, archaic conventions, and corrupt institutions.

A rise in the price of gold is equivalent to a fall in the value of financial assets. The strength in the metal is a sign of distrust in the ability of present day financial instruments, including paper currencies, to preserve capital over time. The global bid for physical gold is potentially immense. It will be generated not by ephemeral and flaky speculative interests seeking instant gratification, but rather by the considered actions of capital interests with a long term perspective driven primarily by the desire to convey present day wealth to future generations.

Russell capped off this discussion in his "daily remarks" letter by confirming his belief in the value of gold and precious metals as a time-honored store of value. When it came to deciding what to pass down to his children and grandchildren, he said he would not hand them a portfolio of stocks or a house, but gold coins.

Food for thought.

Tuesday, January 23, 2007

Inflation and interest rates

A couple of interesting reads on the topics of inflation and interest rates. Thought I'd post them together here, as these issues are interrelated. Overlooked in the minds of many investors maybe, but interrelated nonetheless.

First off, Barry Ritholtz at the Big Picture discusses some of the most ridiculous assertions embedded in the whole inflation debate (what is inflation, what isn't it?). Read, "Your personal inflation rate", and, "The Sordid Truth About Inflation", to find out how inflation is understated while growth is overstated.

Next, we have an article from Mike Shedlock that takes a long term view of the world's experiment in money printing and nonstop credit creation and the resultant asset bubbles.

A brief passage from Shedlock's article, "Gold, M3, and Willingness to Lend", in which Mike discusses the rampant monetary expansion that has taken place in recent years:

This was the biggest experiment in fiscal madness the world has ever seen. Unleashed from the "burden" of gold redemptions, credit has soared far faster than base money supply. This in turn fueled asset bubble after asset bubble, but most notably in the global equity markets and housing.

Which brings us to the main question in Mike's article. Can money printing and credit expansion continue indefinitely, keeping asset bubbles aloft? He answers thusly:

Right now there is enormous faith in the ability of the Fed to keep the bubble inflated. Inflationists fail to see that much of that credit borrowed into existence can never be paid back.

Yet somehow everyone thinks the Fed will expand money enough to matter if a credit bust happens. It has never worked that way in history. Take a good hard look at monetary base vs. M3. Interest rate policy at the Fed can not fuel that expansion forever.

The Treasury Department has massive ability to print money but it can not force banks to lend. It is important to understand the difference. Credit lending standards can only go far so far before bankruptcies and foreclosures force a change. That change is finally upon us and a huge secular reversal is now underway.

Check out the article for Mike's charts of M3 expansion and a long term look at the growth in the monetary base. Be sure to also see Mike's related article on money supply and recessions for an interesting view of the various money supply measures.

Since Mike concludes his latest article by discussing the possibility of a coming credit bust, I thought it would be interesting to include a little bit more about the background of credit and interest rates. How else am I going to learn about this stuff?

Here's an article by Hans F. Sennholz on the market rate of interest; it is a brief, but educational, eye-opener on the subject.

And since David Kotok of Cumberland Advisors, writing in the latest edition of John Mauldin's "Outside the Box" column, advises us to look to Wikipedia for their entry on "real interest rate", I think I'll do just that.

How silly of me. I almost forgot to include Sam Zell's 2005 holiday greetings card and commentary on the world's liquidity glut and the resulting global yield compression. Features a nice little ditty sung to the tune of "Raindrops Keep Falling On My Head". Enjoy.

Monday, January 22, 2007

Double down on commodities?

Goldmand Sachs and Deutsche Bank are advising clients to double down on their commodities bets this year, Bloomberg reports. From Bloomberg.com:

Anyone who followed the advice of Goldman Sachs Group Inc. last year and invested $10 million in the Goldman Sachs Commodity Index would have lost 15 percent, or $1.5 million.

Like so many of Wall Street's best and brightest, Goldman, the biggest securities firm by market value, says it wasn't wrong, just early, and to expect an 8.1 percent return in 2007.

``The long-term secular story is very much intact,'' Jeff Currie, global head of commodities research at New York-based Goldman, told customers in London earlier this month. That's the same outlook provided 13 months ago by Arun Assumall, the firm's London-based head of commodities sales.

Like Goldman, Deutsche Bank AG isn't discouraging anyone from doubling down in what increasingly looks like a bear market. Germany's largest bank in September said oil will trade between $60 and $70 a barrel this year, well above the $49.90 fetched last week. Barclays Capital, the securities unit of the U.K.'s No. 3 bank, said four months ago crude won't drop below $60.

As losses mount in copper, oil and sugar, these firms say the 20 percent plunge in commodities, as measured by the Reuters/Jefferies CRB Index, since May offers a chance to buy before demand from China and India causes a rebound. History shows otherwise. The CRB index dropped at least 20 percent six times since 1970, and on average, fell a further 7.7 percent before bottoming.

First off, as far as their rationale for investing goes, I hope you've got a better command of return-related math if you're taking their advice. If Goldman is calling for investors to stay put in the index for a multi-year holding period, that's one thing. But the rationale for this call seems to be more of a "wait till next year" justification.

As the article reports, "Goldman...says it isn't wrong, just early...to expect an 8.1 percent return in 2007".

Well, if you're banking on a one year catch up performance, I've got news for you. After suffering a 15 percent loss in the GSCI last year, you'll need a gain of about 17.65 percent this year just to break even. Banking on an 8.1 percent gain this year isn't going to make you whole.

Okay, maybe that's just the way they interperated the call for the article, or I'm just taking the wrong impression from that report. But it is a point to consider.

Moving on, it's interesting to see these guys touting the whole China and India demand factor as rationale for getting in at this date. We haven't seen the big slowdown in China yet that everyone's been anticipating for so long. And the whole Asian demand story is what's been partly responsible for powering the commodities higher since 2001.

They say this drop in the commodity indexes reflects a buying opportunity before the next wave of Chinese and Indian demand takes commodities higher. But you know what? I don't think it's going to be as easy as all that. I think that after a one-two year correction in the overall commodity indexes (CRB and GSCI to name two of the most widely followed), the next leg up in the commodity bull market will be powered by an altogether different story.

The demand from Asia will likely remain as the emerging economies industrialize, produce more goods, and consume more resources, but I think by that time this will be the accepted background foundation story to the ongoing commodity bull market.

When the "secular bull" really heats up (if Bannister, Rogers, et al. are correct in their long-term forecasts) I think you'll begin to hear people voicing "new" explanations for the rise in commodities and tangible asset classes. More people will have picked up on the story of rising global liquidities, the shift from paper to tangible assets, and the increased involvement of pensions and investment funds in the commodities arena.

By that time you will also begin to see more involvement at the retail level as well. Maybe someone you know will begin speculating on commodity futures or you'll feel more comfortable adding commodity ETFs and resource focused mutual funds in your portfolio.

Maybe Jim Rogers' book, Hot Commodities, will have shipped its revised third edition. Or maybe, as Clyde Harrison told me in 2003, you'll see Maria Bartiromo reporting from the Chicago grain futures pits. We'll know better when that time arrives.

In the meantime, I want to make note of the fact that we should look behind the indexes and take a look at individual commodities and the various commodity subgroups. We should probably become more selective and look to the fundamentals and performance characteristics of individual commodities and their related subgroups, whether they be grains, softs, or precious metals.

You might want to zero in and be more selective by examining the bull and bear case for each commodity group or each individual commodity, a theme that was stressed in our July article, "The Case for Commodities".

As far as the indexes go, each of the leading commodity indexes reflects a certain weighting (or perhaps a "total return" makeup) that might influence their performance. Take a little bit of time if you haven't already (something I'm trying to learn to do) to check out the various commodity indexes and familiarize yourself with the differences between them. It could help you understand a bit more about the commodity complex.

Sunday, January 21, 2007

FSO Newshour updates

Been catching up with the last couple of weeks of Financial Sense Newshour broadcasts. Lots of topics covered here - definitely give the broadcasts a listen if you haven't already.

Some of the highlights from the recent January 13 and January 20 broadcast:

Jim Puplava and his panel of Newshour experts and guests cover the outlook for the economy, a technical overview of the markets, forecasts on weather trends and the resulting impact on commodity markets (with guest Evelyn Garris of the Browning Newsletter), and opinions on energy and metals markets.

While listening to the first hour of this week's broadcast, I hear energy panel expert, Richard Loomis make some interesting comments on our nation's "energy literacy". This is a competency that Loomis feels is lacking in most individuals, despite the fact that many of us are influencing energy outcomes through politics, investment, and even our daily use of fuel and electricity.

Give a listen and hear Loomis' view on how consumers are being robbed of choice when it comes to selecting our energy future.

Of course, you will not want to miss this week's "guest expert" interview with Marc Faber. Always an interesting and entertaining guest, Marc will be giving us his view of what lies ahead in 2007.

Do check it out and enjoy!

Friday, January 19, 2007

Falling Empires and Their Currencies

I came across a couple of really great articles I'd like to share with you. It should be especially interesting to those interested in monetary history, world history, and politics.

For those who haven't already seen it up at Financialsense.com, there is a two part article series written by Rolf Nef entitled, "Falling Empires and Their Currencies, Part 1" and "Falling Empires and Their Currencies, Part 2".

I've read part one and I'll be rereading it before moving onto part two. Lots of interesting graphs and commentary that explains the history behind the rise and fall of nations/empires and their currencies.

Definitely give this a look.

Thursday, January 18, 2007

Jim Rogers sees opportunity in ags, oil

Jim Rogers spoke recently with Bloomberg News, voicing his continued optimism for overlooked agricultural commodities such as soybeans and cotton.

Rogers says he sees the most opportunity in depressed agricultural commodities, many of which are well below their inflation adjusted highs.

As for the metals segment of the commodities market, Rogers acknowledges that prices for copper and aluminum are at or near significant highs and that they will need to correct at some point.

However, he see a continued bull market for commodities and noted that metals such as copper could continue to move higher after undergoing a normal correction period.

Check out the video, and be sure to also check out Rogers' continued bullish call on oil, detailed in the Bloomberg.com article, "Rogers Says Oil Will Rise to $100 After `Correction'".

Wednesday, January 17, 2007

Altucher on ETFs

James Altucher's latest FT column gives the low down on some new fangled ETFs that might help individual investors with their investment strategy.

In "ETFs with no fund managers", Altucher describes why the ETFs he has selected are a good choice for enterprising investors looking to divorce themselves from indexing and the world of hedge funds.

These are ETFs that are fundamentally oriented, focusing on building baskets of stocks that Wall Street has incorrectly priced according to academic research, backtesting and experience.

The jury is still out on how these ETFs will perform over time but I, for one, think they are at the very least great alternatives to the standard fare. In the best case, they will significantly outperform.

Check out the article to read up on James' picks. All standard disclaimers apply; remember to perform your due dillegence and consult your trusted advisor when selecting investments.

Monday, January 15, 2007

Energy makes the world go 'round

Looking at the world of energy and hydrocarbon fuel supplies, we see a couple of interesting news items out today.

Bloomberg jumps into the ongoing critique of Putin's Russia and Chavez's "21st century socialism" in, "Chavez, Putin Use Power Gained From Open Markets to Close Them".

The article argues that revenues brought about by high resource prices will not be sufficient to drive the Venezuelan and Russian economies forward, as actions against foreign companies have driven away much needed investment and foreign expertise. An excerpt:

State takeovers have made foreign companies reluctant to increase spending or production, Aslund says. ``Russia doesn't need foreign direct investment for the sake of the money,'' he says. ``They need it for the technology, for the management it brings.''

A continued plunge in oil prices, which reached a 19-month low of about $52 a barrel last week, would rob governments of revenue as production stagnates. Chavez ``will be in bad shape, he'll be squeezed,'' O'Neil says.

Even gains from a rebound in prices would be short-lived as political leaders scare off investment, says Kenneth Rogoff, a former chief economist at the International Monetary Fund.

``Commodity-rich countries are living off the success of market oriented-economies,'' says Rogoff, now a professor at Harvard University. ``Twenty-first century socialism will do no better than 20th century socialism did.''

These points are well taken, but notice that noone is saying that the measures taken by these countries in favor of nationalization are, on their face, wrong. I guess they wanted to avoid an ideological slant in favor of a pragmatic sort of argument. So the focus of this particular piece is the shortsightedness of these resource-rich nations, rather than their blatant disregard for contracts, etc.

Now, speaking along the lines of energy scarcity, The Oil Drum has posted a couple of interesting articles in their latest edition of Drumbeat. These are the ones I thought I'd share with you.

In, "Deluded", Kurt Cobb wonders if America and its politicians are being led astray by their belief that remaining oil and gas resources are plentiful and waiting to be exploited.

Even after the Iraq civil war ends--and it will end someday though that day is probably many years away--the government which controls Iraq may not be the one now in charge or may, in fact, turn out to be three governments controlling a partitioned Iraq. Even if a unified Iraq survives, what would prevent it from changing the laws governing oil production, revoking existing contracts or simply renationalizing the oil industry?

An Iraq at peace may find itself capable of doing any of these with the broad support of its people. Certainly, some will say that a continued U. S. military presence in Iraq would cow the country into honoring any agreements made under the law. But who now believes, given emerging political and ongoing fiscal realities in the United States, that the U. S. military will remain in Iraq to the conclusion of the civil war and for many years after that?

Read this piece for an insight into why the country's thinking over Iraq and its potential oil supplies is largely "delusional".

Michael Klare gets a bit darker as he asks, "Is Energo-fascism in your future?".

Klare sees the beginnings of an emergent global energy race, wherein the powerful nations scramble to lock down all "strategic" energy supplies and the U.S. military is transformed into a "global oil protection service".

This emerging reality will set the foundation for a kind of global fascism, as state intrusions into public and private life are increased (as an increased reliance on nuclear energy leads to surveillance against sabotage threats and illicit proliferation). According to Klare:

Together, these and related phenomena constitute the basic characteristics of an emerging global Energo-fascism. Disparate as they may seem, they all share a common feature: increasing state involvement in the procurement, transportation, and allocation of energy supplies, accompanied by a greater inclination to employ force against those who resist the state's priorities in these areas.

As in classical twentieth century fascism, the state will assume ever greater control over all aspects of public and private life in pursuit of what is said to be an essential national interest: the acquisition of sufficient energy to keep the economy functioning and public services (including the military) running.

Is this dark view a real glimpse into the future or just "doom and gloom" paranoia?

Saturday, January 13, 2007

Ron Paul seeks presidency

Texas Congressman Ron Paul has filed papers to create a presidential exploratory committe, which will allow him to raise money for a presidential campaign.

The Associated Press and Guardian Unlimited report:

HOUSTON (AP) - Rep. Ron Paul, the iconoclastic, nine-term lawmaker from southeast Texas, took the first step Thursday toward a second, quixotic presidential bid - this time as a Republican.

Paul filed papers in Texas to create a presidential exploratory committee that will allow him to raise money. In 1988, Paul was the Libertarian nominee for president and received more than 400,000 votes.

Kent Snyder, the chairman of Paul's exploratory committee and a former staffer on Paul's Libertarian campaign, said the congressman knows he's a long shot.

``There's no question that it's an uphill battle, and that Dr. Paul is an underdog,'' Snyder said. ``But we think it's well worth doing and we'll let the voters decide.''

Paul limits his view of the role of the federal government to those duties laid out in the Constitution. As a result, he sometimes casts votes at odds with his constituents and other Republicans.

He was one of a handful of Republicans to vote in 2002 against giving President Bush the authority to use military force in Iraq, contending that only Congress had the power to declare war. At times, he has voted against funds for the military.

Paul bills himself as ``The Taxpayers' Best Friend,'' and is routinely ranked either first or second in the House by the National Taxpayers Union, a national group advocating low taxes and limited government.

Libertarian or Republican, he's got my vote. Thanks to 321gold.com for posting this news on their site (funny to have come across this report in a British newspaper).

Friday, January 12, 2007

World's financial assets valued at $140 trillion

Thanks to Barry Ritholtz at the Big Picture for highlighting this story from the Wall St. Journal.

From, "World's assets hit record value of $140 trillion":

The world's financial system is overflowing with stocks, bonds and other financial assets -- $140 trillion worth, to be precise.

The figure was released in a study by McKinsey & Co. that maps financial assets around the globe and seeks to track the flows of these assets as they move from one region to another, putting hard numbers on the oceans of capital washing up around the globe.

At $140 trillion in 2005, the value of the world's financial assets hit a new peak and was more than three times as large as the total output of goods and services produced across the planet that year.

The study, released today, paints a picture of a world in which investors and the banks that manage their money are spreading their bets more broadly. Flows of investment across borders hit $6 trillion in 2005, McKinsey said, above levels reached at the height of the 1990s stock-market bubble and more than double the figure in 2002.

The article points out that the U.S. currently takes in 85 percent of all financial flows from countries that are net exporters of capital. And hey, there's a cool little graphic to illustrate this point as well.

What will this chart look like ten years from now?

Investment firms boycott Thai debt

In the ongoing fallout over recent currency controls imposed on foreign investors, Bloomberg reports that some fund managers have stopped buying Thailand's debt.

Jan. 12 (Bloomberg) -- Global bond fund managers are boycotting Thailand's debt because of government curbs on foreign investors, raising borrowing costs in Southeast Asia's second-biggest economy.

ING Investment Management, part of the largest Dutch financial services company, won't buy Thai bonds after the central bank said Dec. 18 it will fine investors who sell assets within a year of purchase. Aberdeen Asset Management in Bangkok, part of the Scottish fund group focused on Asia, sold half its Thai bonds due in 10 years or more, said Pongtharin Sapayanon, who helps oversee $1.6 billion.

``We won't be investing,'' said Joel Kim, a Hong Kong-based fund manager who helps oversee $10 billion at ING. ``There's going to be very little foreign involvement.''

Fund managers are wary because the government has revised investment rules six times since September, when the military seized power in a bloodless coup. Standard & Poor's this week said it will lower the outlook on $44.1 billion of local debt should an exodus of investors slow economic growth.

Basically what we're seeing, in the wake of these currency control measures, is a continuation of the investment community's negative sentiment towards Thailand. The article goes on to describe how Thailand's borrowing costs will rise and also discusses the possibility of further debt downgrades.

Marc Faber is also quoted in the Bloomberg article, echoing the sentiments he made here in December and in his recent Bloomberg video appearance.

``The way the measures were implemented was wrong and eroded confidence,'' said Marc Faber, founder of Hong Kong-based Marc Faber Ltd., which manages about $300 million in assets. Faber, who lives in Thailand, says he won't invest in Thai bonds because a ``severe correction'' in global markets will push yields higher in emerging markets.

The investment community is still hoping that Thailand's experience will provide a lesson for other emerging market nations.

Wednesday, January 10, 2007

Banker's patents: locking down financial innovation

You've heard of patents on inventions and intellectual property.

Now the financial industry is looking to march in step with the trend towards patenting ideas and innovations, as bankers get ready to seize control over newly created financial products and service methods with patent protection.

The Financial Times reports on a possible sea change in the financial and investment industries in "Banks lay traps for copycats".

Bankers have historically been highly aggressive in protecting their turf – and profits – but surprisingly bad at stopping rivals from copying ideas. While patents are a vital tool for, say, pharmaceutical companies, their use has not been widespread in finance.

As a result, whenever a bank produces a startling innovation, it is quickly copied elsewhere.
When ABN Amro, for example, came up with a product called a “constant proportion debt obligation” last summer, other banks replicated the scheme within days.

In recent years, however, attitudes to intellectual property have undergone a subtle shift, as banks and other financial companies have become much more active in filing patents, particularly in the US.

Okay, that's the good news. Here's the downside (there's always a downside, right?):

Banks now view intellectual property as an important operational risk, say lawyers. Investment banks and other financial services companies are actively building portfolios of business process patents.

Some in the financial world view this with dismay. Satyajit Das, a former trader who now works as a consultant, argues that the rise of financial patents could crush innovation.

“Just imagine if something such as Black-Scholes had been patented – it would never have circulated so widely, and [created] the whole options market,” he says. “Patents will just end up enriching the lawyers.”

Lawyers – perhaps unsurprisingly – dispute this. “If you have patents in industry, why shouldn’t you protect intellectual property in finance too?” asks a lawyer at a US bank.

I remember a story in Michael Lewis' Liar's Poker that revolved around the issue of financial innovation in investment banks.

Working at Solomon Brothers in the 1980s, Lewis and a colleague managed to invent an entirely new product for speculating on German bonds (the exact nature of the product eludes me now), an idea that was subsequently stolen by a more highly-placed co-worker.

At that time, the invention of a new financial instrument was enough to give the originating firm a head start in that market and bragging rights over other firms. Over time, competitors would imitate or build on the product, making it more widely available. A very free market kind of ideal.

Now it seems, the rush to patent everything under the sun has hit another industry. While not as egregious as the practice of patenting human genomes, etc., it is another leg in the boat for IP and the industry that has grown up around it.

Is this wise? Maybe someone with a first hand view of this field will provide further insight. In the meantime, see another interesting viewpoint in "Bastiat on patents and monopoly".

Tuesday, January 09, 2007

Update on commodity index reweightings

A bit of an update to yesterday's news on reweightings in the Goldman Sachs Commodity Index (GSCI).

While we were searching to find the large changes in energy weigtings reported by the NY Post (see update in yesterday's GSCI post), we came across some notable shifts in the makeup of the Dow Jones-AIG Commodity Index.

The print edition of today's Financial Times reported notable changes in the Dow Jones-AIG's weightings for base metals and natural gas.

Base metal prices extended their slide, with nickel and zinc prices falling after an announcement by Dow Jones that it is adjusting the weightings of the 19 futures contracts in its Dow Jones-AIG Commodity Index. It said nickel would be cut to 2.7 per cent from 5.7 per cent and zinc would be cut to 2.8 per cent from 4.9 per cent.

Dow Jones said it would boost the weighting of US natural gas to 13 per cent from 7.3 per cent. The company rebalances its benchmark commodity index at the start of each year. Historically it reduces the weighting of the best performing commodities from the previous year, and increases the weighting of underperforming commodities.

Hope we're up to date on these issues. Sorry for the delay in posting, we had some difficulties in accessing & editing the blog earlier today.

And for more on the recent commodities action and base metals correction, please see Rob Kirby's FSO Monday market wrap up, as well as George Kleinman's latest article, "Collapse or Correction?". Good reading!

Monday, January 08, 2007

Marc Faber warns of asset market corrections

See this Bloomberg News video segment of Dr. Marc Faber giving a big picture overview of the US and world economy.

Within the first few minutes, Faber takes the viewers and program anchor to school on a multitude of economic/financial issues.

His response to the anchor's assertion that the Fed has done very well in keeping money and liquidity tight and curtailing the easy money policies of the past:

"Well, I think that the Fed, since June 2004, has increased the Fed Funds rate from 1 percent to 5.25 percent. But money hasn't been tight, because the definition of tight money is that credit/debt...credit market volume, or the debt growth, slows down considerably. That is tight money.

And believe me, when you have tight money the art market doesn't go up by 27 percent like in the US last year. And you don't see new highs in stocks, and you don't see new highs in asset markets like commodities and real estate..."

Don't miss this.

Retooling the GSCI

We heard today some more about rejiggering in the Goldman Sachs Commodity Index.

Some component weightings have been changed, and though the changes seem to be far more slight than the energy weighting changes that occurred last summer, they still may have played a great role in last week's commodities drop, according to Joe Duarte and the Bear Mountain Bull.

The NY Post reports:

Goldman cut the energy portion by as much as 50 percent in some of the sub-indexes that comprise the widely followed Goldman Sachs Commodity Index, tamping down moves to buy them by large investment funds who mimic Goldman's index.

The changes took effect this month and apply for all of 2007, a Goldman spokesman said.

Crude oil futures plunged 9 percent Wednesday and Thursday to $55 a barrel, before settling Friday at $56.31. The two-day decline was the sharpest since December 2004.

I took a look at the component tables earlier today, and like Joe Duarte, I'm unable to see the large percentage cuts in energy components cited by the NY Post article. Anyone know more about this?

Update: Regarding cuts in energy weighting, see the Bear Mountain Bull's post (linked above). He points out that the old (New York Harbor) unleaded gasoline contract has been dropped in favor of the RBOB gas contract. Both contracts traded side by side on NYMEX until January 2007. Total index weighting in gasoline is now 2.35%, down from 4.67% last year.

Hope we got that right.

Friday, January 05, 2007

Reads of the week

Some of the day's top news items to lead off some of the week's most interesting stories.

From the Financial Times, "Thailand stocks fall as anxieties deepen".

The New Year's bombings and the ensuing confusion over who is responsible for these acts of terror are adding to worry over Thailand's stability. This drama follows closely on the heels of December's market drop, when Thailand's military government decided to impose - and quickly withdraw - restrictions on foreign share investment.

"Bush claims power to open Americans' mail without warrants", the Christian Science Monitor reports. It was wise to hand over our remaining freedoms to this cabal. Makes Nixon look better everyday.

Onto more positive news. The Australian and FT Business report, "Falling births not a wealth hazard". I found this interesting because this is something I've been mulling over lately.

How many times have you heard someone say, "the demographics of country X are very worrying. At this rate, the young will be outnumbered by the old and the economy will suffer for these reasons..."? Yet at the same time, we know that reproductive rates tend to decline over time in the more advanced, industrialized economies.

In the conventional thinking, this poses a great problem. As the article points out, population growth is equated with economic growth. And I suppose it's very correct to worry over troubling demographic trends if you are trying to prop up the great social welfare programs implemented by those same "rich nations". But is that logical thinking or is the push to increase populations a desperate attempt to keep up with a grand ponzi scheme?

Read the article and get another, much needed perspective.

Jim Rogers (whose views on population are questioned in the aforementioned article) is the subject of yet another profile, this time in the New York Sun (via The Daily Telegraph). Read all about the The Indiana Jones of Investment.

The changing face of retail. "Now that Sears and HBC have new owners, what's the plan?", asks Globeandmail.com reporter Marina Strauss. How will Hudson's Bay Co. and Sears Canada change strategy now that they are being guided by US businessmen who do not hail from the retail arena?

Sears is controlled by hedge fund magnate Ed Lampert and Hudson's Bay by one Jerry Zucker, described by another Canadian outlet as, "a South Carolina industrialist and investor".

Creativity and entrepreneurship. One man's view of what it takes to be a creative and successful entrepreneur. Plus, a profile of another man who seems to fit that bill: India's MCX mogul, Jignesh Shah.

FT highlights the returns made in Argentina's debt warrants in their "Sparkling Trades" series.

A reader and contributer at The Oil Drum takes us back in time to the "Beginnings of UK 'Oil Age'". Well done.

And an article from Bloomberg.com that I found very cool. "Unlucky Pianist Martins Conducts $1 Concert at Carnegie Hall". Enjoy.

Thursday, January 04, 2007

Emerging market shares tumble

Yesterday's story, that of weakness in copper & base metals affecting shares of metals producers, is followed by today's news of a continued drop in metals prices and a slump in emerging market shares.

Bloomberg reports:

Jan. 4 (Bloomberg) -- Emerging-market stocks tumbled, led by Poland's biggest copper miner and a Brazilian iron ore producer, as the prospect of slower global economic growth pushed down metals prices.

The Morgan Stanley Capital International Emerging Markets Index, which tracks 25 developing markets, fell 1.6 percent, the biggest decline since September. Stock indexes in Poland, Hungary, Brazil and India all lost more than 1 percent.

Economic reports today showed demand for services in the U.S. slowed and pending sales of existing homes declined, adding to evidence growth is cooling. Copper fell to an eight-month low in New York, while aluminum, lead and tin also declined. Shares of Poland's KGHM Polska Miedz SA, Europe's biggest copper miner, dropped 4.9 percent

``Many emerging markets are dependent on commodity stocks,'' said Michal Bartek, who helps oversee $11 billion in global equities at New Star Asset Management Ltd. in London.

``Industries that are exposed to raw materials will be hit'' by price slumps.


Short term reality check in the wake of last year's gains or the beginning of something else altogether? We'll be watching.

Wednesday, January 03, 2007

Resource related: copper & uranium

We've seen the copper price breaking down a bit over the past couple of weeks. Now Reuters reports that the ongoing slide in copper prices is, predictably, showing its effect on the shares of copper producers.

The price of copper in New York has erased nearly 16.5 percent of its value since the start of December as steady builds in stock levels, coupled with softer demand in the United States and China, and receding threats of supply disruptions out of Chile, have all contributed to the market's bearish tone, analysts said.

The lower copper price, coupled with higher inventories, predictably sent copper mining company stocks down when the markets opened again after four days.

In morning trading on the New York Stock Exchange, Freeport stock was down $4.92, or 8.83 percent, at $50.81. Phelps Dodge Corp. (PD.N: Quote, Profile , Research), another U.S. copper producer, which Freeport is in the process of acquiring in a $25.8 billion deal, saw its stock fall 2.9 percent to $116.25.

Is the big Freeport-Phelps Dodge deal a sign of a top in the copper market? The deal was announced in November, just as copper prices began breaking down towards the lows of last spring/summer.

Plus, some metals watchers and newsletter writers are very skeptical about the merits of such a deal. From Resource Investor:

John Doody, Editor of Gold Stock Analyst, said the deal changes the basic nature of FCX, from gold being approximately 30% of total revenues to just about 6%.

“FCX’s significant free cash flow will no longer be used to pay extra dividends and buyback stock - it will now be used to payback debt,” said Doody.

He added that although the new FCX said it will not hedge copper, the company implied during the conference call it might monetize gold by selling a “gold preferred” as it had done in the past.

Szabo said his main concern was that the deal will give new company an estimated total debt of approximately $17.6 billion, or $15 billion net of cash, owed to financiers JPMorgan and Merrill Lynch.

“I'm not sure it is prudent to be taking two essentially debt free companies near the possible top of the base metals cycle and combining them to create a debt-laden giant copper producer,” said Szabo, adding “this looks to me like a bet on high copper prices.”

He said that this is a lot of debt to worry about should copper prices collapse, which is “something which more than one ‘metal guru’ views as a distinct possibility.”

Update: January 4th commentary from Andrew Cole of Metal Bulletin Research who suggests that copper may enjoy a continued bullish outlook following this ongoing near-term correction. See also, the accompanying video clip, courtesy of Moneycontrol India.

So there you have it. Have a look and come to your own conclusions.

Now onto the white-hot uranium market and some news we've been wanting to discuss since the new year.

Australian Prime Minister John Howard has asked his nation's state governments to withdraw restrictions on uranium mining, in an effort to capitalize on the country's mineable resources and the ongoing uranium boom.

From Bloomberg:

Australia, with 40 percent of the world's uranium's reserves, contributes just 23 percent of global output because miners such as BHP Billiton have been prevented from opening new pits. The bans were introduced in 1983 by the Labor Party, which lost office in 1996 to Howard's coalition government. Labor controls all eight state and territory governments and the party's policy will be reconsidered at a conference in April.

``I call upon state governments to end their bans on uranium mining and exploration, which stand in the way of investment, jobs and exports,'' Howard said in a statement e-mailed to Bloomberg News.

Prices for uranium, which is used to power plants that supply 16 percent of the world's electricity, have surged almost fourfold in the past three years. Higher coal, gas and oil prices and pressure to cut greenhouse gas emissions, blamed for global warming, are driving increased use of nuclear power.

Australia's federal government controls the sale of uranium while state and territory governments administer mining permits. Mining of the metal is limited to three sites: BHP Billiton's Olympic Dam mine in South Australia; Energy Resources of Australia Ltd.'s Ranger mine in the Northern Territory; and Heathgate Resources' Beverley mine in South Australia. Heathgate is owned by San Diego-based General Atomics.

Australia's "three mines" policy had limited mining to the sites mentioned above in the article. Many uranium share investors and nuclear energy proponents had been hoping for an eventual withdrawal of that policy and mindset. Looks like we're well on the way toward seeing that come about.

And on that note, we should mention that Mineweb is reporting on a hot IPO in the junior uranium maket.

The latest junior uranium explorer to hit the market is Perth-based uranium resource company Prime Minerals (ASX: PIM), which today has listed on the ASX, closing at a 190 per cent premium to its issue price, after its Initial Public Offer (IPO) was oversubscribed and raised A$2.2m.

Prime shares traded as high as 59 cents, a 195% premium of to the issue price of 20 cents, before closing at 58 cents, with more than 1.3 million shares traded.

See also, Sydney Morning Herald's story, "Hanging out for big uranium numbers" for more on the potential of some new Australian discoveries.

Tuesday, January 02, 2007

Subscribe to Finance Trends Matter.

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