To market, to market to buy a fat pig. The stalemate between the Russians and the "West" over the Ukrainian situation continues, I am advised by my parents that I can speak with great authority on this matter, my great grandmother (And I had the opportunity to meet her many times, she lived until the ripe old age of 101) was born in the Ukraine. In Kiev I think. She lived out the rest of her days in Versailles, I could think of a lot worse places to live, that is for sure! But honestly, I am as qualified to talk about the Crimean crisis as much as anyone else. I will say this however, I think that the capital markets (capitalism beat communism in the end 1917-1991) will dictate and temper the aggression that Putin has. If the value of the inner circles investments continue to fall heavily and the growth prospects in Russia dim and there is inflation as a result of a weakening Rouble, I think that President Putin will get a tap or ten on his shoulder.
Nobody is quite sure how rich Putin himself is. Some simple searches suggest he is worth around 70 billion Dollars. WHAT? How? Well, I read somewhere that he holds a 4.5 percent stake in Gazprom. Not sure if that is right. Indeed the other listed stakes that he (Putin) supposedly owns a 7 percent stake in oil company Surgutneftegas as well as a 50% stake in Swiss oil trading business by the name of Gunvor. But yet Putin is able to portray this "man of the people" image, shirtless, riding on horses, unflappable and everything that strong Russian people hope for. Proud of course. But in the capital markets, he will no doubt meet his match. The market has more liquidity than any one given institution or individual, unless of course they are cornering a bite sized acquisition.
So yesterday the local market closed the day much higher after being underwater from mid morning through to mid afternoon. We forgot to tell you that the only good thing about going into Winter (you can feel the chill a little) is that daylight savings in the US and Europe (and the UK) means that we get another hour of trade during our normal hours. That happened for the US on Monday, where they would have had to turn their clocks back an hour. So I guess you get one hour less of your March weekend, but gain it back later in the year. The extra hour for us locally here means that the US market opens at 15:30 local time, instead of 16:30 local time. Our market closes at 17:00 and this extra hour is fabulous for us. At least it means our market has direction for an extra hour, but more importantly, the market now closes at 10pm and not 11pm local time. So more TV watching time for different programs, it just bumps up an hour. But it is a reminder that daylight savings is not for us, but it impacts on us.
What do they know that we do not? The bears that is. There are numerous people always making market related predictions that are normally way out there. It is very rare that you will get someone who will attract attention when they say something like, if you invest 1 Dollar in the S&P 500 over a 35 year period from 1979 to 2013, it will end up being being nearly 53 Dollars, equating to a CAGR of 12 percent. That is an excellent return over a savings period of 35 years and guaranteed to see you through your golden years. Adjusted for inflation, that one Dollar over the same period would have turned into 15 Dollars, meaning that your real purchasing power would have increased 15 fold. But let us start today with one Dollar and invest it at the same return (12 percent) over 20 years, what do you end up getting? 10 Dollars. Or roughly doubling your money every seven and a bit years.
Differently put, let us presume that you have a pot of 10 thousand Dollars and you save 750 Dollars a month at a 12 percent per annum return for 20 years, what do you end up with? 744 thousand Dollars. Yes. Obviously Dollars twenty years out are not the same as today. But it is hard to save like this, it takes discipline and more importantly you need to stick to your guns whilst life happens. Life includes unforeseen expenses. It is John Lennon who said "Life is what happens to you while you're busy making other plans."
But more to the point that I am trying to make, when somebody says that the market is going to halve, there will be massive deflation and the financial systems will collapse. And more importantly, commodity prices will do x or y or z, but mostly in a markedly higher position to what they are now. Today I saw two articles that are a little "out there": Jeff Miller from a Dash of insight reviews one such doomsday prophet: FANCY FOOTWORK AND CONFIRMATION BIAS. But the one that caught me more was a throwback by Josh Brown, an article that Paul sent through in the middle of the night (I was sleeping, man flu hurts real bad) titled A man and his signals. The passing shot about a man (Granville) and his signals is worth repeating:
"No one has a system or set of signals that can be relied upon to do that in all market environments.
No one ever has, no one ever will. Granville didn't either.
Nor will any his modern-day successors."
All true. Ignore the doomsday prophets, if they knew everything then they would be able to be all in and concentrate on making money rather than telling people to trade around certain indicators or events. Beware the person telling you how to get rich by selling tickets to a conference. Normally overpriced ones. If they knew the answers, open a cheap low cost open ended fund and accept only retail clients. Make them money that way, rather than getting them to pay to hear you speak. End of little rant for the day.
Three years ago we sat horrified in the office as helicopter footage showed a tsunami roll in and devastate one of the most industrialised countries on the planet. The aftermath was a nuclear catastrophe at the Fukushima Daiichi power station, which lead the rest of the world to deeply rethink power generated in this form. Cynically I remember that everyone tried to be a nuclear expert, I suppose the inquisitive nature of all of us meant we had to be alongside those people to "solve" the issues.
An Economist tweet from their graphics department had this look at operating nuclear power stations. There are still many, many left. What amazed me about this graphic is that there are NO nuclear power stations in Australia or New Zealand. Italy has no nuclear power stations, all shutdown in the 80's and 1990. The biggest issues are the solid waste disposal, and understandably I can see whilst this is a cleaner way of generating electricity. But of course the waste is horrible, so is it really cleaner? I stupidly in a flu induced haze yesterday said something along the lines that this is the biggest investment theme of our time, alternative energy. Amongst many others of course!!!
On the anniversary of Japan's quake: Fukushima at three. The world's interest in nuclear power http://t.co/VT3InEEQsQ pic.twitter.com/NYGjIUVXUM
— The Economist (@ECONdailycharts) March 11, 2014
Michael's musings: Iron Ore
This week we have seen some of our miners taking heat, with Kumba Iron Ore in particular really feeling it. Monday saw Kumba Iron Ore down by 8.5%, about 4% of it was due to a dividend, and then a further 5.4% yesterday. Why the huge drop in price? The price of iron ore dropped on Monday by 8.3% to $104.7 per ton, it's lowest in over a year. The spark that started the drop was concerns that the demand for steel from China and by extension iron ore would not be as high as anticipated. Once the price started dropping, it gained momentum due to people using iron ore as collateral for loans, which meant that as the price dropped they had to sell some ore to ensure that their collateral value did not drop too low.
Where is the iron ore price heading in the future? According to BHP Billiton the medium term (the next 5 years) does not look great for the miners, with the growth in supply expected to grow by faster than the growth in demand. BHP expects China's demand for iron ore to keep growing (albeit at a slower rate each year) until about 2025 and at the same time the rest of the world's demand will also grow, the demand will be coming from an expected 1.2 billion people who will urbanise globally by 2030. The extra supply is to cater for the increased demand over the long term, the demand that should push iron ore prices up once the increased supply slows.
From BHP Billiton's point of view, increased supply may result in the price of iron ore dropping over the medium term but it will also result in their unit costs also dropping because they are bringing online low cost supplies. For Kumba Iron Ore, their Sishen mine which is their biggest contributor of Iron Ore has a unit cost of about $35 per ton which is expected to drop to about $33 in 2016 and their second biggest mine, Kolomela has a unit cost of about $24 a ton which is expected to drop to about $20.5 in 2016. If the Iron ore price stayed the same, the increased output as well as the lower unit costs would result in higher profits but with iron ore prices expected to drop, profits will most likely be subdued until demand growth outstrips supply growth.
BHP also point out that as there is a drive to become more environmentally friendly higher grades of iron ore will be needed because it is cleaner to make a higher grade of steel than a poor grade. This didn't sound right at first, but the reason is due to higher grades of iron ore having less impurities. In the case of carbon which needs to be removed, they blow pure oxygen into the molten metal, where the oxygen and carbon join to form carbon monoxide, not a gas that environmentalists want being released. This is good news for BHP and Kumba who are suppliers of high quality iron ore.
In the long term the iron ore assets are still quality assets and there is going to be a demand for what they are selling. Over the next couple of years though, unless there is unexpected demand for iron ore I think that Kumba's share price is going to struggle and BHP who have half their earnings in iron ore probably won't be shooting the lights out. BHP are of course diversified, so many of their other businesses can pick up the slack. Spare a thought for their copper business however.
Home again, home again, jiggety-jog. Markets are lower, the copper price was slashed leaving commodity stocks (other than gold companies) lower. Reason? Chinese jitters and copper being used as collateral. Beware, markets are bigger than you or your collateral.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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