 | | The Daily Reckoning | Thursday, December 9, 2010 |
- Have Mexican officials been reading The Daily Reckoning?
- A value investor's insight into an oft avoided marketplace...
- Plus, Bill Bonner on the motivations of man and plenty more...
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An Important Message from Eric Fry, Executive Editor of The Daily Reckoning
Before we dive into today's edition of The Daily Reckoning, we must issue our sincerest apologies to our valued guest columnist, James Turk. In yesterday's edition, entitled, "Investors to Silver: 'Let's Get Physical,'" we erroneously attributed the authorship to Frank Holmes (who is also a valued guest columnist, but not the one who wrote this particular column).
Instead, the author was James Turk, founder and chairman of GoldMoney, an excellent website that provides a convenient and economical way to buy and sell gold, silver and platinum online using the digital gold currency - a currency for which he was awarded four US patents.
Mr. Turk is a seasoned and insightful observer of the precious metals markets. Investors who wish to gain access to his analysis should visit his website regularly. Sorry the slip-up, James!
|  | | | A Step in the Right Direction | | Mexican Oil Goes from Public to Private | |  | | Joel Bowman |
Reporting from Baltimore, Maryland...
We arrived in Charm City late last night, after a lengthy layover in Houston. To say the air here is fresh, or crisp, would be an understatement. It's colder than a central banker's heart. Well, that may be a slight exaggeration. A fierce wind lashes off the Inner Harbor. Steam pours from the manholes lining the streets and billows into the night sky. The few brave - or destitute - souls who venture outside are bundled up in their winter woolies. It's a far cry from the balmy, Pacific Coast weather we'd been enjoying in Mexico of late. Speaking of our southern neighbor, here's a headline for you, Fellow Reckoner:
"In Major Shift, Mexico Allows Oil Drilling by Outsiders," says one of the newswires.
What's this? Has the Mexican government been thumbing through the virtual pages of our "fringy," "doom and gloom" publication? Earlier this week, as you may recall, we wrote anentire article outlining how needless pressure from Mexico's bureaucracy has, over the years, inhibited the full development of the nation's vast oil reserves.
"With heaven and earth conspiring to deliver such a bounty to the Mexican people," we wrote of the geologically freakish Cantarell Field deposit, "one is tempted, perhaps beyond better judgment, to ask: What could possibly go wrong? Enter Pemex, the nation's state-owned petroleum company. Again, it seems there is no privilege so vast as to render it beyond the destruction of the 'people's' government."
Mexico's crude production, under the "stewardship" of the state-owned Pemex, has traversed a steep, seemingly inexorable decline for the better part of the past decade.
"Despite annual revenues in excess of $75 billion dollars, Pemex is only able to survive today through its immense borrowing," we wrote. "Pemex pays out over 60% of its revenues in taxes and royalties. Those receipts, in turn, account for around 40% of the federal government's entire budget. As such, the state-owned dinosaur is now over $40 billion in the hole (so to speak) and, to make matters worse, is facing inexorable production decline in many of its fields, including that giant asteroid baby, Cantarell."
All this amounts to falling revenue for the Mexican government and, as a side non-benefit, imperiled US energy security. (The US is the Central American nation's largest customer - declining production there translates to more pressure on the US to "fill the tank" from other, relatively unfriendly nations abroad.)
But that all changed on Tuesday, when Mexico's supreme court decided to invite private companies - both domestic and foreign - into the marketplace for the first time in 70 years. Juan Jose Suarez Coppel, the CEO of Pemex, said he hopes the liberalization of the sector will help Mexico work toward production of 3 million barrels per day within ten years. There's plenty of room to go wrong, of course, but this seems like an uncharacteristically rational step in the right direction by the Mexican government. We'll see where the chips fall in due time.
Alas, where the tide of state strangulation recedes from one shore, it rises to wash away whole villages on another. Back here in the United States of 'merica, we see evidence of government involvement all around us. There are rules and laws against all sorts of things, all, we suppose, designed to help protect us from our infant-minded selves. "No loitering"... "No running"... "No standing on one's head."
And nowhere is the feeling of Big Brother more oppressive than in the sphere of economics. It's a government-sponsored recovery, we are told (though we hear little mention of the government-sponsored recession that preceded it...nor the government-sponsored depression that will likely follow).
For the most part, the media tends to view Obama/Bernanke policy like it's handed down from Mount Sinai: "Thou shall have thy cake and thou shall eat thy cake," seems to be the general gist of the story. More tax cuts...and more benefits. More spending...more credit for crooks...more deals and handshakes for deviants and shysters.
As far as we can tell, all this circus activity is doing little to inspire confidence in the markets. Yesterday, last we checked, major indexes were neither up enough to raise an eyebrow nor down enough to raise a smile. Gold, however, had taken a $30 nosedive by lunchtime...enough to remind us not to check the daily charts so...uh...daily. The precious metal, a very natural bet against the world's very unnatural fiat money, is in a decade-long bull market. A $30 single day move may be sufficient to entice some traders to take profits, but it's probably not enough to entice most investors to sell. And, with central bankers at the pump from the Potomac to the Thames to the Rhine and beyond, that's not likely to end any time soon.
Bill has much more on this below, but first, our resident value maven, Chris Mayer, digs up a few hidden treasures in a place most investors never think to look. Please enjoy...
| | | | Did You See The Video About The American Nuke Bomb LOST Under Ancient Ice Fields? |
Way back in 1968, an American B-52 crashed in northwest Greenland...
Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet...
But there's an unknown penny stock set to rise 2,000% from this sorry situation.
Sound unbelievable? Watch this presentation for proof...
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| | The Daily Reckoning Presents | | Africa: Open For Business | |  | | Chris Mayer |
Markets make opinions, the old saying goes. So it is hard to maintain old views on Africa as a place to avoid in the face of so much evidence to the contrary. A few snapshot images from the past few weeks should help you think differently about the continent.
There has already been a record $54 billion in buyouts in Africa this year - not including Wal-Mart's initial $4 billion offer for Massmart, an African retailer. There have also been a number of Africa-focused funds gathering money of late.
These investments are not fool's errands. The people behind them are not stupid. They see something: growth and opportunity.
The IMF recently upped its estimate for economic growth in sub-Saharan Africa to 5% for the year and 5.5% for next year. Africa is riding a boom of trade with resource-hungry China, but also with developing economies throughout Asia and Latin America. Money goes where it can get the best return. So far, African investments have offered higher returns. And prices remain far cheaper than developed markets, for similar assets.
Of course, Africa is an enormous continent of 54 countries - a diverse group, to say the least. It hardly makes sense, really, to talk about Africa as if it were a set of similar countries. It isn't. But there are pockets and regions and broad similarities of experience.
In any event, the opportunity in this vast area of 900 million people is hard to ignore.
Recently, I attended Grant's Fall Investment Conference in New York. One of the more interesting presenters was Francis Daniels, co-founder of the Africa Opportunity Fund, who delivered a talk titled Reflections of a Value Investor in Africa.
Afterward, we had lunch together and I got to chat with him a bit more about investing in Africa. Daniels is a soft-spoken, modest Ghanaian who left his home country in 1982 to study in Canada. By that time, he had witnessed six coups. The first was in 1966. "It had the tremendous benefit of giving me an unexpected school holiday," he said. But by the sixth attempt in 1982, he had a different view. "I was tired of coups and exhausted by Africa's seemingly perennial coups, corruption and mediocre leaders."
Over his 15-year career, he's invested in every region in Africa. His reflections included many super-cheap stocks that later delivered some multiple of his initial investment. For a Graham-and-Dodd investor, Africa was a carnival of riches. Price-to-earnings ratios of 2 or 3 times with 20% growth rates. Yields of 30% on convertible debt. All kinds of hidden treasures - such as free real estate or unrealized portfolio gains - lurked in the folds of African balance sheets. Africa, too, was rich in untapped natural resources that the world craved.
Africa, though, is famous for its resources, and a value investor has to figure out a way to apply these principles to natural resources or miss out on a big piece of the pie. Daniels made them work, and some of his best investments came from mining stocks. (Uramin, for example, was a uranium explorer in Namibia and South Africa. It delivered 1,000% returns in two years.)
Here is one of Daniels' favorite holdings... The stock is Zimplats, a platinum and palladium producer on the Great Dyke in Zimbabwe. It lists on the Aussie exchange under the ticker ZIM.
Zimplats does not produce refined platinum and palladium. Rather, it makes an intermediate product called matte, which it sells to refiners in South Africa. Impala Platinum of South Africa is the second largest producer of platinum in the world and has offtake agreements with Zimplats. It also owns 87% of the shares.
Daniels has owned Zimplats since 2003 and paid an average price of $2.25. Today, it is $12, but Daniels feels it is still too cheap. The stock trades for a price-to-earnings ratio of 10 times. Its enterprise value is $57 per ounce of reserves, compared to $193 for the industry.
Zimplats is also the lowest-cost producer in the world. Costs are $325 per ounce, versus the industry average of $948 per ounce. Zimplats mines from shallow depths at 50 meters below the surface, whereas South Africans have to go at least twice as deep.
Zimplats mines 350,000 ounces a year and plans to reach a million ounces. Its proved and probable reserves will last 67 years at current production. It has about six centuries of resource - yes, six centuries.
Let me finish with a few of Daniels' lessons from 15 years of investing in Africa, as I think these are applicable to investors everywhere:
- "Macro-time is slower than micro-time. It took a few years for the hyperinflationary logic of Zimbabwe's fiscal and monetary policies to end in actual hyperinflation." I think we are seeing the same thing happen in the US. While it's clear where deficits and money printing ultimately lead (i.e., high rates of inflation), the market has been slow to realize it, as shown by a 10-year Treasury rate still smaller than my hat size.
- "Government paper is riskier than private paper." This one sounds less surprising than it might have three years ago. But a slew of sovereign debt defaults (i.e., Greece, et al.) shows that, as Daniels says, "Fantastic promises prove to be just that in the long run."
- "The best way to preserve real wealth in Zimbabwe was to own the equity securities of companies that earned non-Zimbabwean dollars." Applied to the US, it would be to own the stocks of companies that earn their bread in stronger currencies.
These are just a few. I think Daniels shows a smart value investor can do very well in Africa. Of course, you could just buy his fund, which as I write trades for a 27% discount to underlying NAV. I also think Daniels' lessons in Africa are worth thinking about, even if you never invest in Africa.
Regards,
Chris Mayer,
for The Daily Reckoning
| | | | Exposed! How Wall Street's Breaking the Rules... |
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| | | | Bill Bonner | | Worlds Apart: A Firsthand Look at Emerging Market Growth | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Yes, we're back at home, after flying around the world. It was a good trip. No problems. No hassles. Everything went well.
What was the point?
"You know, my friends and relatives in the states still believe that the US is the greatest place in the world," explained an American in Melbourne, Australia. "They think the rest of the world is full of poor people who can't wait to emigrate to the US. They need to get out more."
So we get out. We open our eyes. We look around.
And what do we see?
We see a whole world full of people who are hustling and bustling...schlepping and bussing...each trying to gain an advantage...each looking for a way to get richer, faster.
The motivations all over the world are about the same. People generally want wealth, power and status. And they want to get it in the easiest possible way. But it can mean different things to different people...and they go about it differently too. In the mature economies, they look for subsidies and angles. Tax breaks. Bailouts. Boondoggles. Sinecures.
"We have plenty of corruption here in India, too," a colleague noted. "But most people know they can't get much from the government. They have no choice. They have to start a business or get a job."
Nothing stands still. A few years ago, the Russkies, the Indians and the Chinese were all very helpfully sitting on the sidelines. With their goofy theories and their counterproductive policies, they posed no competition. Americans found it easy to feel superior. Half the world had tied its hands behind its back.
But in the '70s and '80s, things began to change. "To get rich is glorious," said Deng Xiaoping. "Perestroika," said Gorbachev. And now they're all at it. Indians, Brazilians, Turks, Indonesians - they all have faster growth rates and much less debt than the developed countries. China and Turkey are both growing about 5 times faster than the US. India, Brazil and a dozen other countries aren't far behind.
The latest test scores show Chinese math students in Shanghai far ahead of Americans. And the latest reports tell us Chinese trains are setting records - at 300 mph.
Nothing is off limits. No industry is safe. Nobody can expect a free lunch forever.
In India, we rode in a Nano, the car Tata Motors is selling for $2,500. It was a little loud...but surprisingly spacious and comfortable. For getting around town, it seems perfectly adequate. And soon it will be available in the US. How will Detroit compete with these guys on the low end? And on the high end, there's plenty of competition too - from Japan and Germany.
"But wait...Germany is a mature economy too."
Well, yes...and no. Germany's factories and infrastructure were flattened in WWII. It had to rebuild from the bottom up. Its post-war government was completely new. Its currency just came out less than 10 years ago.
Besides that, a large piece of present-day Germany lived under the heel of the Soviets for 45 years. They had a close-hand look at what central planning can do to an economy.
America's government, meanwhile, has been in business since 1776. Its economy has been the biggest in the world for the last 110 years. It was the only major combatant in WWII to come out the other end with its wartime plant and equipment intact. It has had the world's richest people and the most gold for many years.
"Nothing fails like success," is one of our Daily Reckoning dicta. Will it fail now, or later? We don't know. But readers are urged to get out more...and draw their own conclusions.
And more thoughts...
The news yesterday was all about the tax deal. Did President Obama drop the ball completely? He was against extending the tax cuts. How come he caved in? Will he alienate his voter base?
Or did he just pull a fast one on the Republicans? The tax cuts/unemployment benefit extension deal is a kind of "stealth stimulus," say some commentators. It will stimulate the economy, with no need for another vote on Capitol Hill. The Tea Party people were dead set against any further stimulus. But there it is.
"Obama tax move lifts hopes for growth," says The Financial Times. It will even eliminate the need for more QE, said one hopeful commentator. The dollar will be stronger as a result.
Stocks went up 13 points on the Dow yesterday - nothing at all, in other words. But gold fell $25.
But so far, bonds are telling us a different story. Yields on the 10- year T-note are over 3% - at 6-month highs. The feds have pledged to buy more than $800 billion worth of government bonds. And still prices go down. Go figure.
What we figure is that investors are wary. At least a fair number of them must be thinking what we're thinking - that the authorities don't know what they're doing...that they are going to lose control of inflation...and/or that the economy is going to collapse despite all their stimuli and money printing.
The effect of the tax deal (assuming it is passed) will be to increase government spending and lower government revenues. That will produce a federal budget deficit, according to official sources, of more than 8%. Meanwhile, the states are looking at huge deficits of their own. With muni bonds falling, they will have a hard time raising more money and may be pushed into bankruptcy - roughly the same drama that is on the European stage.
While bonds fall, commodities soar.
"Investors pile into commodities," says The Wall Street Journal.
Hmmm... They must be worried about inflation...or maybe they're just speculating. It looks to us as though the feds are creating yet another bubble.
It's a set-up, dear reader. Watch out for commodities and stocks. And oh yes, watch out for bonds too.
*** Except for the very old, Americans have generally lived pretty easy, comfortable, safe, and prosperous lives.
"That's why this downturn will be worse than the Great Depression," says a particularly gloomy friend. "Americans are not prepared for adversity. During the Great Depression, most people still lived on farms. They heated their houses with wood they cut themselves. They grew their own vegetables. They canned their own fruit. They raised their own hogs. They knew how to survive.
"That's not true today. We don't know what would happen in a major crisis. But people are not ready for it. They depend on the system...the cash machines and grocery stores...and the unemployment compensation and food stamps. I don't think they could stand it if theses things break down."
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Betting on Gold a Bet Against Currency Management
While stocks have been going nowhere, guess what’s been going up. You know. Gold! That’s right, gold has been in a bull market for the last 10 years. And this year, gold is up 28%. That’s a trend we like. Because it is long. Solid. And it shows no sign of stopping anytime soon. Why? Because the world monetary system has a rendezvous ahead of it too...a rendezvous with destruction. Until that’s behind us, it’s still ahead of us.
Emerging Markets and Commodities: Where Stimulus is REALLY Going
The US Federal Reserve: A Bank that Will Live in Infamy | Bernanke Ignores 4,500 Years of Failed Monetary Policy
I naturally wanted to get my two-cents in about Ben Bernanke’s interview on 60 Minutes where he answered softball questions by explaining that everything will be fine and there is no cause for alarm because he and the Federal Reserve were “on the job,” although things will probably get worse for a long time, while he is “100 percent” certain that he could prevent inflation in prices by (get a load of this!) raising interest rates!
What Happens When Currencies Go Bust?
Danger of Deflation Depends on Your Definition of Deflation | Congress Growing up, Putting Away Childish Things... Sort Of
The co-chairmen of President Barack Obama’s National Commission on Fiscal Responsibility and Reform — former Wyoming Senator Alan Simpson and University of North Carolina President Erksine Bowles — have called for increasing taxes and cutting spending in order to trim some $4 trillion from the nation’s budget over the next ten years.
The Municipal Bond Pitch: “What You’re Giving Me is Pure Bulls**t”
Oil Demand’s Triumphant Return | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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