Well reader, it seems as though the property bulls and spruikers are spoiling for a fight.
We’d be tempted to give them one but we’re afraid our mastery of the Queensberry Rules is more like Hugh Grant and Colin Firth in Bridget Jones’s Diary than Muhammed Ali and George Foreman in the Rumble in the Jungle.
However, we shall bring the subject of Australian property to a close in the Friday edition of Money Morning.
Today we won’t even mention Dun & Bradstreet’s claim that 62.5% of Melbourne suburbs have a high statistical risk of people defaulting on their mortgage. We’ll leave that for Friday.
To be honest though, we think we’ve written everything there is to write on the subject, but there are a couple of loose ends worth tying up. So, make sure you’re sitting comfortably around 11am on Friday, ready to receive your “Property Smackdown” special issue of Money Morning.
Until then, we have other things to consider…
We were going to have a crack at the fuss over the Fairy Ruddfather spending all the government money on pet projects and how the mainstream press seems to forget it’s not government money at all – it’s your money.
When any government – not just Labor – pork barrels it’s way to election victory you should remember it is your taxes funding their victory. When the pollies thank all their supporters on election night, they really should also thank every single taxpayer for bankrolling their campaign.
Except they always seem to forget.
Which makes recent calls for political parties to be given more taxpayers money to spend on their campaigns even more distasteful.
Now is probably a good time to be thinking of that as you are doubtless either in the process of completing your tax return for this year, or you’ve just received your tax bill, or perhaps you’re lucky enough to have received a tax refund – ie. Getting back some of your own money.
Make the most of it, as we’ve mentioned before, the vultures are already lining up to find more ways of stealing your hard-earned money as part of the Henry Tax Review.
Anyway, we can save tax ramblings for another day.
Instead today we’re going to take another look at the energy markets. As you’ll have noticed, we’ve been banging on the liquefied natural gas (LNG) drum for nearly a year now.
Subscribers to Australian Small Cap Investigator have seen some big returns in this market. We sold out of one position a couple of months ago with a 458% gain in six months, but it hasn’t ended there.
We’re still sitting on three stocks which have racked up gains of 428%, 286% and 319% in less than twelve months.
At the moment it seems as though barely a day goes by without some reference in the mainstream press to LNG and the massive projects proposed for the gas fields off the North West coast of Western Australia, and the coal seam gas fields of Queensland.
Last year we wrote that 2009 would be the year for energy stocks. So far we’ve been proved right, but to be honest, the gains we’ve seen so far have exceeded even what we thought possible.
It is those quick gains that naturally cause us to take a pause. With any market it’s easy to get over-excited about the opportunities that abound.
Fortunately, we’ve been around the traps for a while, so we try not to let excitement get the better of common sense.
That’s why in August we didn’t add a new tip to the main portfolio of Australian Small Cap Investigator – although we did provide an ultra-speculative tip for those subscribers who like a bit of fire in their portfolio. That was in the ‘Radioactive’ section of the portfolio – tips for the most daring only.
Even though there are a handful of energy stocks on the market we like, we resisted the temptation of just tipping something for the sake of it. Instead we preferred to stick with the three LNG related stocks already in the portfolio.
The way I looked at it was, the market – and energy stocks in particular – had soared over the previous few weeks, we didn’t want to get onboard a stock if it was trading at an unrealistic level.
When the market behaves that way it’s better to just sit back, watch what happens and stick with the stocks you know inside and out. That’s what we did.
Although saying that, we do have one energy play on the radar for inclusion in the September issue of Australian Small Cap Investigator. But for that you’ll have to wait another couple of weeks until we’ve done the analysis to see if it makes the grade.
But it’s not just the energy stocks either. Last October, before the markets crumbled completely we tipped an iron ore stock. Like many others we didn’t think materials stocks could go much lower than they already were.
We thought China would ‘bail out’ the global economy.
Oh, how wrong we were. By the middle of December that trade was down about 80%.
Was it bad timing or a bad investment? You could argue it’s the same thing.
Well, ten months later and that position is finally back at breakeven. For investors that tucked in near the bottom or on the way up then they’re sitting on a handsome gain.
But that’s part of the risk with small cap investing. If you get it wrong then you’ll get a very public toweling. The key is to re-assess and decide whether the big picture outlook is the same.
In the case of our iron ore stock pick is was – and still is.
But all this talk of energy and resources and the inevitable link to China still needs to be looked at in a sober light.
There is little doubt the Australian economy has been saved by China. Forget the stimulus package, it’s all about China. But it’s easy to get over-excited by that and think it will last forever. Instead we should ask whether China is a sustainable benefactor.
How deep are China’s pockets?
For years we’ve heard about the saving mentality of Asian people. How they would rather squirrel their money away than blow it all on fancy consumer items.
Whether that’s true or whether it’s a stereotype isn’t all that important. The important thing to remember is the actions of the people are secondary when it comes to spending.
Because whether it’s a government in Europe, North America, Australia or Asia, the philosophy is the same. They need to stay in power. It doesn’t even matter whether it’s a democracy or a dictatorship, the need to stay in power is paramount.
The only way to do that is to exert power. And the only way to do that, is to spend money, taxpayers money.
Even China isn’t immune from this. Right now China is probably the most powerful nation on earth. Our guess is that it will want things to stay that way.
The only problem is that as the nation gets wealthier, the cost of maintaining control will become more expensive. As citizens become wealthier they will want more things. And they will want more protection.
And there’s only two ways for them to get it, either they get it for themselves, or the government provides it.
Of course, as we know in the West, there are no votes in letting the people make up their own minds and spend or save their own money. The public can be very ungrateful!
Instead governments have learned to take as much money from taxpayers as possible and spend it for them. That way they can put up big signs to show how great they are, and hopefully bribe their way to a longer stint in power.
The saving grace for China – and Australia’s resources sector – is that China has a lot of money. It can afford to buy a lot of Australia’s natural resources. And for now, it can afford to ‘buy’ more time in power.
That should help to ensure the “New Resources Boom” continues for some time yet.
But you shouldn’t make the mistake of thinking it will last forever, because it won’t. We’re just banking on the probability that we still have plenty of years up our sleeves.
And while China is in the spending mood we may as well take every opportunity to make as much money from it as we can.
Other Stuff on the Markets
The S&P/ASX200 gained 0.43% yesterday, while US markets were closed for the Labor Day holiday. In Europe the FTSE100 gained 1.68% and the CAC40 added 1.50%.
The price of gold in Australian dollars is trading at $1,164.19, while in US Dollars it is trading at $995.82.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8553, and JPY79.56.
Crude oil closed overnight at USD$67.96.
For the biggest movers on the market yesterday click here…
{ 10 comments… read them below or add one }
So you “shall bring the subject of Australian property to a close in the Friday edition of Money Morning”. How arrogant of you and how foolish. Why not bring the subject of gold to a close the week after and then finish up shares the following week? You will soon be left with nothing to write about. I don’t believe that you will never mention Australian property again.
Your previous articles suggest that you Kris Sayce knows the correct amount of housing for Australia and that in fact that amount is being supplied. With all the arrogance of a USSR central planner you dismiss the role of a market in steering supply and demand via price. I thought you believed in a free market where the market determined supply. But regarding property you claim you know there is no shortage.
You should consult your mate Dan Denning who believes that Australian housing is one of the most distorted and least “free” markets there is. In such a distorted market there are all kinds of oversupplying and all kinds of undersupplying. Yes there is a shortage of housing in some parts of Australia and many young families are suffering as a result.
Claw – Well said. Perhaps they should stick to their knitting from now on.
Wow – you guys are really looking for an argument.
All Kris said was that he was bringing the topic of property to a close on Friday. I took this to mean (as many other regular MM readers would have as well) that the recent barrage of property write ups will not continue next week and from here on, Kris will talk about whatever the relevant issues of the day/week are. This may or may not include property – depending on what happens out there in the market.
The Claw – Kris never said he would summarise the whole property issue and then never touch it again – where did you infer that from? It is such an idiotic inference that it is clear you are simply looking for an argument for the sake of it.
You say there is a housing shortage in some areas of Australia, as if this somehow weakens Kris’s argument about there NOT being a “chronic housing shortage in AUSTRALIA”…Kris wrote about the housing shortage issue in the context of the repeated claims by property spruikers that we dont have enough houses in Australia and this would prevent a price crash…
He was never suggesting that there are no regions throughout Australia that dont have a shortage of houses.
Geez – you guys must be really worried about what Kris will say tomorrow if you are upset by the mere prospect of a ‘Property Smackdown’ article.
For me, I cant wait….LETS GET READY TO RUMMMMMBLE!
Sorry PuntPal, the day has come, and lo and behold:
The same old worn out windmills and strawmen have been lined up for a salutary knockdown. Same old, same old, with a complete failure to engage with any of the more serious problems raised for Sayce’s arguments. Without getting carried away with details here, let me say this much: If he was my student in a class of Argument and Reasoning, I could only give him one grade for all his efforts: FAIL.
Nah, make that ‘FAIL -’ . (Yes, that is a minus.)
Steven Keen, by comparison, gets an A from me for the lucidity and cogency of his arguments. Had he also been right with his call, one could not justify not giving him an A+. But, as it is, it looks like he is going to walk.
Lol, Peter Fraser. That would be safer for them, even if somewhat less interesting for the rest of us.
CB – You beat me to it. PuntPals gunslinger didn’t show for the shootout at OK Corral. Yes I think that you are right to be kinder to Steven Keen, were it not for the stimulus and our fortunate position as a major supplier of raw materials (thin air) to China then he would have been a lot closer.
But that’s life.
Almost time to make another offering of vino to the gods.
Yes, I will second that, Peter Fraser. Will all the meddling going on, even the best are bound to miscalculate. Add to it the number torturing and waterboarding of official numbers on unemployment, CPI and inflation, and you soon realise that you have precious few reliable reference points for informed decision making going forward. Oh, and we haven’t even mentioned the other factors, such as interest rates, currency risk, and the political risk of goal post shifting through legislation. Little wonder that even the best get blindsided by one thing or another — which only goes to highlight the importance of spreading one’s risk through asset class diversification, as you quite rightly pointed out.
Yes, the stimulus cheques kept the soul alive in people. Its psychological effect might have been just as important for all we know. People felt supported at a time when the fear of god was put into the populace’s heart by the RB’s relentless ratcheting upwards of the interest rates. It was insane. The quick and drastic backpaddling by the RB also helped to calm the nerves. With so much private debt on balance sheets, one can only wonder how far were were from a panic. That people were getting terrified, of that we can have somewhat less doubt.