Wealth Wisdom

Market Update – March 18th 2011

Julian — Fri, 18 Mar 2011 00:36:25 +0000

Another choppy week on the market!!

This week we saw large falls in the Dow Jones Industrial Average, the Australian ASX/200 and especially the Nikkei! The Nikkei is the primary stock index in Japan and the price action of it this week deserves a little attention, as it has framed equity markets behaviour above all else in recent times.

Short term prices...

As you can see illustrated in the chart below, the Nikkei was repeatedly flogged as continuing news from the Japanese nuclear facilities’ (Fukushima 1 & 2) deteriorating conditions were broadcast over the news wires.

Gone fission…

The news being reported is of continued explosions and fires in both facilities 1 & 2 that are threatening the integrity of the “containment vessel” within both facilities. The process of nuclear fission is perhaps a little outside the scope of this article; however it is worthwhile touching on the “safety basics” of even the oldest nuclear facilities to get an understanding of what could be ‘worst case’ scenario.

The safety precautions...

Of the six plants damaged due to the earthquake/tsunami only two are currently in questionable conditions. Explosions have been reported from both facilities and the global media has spread fear throughout the world of impending “core meltdowns”, as a result of the fires and explosions.

This is obviously an extremely tenuous situation and one that will quickly change from day to day. Its effects on the markets will be felt each day as well. However, from doing a little research, one can quite quickly ascertain that there are indeed many safety precautions or “lines of defence” (known as “depth of defence”) within each facility to contain any “meltdown” and that this maybe, a little less dire than CNBC will have you believe!

Firstly, what is going to melt?

The “nuclear fuel” used for creating nuclear power is Uranium Oxide. This Uranium Oxide is contained within a long metal tube made of “Zircaloy” – an extremely strong metal, which is the first line of defence to stop nuclear leakage. The ends of these Zircaloy tubes are then sealed tight and this combination forms a “fuel rod”.

Many of these fuel rods together are then bundled and placed into a ‘reactor’ and this bundle is known as a “the core” – it is this ‘core’ which will likely “melt” if it is not efficiently cooled. If it melts it will release radioactive material – but not just out the front door and down the street! Let’s take a look at the standard ‘passive defence’ mechanisms in place in a modern nuclear facility.

Depth of Defence...

Defence 1 – Is the Zircaloy tube itself, it is strong and designed to contain the Uranium Oxide – however, without efficient and constant cooling, the nuclear fission process will eventually generate too much heat and will melt the Zircaloy tubing.

Defence 2 – The ‘core’ is housed within a “containment vessel” which is essentially like a big pressure cooker. This pressure cooker is designed to withstand incredible pressure and can be vented to release this pressure if need be (as opposed to simply “exploding” from it). Once the Zircaloy melts, the pressure cooker will catch any leakage!

Defence 3 – Is the final line of defence and is an air tight ‘bubble’ that encapsulates every bit of ‘hardware’ involved in the nuclear process – this is known as a “core catcher”. If the core melts and the pressure cooker explodes, this hermetically sealed bubble will stop anything from reaching the outside world – breaching this would be catastrophic, but exceptionally unlikely (Chernobyl had no ‘core catcher’).

The events so far...

So far, the tsunami caused massive damage to both facilities and surrounding areas. This has obviously disabled power supply which is required to power the cooling systems of the cores.

Backup generators of both facilities were also all but destroyed by the tsunami, which meant that within 8 hours (of the third back up power – batteries – running out) the cores were no longer being cooled and began heating rapidly, causing gas/pressure build ups within the ‘pressure vessels’.

To combat this build up of pressure, venting has begun in the containment vessels of both facilities. This venting of pressure caused several explosions outside of the containment vessel and started some fires. None of these have caused any identified damage to the containment vessels, much less the outer ‘Core catcher’.

Ok, so right now, we know it’s not the next Chernobyl - How has this/will this effect markets?

As you can see from the chart above, markets have been very, very, volatile as a result of these incidents – and I am not just talking about equity markets.

Let’s take a look at a few things which may be happening within global markets in response to the aftermath and continued havoc of this horrendous natural disaster.

Equity markets...

Equity markets have fallen sharply – our Aussie market is now down -467pts or -9.45% in the last twenty days.

The Nikkei has fallen -2557pts or -23% in the same timeframe!

Currency markets...

Now this is interesting, The Aussie dollar, which has been extremely strong due to solid local economic conditions, fiscal/monetary regulation and our natural resources, has been sold off over the last few days, quite sharply, as we see an obvious repatriation of the Japanese Yen,.

Take a look at the chart below of the AUD/JPY cross.

This sell off of the AUD against the Yen (JPY) is likely due to rattled Japanese investors unwinding their “Long Aussie” carry trades – in which they invest in Australian assets (equities) and Aussie dollars with borrowed Yen.

Given the uncertainty in Japan, it is not to be unexpected that these positions would likely be sold down (or “unwound”) for the safety of local cash!

Another suspected driver of the sharp decline in the AUD/JPY is the rumours circulating that a lot of Japanese insurance companies will need to offload foreign held assets in order to front the enormous bills they are about to receive.

So what does this all mean?

There is quite simply no getting away from the fact that this is a very volatile and unpredictable environment. It is quite likely however, that within weeks the news from Japan will slow and focus will again turn back to the middle east (remember Libya? That’s not over – Bahrain is getting angry) and the markets will use that as the excuse for continued volatility.

But, as we have said before, this uncertainty creates opportunities and we continue to like the markets as a BUY at this level – however in order to sleep at night, a longer term view is required and some serious caution is needed in certain sectors! (Uranium, as we mentioned, has been hammered).

Snap ‘em up...

There is an old saying which circulates the markets in times like these – “If the markets don’t want ‘em, the corporates will” – this applies wholly in this circumstance. If investors in equity markets sell off quality stocks on mere speculation, we will probably see a flurry of corporate activity in the form of well timed takeovers and acquisitions; this in itself will act as a catalyst for buying (increased confidence).

And this doesn’t even touch on China’s stance on nuclear power (pro nuclear) and their recent announcement of “reviewing” their own nuclear programs in response to Japan’s situation.

It’s no secret that the Chinese have been trying to secure strategic assets across a suite of commodities for the last five years and as crazy as it sounds, it could be part of their strategy to make such announcements in a ploy to drive uranium prices (and associated Uranium miners prices) as low as possible before pouncing on vulnerable (and cheap) companies to acquire them (imagine a bid on Paladin! PDN.ASX).

So, we say, keep it realistic and stay focussed on the medium term outlook, it’s rocky right now, but better, much better days are just around the corner for Australian companies in particular . This translates into profits for early buyers.

To your investing success,

Jules Dawson

(Author: Wealth Wisdom - How Ordinary Australians Can Create Extraordinary Wealth)

P.S. I’d like to hear your thoughts. Have your say by typing your comments below

Market Update – March 14th 2011

Julian — Mon, 14 Mar 2011 00:56:20 +0000

2011 Sendai Earthquake and Tsunami
As I am sure you are aware, Japan has recently experienced a significant earthquake and Tsunami which has affected the east coast of the Oshika Peninsula, Tohoku.

This 'megathrust' earthquake, resulting from a shift of the Pacific Plate and Okhotsk Plate, was over 9.0MW and rates as one of the worst earthquakes the world has ever seen.

Following the initial shock, a Tsunami formed and hit the Japanese coast with walls of water up to 10 metres high - it is reported that the Tsunami waves reached up to 10km's inland.

To date, this disaster has claimed a confirmed 1597 deaths, 1923 injuries and over 1400 people remain missing (however, this could be a substantial underestimate).

Damage from the Quake
Damage from the Quake is widespread. Obliteration of the Sendai coast from the Tsunami can be seen in the following photograph below. Throughout Japan roads have been destroyed, railways have been critically damaged and several nuclear reactors are teetering on meltdown.

Over 4.4 million households are without power and around 1.4 million have no drinking water. Dam's have burst which has resulted in additional flooding and evacuation.

This is a disaster on the largest of scales. The cost for repairs are already well into the Billions of dollars and the immeasurable cost of lost life is of course the worst tragedy of all.

What are the potential impacts to global markets?
We have already seen a sharply negative reaction in Asian markets. The Nikkei (Japanese Index) in early trade Monday was lower by -5% as the severity of the Quake was reflected in the equity markets.

Closer to home the Australian ASX/200 is trading lower by 51 odd points (at 4593 at the time of writing) down -1.11%, this negative performance is ignoring a position +0.5% lead from the US on Friday's trade.

Although of course quite negative in the early days following this disaster, one may wonder what the potential longer term implications may be. We will touch on this below.

Energy demand to rocket - Japan is the 3rd largest consumer!!
Energy is the key focus for most and Japan is the 3rd largest consumer of energy in the world (behind the US and China). Japan has over 54 nuclear power plants which supply over 1/3 of total energy supply.

The quake has crippled two key reactors which are currently teetering on meltdown and being flooded with seawater to aid in cooling the core and preventing said meltdown. Once this has been done, these reactors are useless.

The result of these reactors being shut down (and others on standby to be shut down due to aftershocks) is estimated to be a reduction of around 10% of nuclear power supply or 3% of total power supply.

If this is the case Thermal power generation will need to be increased to meet any slack in supply. This means that Oil, Coal and LNG will be in much higher demand in the short term.

This translates to potentially sharp price increases in the price of Oil, Coal and LNG moving forward, which can be harnessed by being long Australian key producers such as Woodside Petroleum.

Then recovery...
Obviously, to recover from this disaster will take some time and several steps will need to be taken. First and foremost will be immediate damage control and assessment of critical infrastructure (namely the damaged nuclear facilities). This will need to be thoroughly assessed and will likely take years to fully certify as "safe" to operate or repair/rebuild.

During this time, alternative forms of energy (thermal energy) will remain in much higher demand which is likely to be skewed towards Coal and LNG, as opposed to Oil, due to what is quite likely going to be increased prices in Oil from current levels.

Demand will keep going...
Obviously at present Japan's energy demands have fallen dramatically, as millions of homes are without power and industrial production in effected areas has essentially come to a grinding halt.

However, as the country begins repairing the damaged infrastructure, industrial production will quickly increase and following this, the country will need to undertake widespread repairs/demolition/rebuilding of structures in the immediately effected areas.

This will be extremely capital intensive and will spur huge surges in demand for Iron Ore, Base Metals, Coaking Coal, and of course, more energy in the form of Oil, Coal and LNG as the country rebuilds.

Australia is in a prime position to meet this increase in demand by Japan and as a result, we should see impressive performance in local material stocks such as BHP, RIO, FMG, MCC etc.

Economically speaking
It's important to consider the macro economic effects of this event. Japan is currently running a Debt to GDP ratio of over 200%, and virtually non existent monetary policies.

This huge deficit will obviously blow out as huge government capital requirements to fund rebuilding are funded with additional debt and productivity (GDP) falls in the short term.

To manage this situation, it would be expected that the Japanese government would have to implement some sort of monetary policy and fiscal policy changes. Simply put, Japan will need to restructure itself to be able to afford to recover!

Taxes will need to be raised and personal spending will quite likely stagnate. This will trigger weakness in the Yen and will make Japan a more competitive producer on the world stage.

If managed efficiently it is quite possible Japan will be able to redevelop into a fiscally sound and competitive producer on the world scale - post disaster.

The US
It is likely that the US response to the Quake, from an economic perspective, will be to leave their expansionary monetary policies unchanged. This will help Japan at least indirectly as consumer spending (which is 75% of US GDP) will remain strong.

Outlook
This is a disaster of grand scale and will take years to overcome. However, as investors we need to look at where this creates opportunity in the equity markets and to this effect we would suggest that the increased demand for all sources of (non nuclear) energy will spike, as well demand for base metals etc.

We keep a close eye on BHP, Rio Tinto, FMG and many others to take advantage of this almost certain spike in thermal energy and base metal demands.

It is also worth noting that we remain very cautious of our uranium sector, as the damage to several reactors will likely bring the safety of nuclear energy back into the spotlight.

Have your say...
I'd like to hear your thoughts. Have your say by putting your comments below

To your investing success,
Jules Dawson
(Author: Wealth Wisdom - How Ordinary Australians Can Create Extraordinary Wealth)

Market Update – March 4th 2011

Julian — Fri, 04 Mar 2011 05:32:24 +0000

This week, we have seen continued volatility in markets across the globe. The Dow Jones and S&P500 have failed to hold any significant gains as Libyan political unrest continues to keep investors on edge.

Also not helping investor nerves is the price action seen in commodities. Oil, often seen as a precursor to potential economic instability in the US economy, is trading sharply higher this week. The main gauge for Oil is the NYMEX WTI futures - of which the contract for April delivery has rallied 20% in 16 days (84.99/bbl to 102.23/bbl).

Oil and inflation...

Sharp spikes in the price of Oil are typically a cause of concern to stock markets due to the inflationary effects which flow into the economy. Inflation itself, is OK, and required for a healthy economy. Too much however, has an extremely negative influence on broader economic growth.

As Oil prices increase, so do the prices of many others goods, which inturn increase inflationary levels throughout the broader economy. This increase in inflation stunts a country's relative growth and is an undesired environment for policy makers and investors alike.

Then there's gold...

On the flipside of the commodities world is Gold, known worldwide as the "safe haven" commodity. Gold has also rallied strongly in recent days, forging new 'all time highs' at over $1400/oz.

Gold is considered an inflationary hedge, and at times of uncertainty investors will buy the precious metal as a means of protecting equity in the face of the erosionary effects of inflation in the US dollar and US equities.

But not all is what it seems - look a little deeper...

These two tell a story about the sentiment of global investors, they tell us fear is prevalent but not overwhelming and the relatively robust performance of Equity markets around the world attests to this - realise that equity markets have only fallen around 4% from 'pre Libyan' highs, yet some of our largest local stocks have tumbled in the face of strong reports and economic strength. This to us doesn't make sense and we reiterate our BUY view on the Australian shares.

Bullish but nervous to buy? Covered calls could be an option...

Being bullish is a good start, and buying on dips will always allow us to have a strong base to 'work around' within our portfolio of stock. However, what can we do if it turns out that 'now' isn't the perfect time to buy? Simply hold, wait for dividends? No.... There are other options to keep the portfolio and the stocks within it active, one of the most commonly utilised being Covered Calls.

A 'Covered Call' is a trading strategy which utilises your existing stocks within your portfolio coupled with Exchange Traded Options (ETO's). Don't be confused by this introduction however as the actual strategy itself is surprisingly easy and can be quite a yield spinner when timed well.

Capital Growth or Yield - It's usually one or the other...

Essentially, there are only two reasons an investor buys shares, capital growth or income (known as yield). The first obviously comes from buying low and selling high. The second, yield, traditionally is derived from dividends.

This investment paradigm, albeit well founded, can be somewhat limiting in terms of what can be achieved with a finite amount of capital. For example, let's say you have bought Telstra (TLS) for its high dividend yield. Yes, you would have received a high "annual return" on your invested capital through dividend yield but you would have likely lost a great deal in capital invested through poor share price performance.

Conversely, BHP is a 'must have' stock for almost all Aussie investors, but its yield (along with all of its mining peers) is terrible. In flat markets, this means 'real returns' on your invested capital is a negative (you would have been better off sitting in cash).

The 'yield alternative'...

A covered call essentially allows you to extract additional 'portfolio income' from your blue chip holdings, without the need for selling the stock or being invested in high yielding sectors which are falling by the day.

It's quite easy to illustrate the benefits of a covered call strategy by comparing it to buying an investment property. Like shares, there are two reasons you buy an investment property - capital growth, or yield, or ideally - both.

As is often the case, one will buy an investment property and immediately rent it out to assist in meeting the costs of repaying the loan or simply to compliment ones income month by month. The same principles can apply to most of your blue chip stock holdings.

When trading a 'covered call' over your stock holding you are essentially renting the shares out to another investor. Being a 'landlord', and renting your shares, you receive a 'rent', which is referred to as a premium.

When renting your stock, you will rent it out at a set share price, for a set period of time. Most investors will trade covered calls which last for one month, at a share price level which is ABOVE the current share price of the stock itself. As long as the share price does not finish up above that agreed level, you keep the entire premium (rent).

The outcomes of renting your shares can vary and can be used to your advantage accordingly. As far as percentage yield is concerned, it is common that the active 'share renter' will receive an additional yield of around 2-5% per month on total value of their rented shares, about 8 months of the year. This is yield which is difficult to ignore.

But it's not all about yield - speak to us for more information...

On top of yield, an investor can use covered calls as a means of short term 'insurance' over their share holdings, if their view is the stock will fall in the near future.

Covered Calls are a simple strategy and my team and I can help you review your current portfolio and assist you in structuring an appropriate strategy for maximum portfolio performance, which can easily be enhanced by adding the simple, but effective covered call strategy to your arsenal.

To your success,

Jules Dawson
(Author: Wealth Wisdom - How Ordinary Australians Can Create Extraordinary Wealth)

Welcome to the Members Area

Julian — Thu, 31 Dec 2009 14:00:18 +0000

Hi and welcome to the Wealth Wisdom Members area.

This is where you will access your training videos and other exclusive resources and giveaways to celebrate the launch of the book.

If you are not seeing any other information in the members area it may be that you are not logged in. You can Login to the site using the "Login" link at the top-right corner, then use the "Members" menu option to access the Members area.

Make sure you keep an eye on the site for updates and special announcements.

Join my "Wealth Wisdom : Ultimate Cash Generation" webinar series : https://www2.gotomeeting.com/register/295811786