John Stepek highlights some of the best bits from all the free emails, newsletters, and blogs – not to mention MoneyWeek magazine – from the past week.
● It was another very mixed week for the markets. BP was a highlight – the beleaguered oil major managed to stop its well from spilling oil into the Gulf of Mexico for the first time since the Deepwater Horizon explosion in April. It’s not a permanent solution – that’ll require the drilling of a relief well – but it’s the best news BP has had in near enough three months. It also helped that star fund manager Anthony Bolton expressed his regrets elsewhere that he couldn’t buy BP for his China fund.
We suggested buying BP on the way down between about £3.50 and £4, but I’m not going to take credit for anything – we also warned that it was quite a punt and worried that our calls were wrong when it hit £3. There’s a bit less risk involved in the stock now, but also not quite as much reward.
● Meanwhile US banks were back in the news as the bank reform bill passed, and JPMorgan posted some decent results. My colleague David Stevenson is not convinced that banks as healthy as they look though – in fact, he reckons they could take another tumble again soon and even suggested a way to short them.
● Of course, shorting is a risky business – the timing is the big difficulty. I’d be inclined to stick mostly with high-yielding defensives just now. I suggested investors should be preparing for a double-dip earlier in the week. And a steady stream of bad news out of the US since has made that prospect look ever more likely. Consumer confidence has dived, along with business conditions in the manufacturing industry.
And yesterday, we learned that the ECRI Weekly Leading Indicators index saw its annualised growth rate slide to -9.8%. That’s just a few points off the -10% that has historically preceded a recession (though I’ll point out that ECRI itself hasn’t yet forecast a double-dip).
● What does it all mean? Well, if everything continues downhill, we’ll likely see another bout of quantitative easing. What’ll that mean? Well, you can take a look at our most recent MoneyWeek magazine cover story on how to invest for a double-dip. And I might return to the subject in Monday’s Money Morning.
● So now is definitely not the time to be taking a punt on over-hyped stocks that will never make any money. That was OK for a few days in the tech boom as long as you got in and out quickly, but we’re sorry to say, it just won’t pass muster any more.
That’s why online grocer Ocado looks to be in trouble. With the recent failure to float of oil and gas group Fairfield, the market is clearly turbulent for IPOs right now. And the Ocado float has very little to recommend it. As my colleague Bengt Saelensminde pointed out in his Right Side free email: “Ocado wants over £400m. That’s £200m for ‘expanding’ the business and around £200m for founders that want to bail out. It’s not unreasonable to take some cash off the table, but it’s hardly a sign of confidence when some founders want to dump all of their shares!”
Unfortunately, says Bengt, “Ocado was a terrible mistake. Believe me, no entrepreneur sets out a business plan that says it’ll reach profitability in 12 to 15 years time (brokers estimate a profit somewhere between 2012 and 2015). Nobody would have leant them money on that basis. So this is a business that went wrong.
“But don’t expect the founders to admit that. City bankers have big egos. These guys left well paid jobs to start a dotcom at the height of the bubble. They want to show everyone that they’re winners. Everything else has failed, so now they want to sell the shares to us, the public. They’re offering shares to us via our pension and insurance institutions and directly to Ocado employees and customers. They’re asking the latest round of mug-punters to pay more than the original investors paid. This is bonkers.”
In case you’re still wondering, Bengt’s message is – don’t buy Ocado.
● That’s not to say we’re opposed to taking any risk. You’ve just got to have a realistic approach. Buying Ocado looks like throwing money into a hole in the ground. Whereas with some junior mining stocks, says Tom Bulford, this can be quite a profitable activity – as long as you know what you’re doing.
“The financial models of small mining companies are very straightforward. That’s one of the reasons I like them! You start with the amount of ore that is mined. Next you calculate how much metal can be extracted, which is a factor of the recovery rate and the grade. Then you multiply this by the price of the metal, and deduct three things:
1. Running costs.
2. Initial capital investment amortised over the life of the mine.
3. Whatever must be paid to the government.
“After that, the only thing you are left to worry about is the discount rate that you apply to future earnings.”
But, you might be asking, “if it’s that simple, why are the share prices of junior miners so volatile? There are three reasons.
“The first is that many junior mining companies are not yet at the stage of actually producing anything. Indeed many never get there. The second reason is that, although there are few moving parts in the equation determining the value of a mine, these can move about quite a lot.
“Say it’s costing you $3 per lb to produce copper. Suddenly the copper price moves from $3.30 per lb to $2.70 per lb. That’s not an uncommon scale of move for copper. But for the miner it’s the difference between comfortable profitability… and a terrible financial squeeze.
“Finally, plenty of problems can come out of left field and totally whack your plans. For example, a new hostile government, some expensive equipment that does not work, power shortages or bad weather. There are all sorts of things that can hijack the best of mining ideas.”
That’s why Tom prefers to focus on small miners that are at or nearing the production stage. He looked at a couple in his free Penny Sleuth email last week – you can read it here.
● Getting back to quantitative easing (QE) – the point of QE is basically to cause more inflation. So should the Fed print more money? Or could it cause inflation by a more subtle manner – by simply employing more women?
What am I talking about? Well, it’s a controversial issue, but my colleague Merryn Somerset Webb wrote a blog on how greater power for women might be connected with inflation. It came from a question posed to her by CLSA’s Russell Napier (the highly-respected analyst of bear markets).
“Had we noticed, he asked, that the UK had only been bothered by persistent inflation since the introduction of universal suffrage. Did we think there was a connection?”
This may not be as outlandish as it seems, thinks Merryn. “Why? Because politicians promise what they think voters want, and women voters, being society’s main carers, are most likely to be promised the things that most expand the state. Historically it has mattered – or been perceived by politicians to matter – more to women that they get help looking after the young, the sick and the disabled than it has to the men who don’t do so much of this kind of work.
“And the more unaffordable things the state promises, the more likely it is to have to print money to pay for it – and the more likely inflation becomes. So it is entirely possible that giving women the vote in the end causes inflation (although that doesn’t make it their fault).”
For more on how an absence of women in high places could be responsible for Japan’s deflation, read the rest of Merryn’s blog here and contribute your own thoughts…
● Out of time again – look out for next week’s issue of MoneyWeek magazine (out on Friday) – we’ll be having a Roundtable discussion on the future of energy which should be a lively one. And if you haven’t read the current issue yet, you don’t want to miss it – David has tracked down one of the most despised sectors in the stock market and picked out some juicy stocks on dividend yields of 6% and upwards.