InvestMacro FX

By MoneyMorning.com.au

Yesterday Kris wrote about shale gas.

Which got us thinking about the energy sector…

Which led us to this interesting chart…

Which makes the energy stocks in the ASX Energy Index look cheap!

The Australian Stock Exchange’s Energy Index (XEJ) is trading at 13,764.50… That’s 44% below its all-time high… It’s 27% below its most recent high in April 2011… And right below an important support level.

If the index can break out above this red line, the index could trend up… Where it would find its next support at around 15,000, followed by 16,000… roughly a 14% gain.

But as you can see in the circle to the right of the screen, in October and December 2011 the index had two false breaks through this level. And the index quickly fell back below this line.

On the long-term chart, the next support to the downside comes at 12,000… Followed by 10,700… If the index hit that level and you invested in a fund that tracks it, you’d be looking at a 28% loss. That’s a risk-reward ratio of 2-1 – those odds are against you.

Most novice traders place their trades as soon as a stock breaks out of a trading range. Slipstream Trader, Murray Dawes says that’s a big mistake. Because many break outs tend to be a ‘false break’, where the stock is unable to hold above a previous high.

Murray prefers to see the stock (or index) settle into what he calls a ‘distribution’ and then trade the stock within that range.

For the moment the higher probability bet is to hold off and wait until the index makes a sustained break either way. Only then should you think about placing a bet.

Aaron Tyrrell
Editor, Money Morning

From the Archives…

Why Fallen Commodity Prices Mean This Sector is Worth a Punt
2012-01-13 – Kris Sayce

Why Australian Banks Are a “Suckers” Investment You Should Avoid
2012-01-12 – Greg Canavan

The Fed’s Funny Money Merry Go Round
2012-01-11 – Kris Sayce

Silver Price Ready to Explode
2012-01-10 – Dr. Alex Cowie

Will the Gold Bull Keep Running in 2012?
2012-01-09 – Dr. Alex Cowie

Are ASX Energy Index Stocks Worth The Risk?

By MoneyMorning.com.au

Successful businesses detect change.

They don’t always have to act on it (although they may be foolish if they don’t).

The same goes for successful investors. If you can spot a change (or even a potential change) early on, it can lead you to a big pay day.

But if you spot the change and don’t act on it… well, the results aren’t as good.

Take Eastman Kodak [NYSE: EK] as an example. The company had a great new idea in 1975… it invented the world’s first digital camera.

That’s some foresight.

Today, digital cameras are a central part of new media and the social networking fad. Photos on Facebook. Twitpics. Photos taken and published seconds or minutes after both trivial and important events.

Who doesn’t have at least one device with a digital camera? So, for the digital camera inventor it should have been the path to fortune for them and their business. But based on the news we’ve seen overnight, that hasn’t quite happened…

Yesterday, Eastman Kodak went into chapter 11 bankruptcy protection. It means the company will have the chance to reform the business rather than go bankrupt. But, a once household name is on the verge of death.

Where did it go wrong?

Well, this is where it gets interesting. After the invention of the digital camera, Eastman Kodak either made its biggest mistake… or one of its best ever decisions.

Bloomberg News writes, “The company also invented the first digital camera in 1975, which it shelved because it would threaten its lucrative film business…”

The first reaction is to say, “How dumb were they?”

But maybe shelving digital photography 37 years ago was the best choice the firm ever made. After all, if they had gone ahead with it, who can say Kodak wouldn’t have gone bust earlier… By other firms beating them out that had a better handle on the technology.

After all, as you can see on the chart below, the Eastman Kodak share price didn’t do so badly after it shelved the idea:

Click here to enlarge

Of course, we can never know for sure what would have happened.

But it’s an insight into why some ideas stay hidden… while others are just delayed.

That’s typical of what happens in big companies. For them it’s not just whether a new idea is profitable. It’s about whether the new idea will harm or destroy the company’s existing business.

In 1975, the managers of Eastman Kodak weighed up the options. They decided the risk of introducing a digital camera to the market was too great. In the short term they may have been right. But in the long term they were hopelessly wrong.

Because all it did was delay the technology. It didn’t kill it. Soon, others picked up on digital camera technology. They saw the opportunity and what it could be worth.

The will to detect and accept change is why those businesses succeeded… while Kodak failed.

Detecting and accepting change is one of the things we look for in small companies. When you think about it, it’s hard for a small company to just copy a big company. Small companies have to do things differently.

That’s where entrepreneurs either create a new product to replace an existing one… or they’ll try to nudge an existing product in a new direction.

That’s what makes small firms more interesting than big firms. If a big firm does something new it may only have a small impact on the firm. But if a small firm does something new, it can be a game-changer.

The lesson you (and Aussie companies) can learn from Kodak’s demise is investing and hoping a company isn’t overtaken by new technology is a sure-fire way to lose a lot of money.

And while investing in small firms with new ideas is risky, if the game-changing idea comes off, that’s when you get the big pay day. Simply because you only need to make a small bet to potentially make a big return.

If the bet doesn’t go your way, what have you lost? You only placed a small bet anyway.

Right now, the Australian Securities Exchange is full of good businesses with great ideas: biotech companies developing new drugs, oil and gas companies using new methods to recover hard-to-reach resources, and hi-tech firms looking for the next direction for the technology industry.

But more than that, after a year of taking a beating, many of these stocks trade for just cents on the dollar.

Our job over the coming weeks and months is to figure out which of these good businesses with great ideas has the best chance of success.

It’ll be hard work, but it’ll be a lot of fun too.

Cheers.
Kris.

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IBM (NYSE:IBM) reported Q4 EPS of $4.71, topping consensus estimates of $4.62.Revenues in the quarter came in at $29.49 billion, slightly below estimates for $29.71 billion.The company is forecasting 2012 EPS of at least $14.85, vs. consensus estimates of $14.81.The company added that its services backlog rose $4 billion, to $141 billion.

Mcgraw Hill Companies Incorporated (MHP) announced its quarterly dividend of 25.5 cents per share, an increase of about 2% over its prior dividend in November of 25 cents. The dividend is payable on March 12, 2012 to shareholders of record as of February 27, 2012.

Bargain hunters are wise to pay careful attention to insider buying, because although there are many various reasons for an insider to sell a stock, presumably the only reason they would use their hard-earned dollars to make a purchase, is that they expect to make money. Today we look at two noteworthy recent insider buys.

Brazil Points to a New Sovereign Debt Story

by Jason Jenkins, Investment U Research
Thursday, January 19, 2012

Will there be some slowdown in the BRICs and emerging markets for 2012?

Yes…

But let’s remember: It’s all relative – relative to the fact that those returns will probably be better than those of developed countries. Plus, who can say what dictates an emerging market anymore?

Some have already emerged and can be considered growing markets – a term Jim O’Neill now uses for those countries he once coined BRICS.

Over the last three months we’ve seen a clear flip-flopping in a new world order. It sounds a little dramatic – because it really is. One of the best examples is Brazil. I know they’re a sexy country in the investment world at the moment, but there’s substance behind the flash.

And when you compare them to other supposed developed countries, they began to look a lot better.

Brazil Debt Upgraded in November

Standard & Poor’s upgraded Brazil’s sovereign dollar-denominated foreign debts to BBB from BBB- and upgraded the government’s local currency debt to A- from BBB+. It’s the first time since the nation’s inception that the government has an A rating on its debt. The S&P said the outlook for Brazil’s credit profile was stable with over $350 billion in foreign currency reserves, a stable economy and strong leadership on both the monetary and fiscal fronts.

Now if you take this information and compare it with Italy’s current bio – which somehow still has an A credit rating – there’s not much of comparison.

The Sixth-Largest Economy

According to the Centre for Economics and Business Research (CEBR), Brazil has already overtaken the U.K. as the world’s sixth-largest economy. As the banking crash of 2007 to 2008 and its subsequent recession are still being felt by developed countries, Brazil has been propelled by its exports to China and the rest of Asia.

The English newspaper The Guardian reported – while covering the CBRE’s announcement – that Europe is expected to suffer a “lost decade” of low growth following a credit binge over the past 20 years. Paying back debts over a short timescale will restrict growth and prevent many countries, including the U.K., from clawing back output lost in the banking crash for many years.

A Record Low Yield on Foreign Bonds

The Brazilian government sold $825 million in long-dated bonds on Wednesday and demand for the debt was so great that yield came in at a record low 3.449 percent. The bond’s coupon yield at par was 4.875 percent, but buyers pushed the value of the bond higher, meaning interest payments, or current yield on the bond, was sold at historic lows for Brazilian foreign debt.

Demand for Brazilian government’s dollar denominated bonds was seven times the anticipated volume, with an order book of more than $3.5 billion, according to Itau, one of the underwriters.

“Sovereign U.S. dollar paper of high quality issuers like Brazil still are favored by the marketplace in these turbulent times,” said Sara Zervos, an international bond fund manager at Oppenheimer Funds. “It’s analogous to the amount of money invested in money markets and U.S. Treasuries, low yield, but ‘safe.’”

Above is a table of the CEBR’s Top 10 national economy 10-year forecasts. No change in the top three… but the middle gets very interesting.

Good Investing,

Jason Jenkins

Article by Investment U

AutoNavi (AMAP) was downgraded today by Jefferies (JEF) to hold from buy with a price target of $12, as the company’s business is in transition. Shares are lower by about 5.3 percent.

Advance Auto Parts (AAP) was upgraded today by Credit Suisse (CS) from neutral to outperform with a price target of $80, as the firm believes that the stock has yet to price in momentum from solid earnings. Shares are higher by about 1.7 percent.

Stocks held onto modest gains, as investors took into consideration mixed economic data, including weekly jobless claims which fell to a near four-year low. The Labor Department reported that claims were down 50,000 to a seasonally adjusted 352,000, far better than economists had expected.

U.S. Gas and Diesel Prices: The Latin American Connection

by David Fessler, Investment U’s Energy and Infrastructure Specialist
Thursday, January 19, 2012

Pull into any gas station in the United States, and you’ll find diesel fuel more expensive than regular gasoline. About $0.46 a gallon more.

In the United States, diesel and heating oil (known collectively as distillate fuels) have been higher than gas since 2004. Before that, it was the other way around. So what’s changed?

In a word, demand. Prior to six or seven years ago, the demand here for gasoline was higher than for distillates. The only time diesel and heating oil jumped above the price for gasoline was during colder-than-usual winters, when demand for heating oil soared.

Very little U.S. distillate production was exported, so prices fluctuated primarily based on the supply and demand equation here.

Today, it’s whole different ballgame. Diesel’s much higher than gasoline because, on a worldwide basis, the demand for it is greater than it’s ever been. Oil refineries, ever the opportunists, are producing and exporting as much of it as they possibly can.

It’s the exporting that upsets the supply demand equation in the United States. With more of U.S. distillate production headed for foreign shores, the dearth of supply makes it more expensive here.

When I travel to Latin America, diesel is the number one transportation fuel. Nearly every car, bus and truck you see runs on the stuff.

Consequently, gasoline is more expensive there than diesel. In some places, it’s the equivalent of $1.00 a gallon more. Once again, it’s all about supply and demand, and now it depends on where you live.

There’s another factor at work here, as well. The United States has imposed stricter limits on the sulfur content of diesel, whereas many other countries haven’t. The low-sulfur variety is more expensive to produce, and most of it stays here.

With a few key East Coast refineries shutting down over the next year, things could get even worse for diesel prices here. But there’s a light at the end of the proverbial tunnel.

Strict new government standards on emissions, as well as a pending 54.5 miles-per-gallon standard that’s supposed to be in place by 2015, could spell the beginning of a diesel-powered renaissance in the United States.

If demand for diesel here exceeds that of gasoline on a permanent basis, more refineries will start producing it. Those that already do will begin to export less, since the margins will be greater here. Distribution costs will be lower since there won’t be a ship involved.

As more and more manufacturers begin to offer diesel-powered vehicles here, it’s difficult to imagine that U.S. consumers will turn their noses up at them.

Volkswagen has offered diesel version of its most popular models here for decades, and has done very well with them. But now GM, Honda and Toyota are all planning to introduce diesel variants by 2014.

Even at $0.46 cents a gallon premium over gasoline, diesel will certainly make economic sense to a lot of cost-conscious consumers.

Will that bring prices down here? We’ll have to wait and see, but my bet is prices will stay elevated due to the global demand for crude.

The bottom line is that oil, in just about any form, is going to be a good investment for some time to come.

Good Investing,

Dave Fessler

Article by Investment U