A Market Built on Shaky Foundations

Let’s see what’s been going on in the market…because it gets weirder by the day.

The Australian share  market got another shot of adrenaline yesterday with the news that Japan’s economy is in recession…still. Yep, in the Alice in Wonderland world, a recession in the economy of one of your major trading partners is good news.


Because it gives ammunition to the currency debasers to print more yen. Japan’s economic witch doctors reckon this will boost their economy. But all it does is shower profits on speculators. The Financial Times reports:

For an elite group of the world’s most successful and secretive hedge funds, only one bet has mattered for the past three months: the “Abe trade”.

Shorting yen and buying Japanese equities, inspired by the dovish monetary bent of Japan’s new prime minister, Shinzo Abe, has been one of the most successful hedge fund wagers in years.

And it’s not a bad deal for Aussie equities either. Australia’s large cap, liquid stocks are a prime beneficiary of the ‘short yen, long anything else’ trade.

But all it takes is for one hedge fund to shout ‘fire’ and the trade will reverse very quickly. We’re not there yet, though. With Japanese politicians mouthing off like drunken teenagers, the speculators see more easy money ahead.

Speaking of easy money, did you see Rio Tinto’s result, released yesterday evening Aussie time?

It might not look like easy money, with underlying profit down 40% year on year. But it’s certainty a case of turning red dirt into ‘money’ pretty easily.

Overall, the diversified miner generated underlying earnings for 2012 of US$9.3 billion.

At a divisional level, net earnings came in at US$10.2 billion. The iron ore division contributed $9.24 billion, or 90% of earnings. That gives you a pretty good idea that Rio is not diversified at all.

The copper division was the next largest earner, bringing in just under US$1.1 billion. The other divisions contributed negligible amounts, or losses.

Sam Walsh, the new CEO and former iron ore divisional boss, make a point in one of the presentation slides that, ‘China is Key.’ You’re not wrong Sam. China is the keystone for your entire organisation. Pull it out and the whole red dirt monetisation engine crumbles.

Lucky, then, that China is booming again…for now. But what happens when the keystone is on shaky foundations itself? We’ll find out soon enough.

Greg Canavan
for Markets and Money 

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From the Archives…

Money in the Time of Financial Cholera
8-02-13 – Satyajit Das

Dishonest Leaders and Delusional Voters
7-02-13 ­ – Bill Bonner

Uranium: The Commodity Like Gold Ten Years Ago
6-02-13 – Byron King

How Australia-China Relations Are Caught in the Monetary Battle Space
5-02-13 – Dan Denning

The Great Rotation Into Stocks
4-02-13 – Dan Denning

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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