Saturday, May 28, 2011

Gold as collateral

Last week one news article in particular caught my eye. Francesca Freeman of Dow Jones Newswires reported that European parliamentary committee approved a proposal to allow clearing houses to accept gold as collateral:

“The European Parliaments Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold. The proposal, under the European Market Infrastructure Regulation, will be passed to the European Parliament and the Council of the European Union for another round of voting in July.”

Same type of announcements (but with less significance):
  • “In October 2009, CME Group Inc. said it would allow physical gold to be used as collateral for margin requirements, a move that was followed by rival IntercontinentalExchange Inc. in late 2010.”
  • “In February this year, JP Morgan Chase & Co. announced its decision to accept physical gold as collateral in some financial transactions.”

Also consider this:

“At the same time, many traditional collateral assets, such as European government bonds, have continued to see a deterioration in credit quality as a result of the sovereign-debt crisis.”

Oh, Really? ;-)

For thousands of years, gold has played an important part in monetary systems of the world. Most central banks still have it in their vaults despite the fact that no modern currency is officially transferable to gold with a fixed exchange rate. It used to be so. I’m not expecting that world is going back to gold standard any time soon. However, the importance of gold is clearly rising.

Tuesday, May 24, 2011

Book Review: Endgame

I finally finished a book published earlier this year titled "Endgame – The End Of The Debt Supercycle And How It Changes Everything" by John Mauldin and Jonathan Tepper.

The first half of the book deals with basics of economics and looks at recent research about sovereign debt problems. Besides some economics 101 they explain the concepts of the debt supercycle, deflation, inflation and hyperinflation. In the second half the authors look at various countries and their specific problems: The United States, The European Periphery ("PIIGS"), Eastern Europe, Japan ("the bug in search of a windshield"), The United Kingdom and Australia.

The authors argue that we are in a balance sheet recession which is the end of the 60-year long debt supercycle. They write: "The recovery time in much of the developed world is going to be measured not in months but in years, perhaps decades for some. It will be a much more volatile economy with more frequent recessions. For some countries, this will be very deflationary; for others, not so much. And for some, the risk of high inflation is very real.”

The full review is available only via Seeking Alpha:

Friday, May 13, 2011

Our portfolio grows with Statoil

I decided to add Statoil (OSE: STL, NYSE: STO) to our portfolio after following some time the overall decline in the oil-related stocks. A while back I wrote an article about Statoil to Seeking Alpha and the conclusion was that I wasn’t overly excited about the stock, but thought that it is certainly worth to consider Statoil as an oil & gas play.

Chart courtesy of

The reason why I finally decided to add Statoil was simply that it was time to grow the portfolio with an additional company from oil and gas sector to complement Chevron (producer), Noble Corporation (drilling rig provider) and Fred Olsen Energy (drilling rig provider). I don’t expect that one can really find bargains in companies of this size. They are all equally fairly priced in the market. It would seem rather stupid to assume anything else. Even more stupid would be to expect that I would be the one spotting a true bargain. Therefore, the main drivers behind the decision were the fact that the company was high in my short list for this sector and the fact Statoil is a Norwegian company. Not quite local (i.e. Finnish), but close.

Statoil is already taxed quite heavily. Therefore, I do not believe that the tax burden will grow from the current level unlike what can happen to companies elsewhere in the world. Given that the state of Norway has majority of the shares it is unlikely that resources would be nationalized. They pretty much already are (given the combination of government ownership and taxation). Despite of this the company offers dividend yield which is among the best in the industry as well as healthy net income. Also, given that most of the production happens near Norway Statoil seems like a very safe play in this sector.

The company is much smaller than Exxon and other giants in terms of market cap and revenue. Therefore, it is easier to get a meaningful growth rate. The gross margin of the company is among the best in the whole industry so the company can afford to invest. They have technical skills to operate in tough environments and have experience in exploiting ever harder-to-find and harder-to-drill pockets of oil and gas. They are also tapping into unconventional oil deposits (tar sands) in Canada as well as shale gas in USA.

As always, I started with as small position as it is meaningful to have given the size of the overall portfolio and the transaction costs related to buying stocks. As I don’t believe in timing the market, I continue to add to existing positions regularly and especially if there is a good buying opportunity (and if I happen to have cash available at the time ;-).

Wednesday, May 4, 2011

Rocking The EU-boat

The faith of Portugal-bailout by EU is now in the hands of these three Finnish political figures. One of them OKs the rescue package, one of them said NO to all kinds of bailouts (for any country) and one of them isn't quite sure.

Here they are from right to left in terms of political views:

Jyrki Katainen

Jyrki Tapani Katainen (born October 14, 1971) is chairman of the Finnish National Coalition Party (Kokoomus) and the Finance and Deputy Prime Minister of Finland. He wants to bail out Portugal and has been the Finance Minister in charge of previous EU-bailouts. He doesn't like it, but he says that it is the lesser of two evils (the other being another EU/World-wide financial panic).

Timo Soini

Timo Juhani Soini (born May 30, 1962) is a Finnish politician, and co-founder and current leader of the True Finns party. The party combines left-wing economic policies with strongly conservative social values. They are basically against EU and not surprisingly against any EU-level bailouts. Just a few months ago, the party was a rather small player, but is now third biggest party and very close to #1 (Finnish National Coalition Party) and #2 (Social Democratic Party). It will be extremely hard to not to let these guys to next cabinet.

Jutta Urpilainen

Jutta Pauliina Urpilainen (born 4 August 1975 in Lapua) is the Chairman of the Social Democratic Party of Finland (SDP). She is the joker in the deck. It is basically up to Social Democratic Party whether the EU-bailouts get a green light from Finnish parliament. So far SDP have demanded that investors of Portugal and other EU-countries in trouble will be made partly accoutable. However, it seems that there is no way to re-negotiate the already negotiated EU-bailout packages. Therefore, it remains to be seen what SDP and Urpilainen does.

Jyrki Katainen have been forced to invent an ad-hoc process to get the Portugal bailout approved. The ex-Prime Minister Mari Kiviniemi has said that they won't advance the matter and she will not present anything to Finnish parliament regarding bailouts. Her party lost big time in the election - a lot of their seats in parliament went to True Finns. The position taken by Kiviniemi and Soini puts Jyrki in a tough spot. The solution that he came up is to try to get approval from each party separately. Without the support of Jutta and SDP it looks like he will not get majority behing the package.

What happens if Finland does not support the bailout is unknown.

The Helsingin Sanomat newspaper listed today some pros and cons if Finland rocks the EU-boat big time. The pros include:
  • People living in EU and Portugal in particular will remember that Finland is part of EU.
  • Finnish citizens have been wining for a long time that why Finland needs to always be the model member of EU. Not anymore.
  • EU gets slap in the wrist and reminder that the national parliaments still have a lot of power.
OK. Maybe so, but the list of cons is a long one and at the extreme end of it looms another financial panic. The cost of yet another panic would by likely be much larger than any foreseeable cost of bailouts.

By 13th of May we will know.

I am glad I have put together a fairly defensive portfolio. At the moment I am also letting cash to pile up.