Sunday, December 2, 2012

Metso corporation

Added Metso Corporation to our portfolio.
"Metso is a global supplier of technology and services to customers in the process industries, including mining, construction, pulp and paper, power, and oil and gas."
During first three quarters of this year (2012) 44,8% of net sales came from mining and construction segment. Paper and pulp related segment also includes recycling and Valmet Automotive. 38,6% of net sales came from this segment. Automation segment was responsible of 11,6% of the top line.

Metso is a global market leader in e.g. grinding mills, mining crushers, pulp and paper control valves, and tissue machines. It has many more products in globally in top 3 positions. About 50% of their sales come from developing markets. Services account for 46% of sales. Their order book look solid with approximately 5 billion euros worth of orders at end of Q3 2012. Half of this is for mining and construction. Net sales of Metso corporation was 5,4 billion euros in the first three quarthers of 2012 and 6,5 billion euros in 2011.

Metso pays good dividend and is expected to pay 2,2 euros per share in 2012. That would be 7,6% yield based on closing price of 28,91 euros per share in Helsinki stock exchange (30.11.12). According to Nordnet bank the P/E of Metso is 12,0 while P/B is 2,1 based on the same closing price. 

Metso certainly is not a defensive pick, but it does have quite a bit of service revenue along with its fat order book to carry it forward even if times are turbulent. I decreased our gold position to get money for this purchase. Going forward I believe companies like Metso are a far better bet than gold which itself does not produce yield. However, our remaing gold positions along with our positions in gold mining companies continue still to be significant part of our overall portfolio.

Wednesday, November 28, 2012

Helsinki Top 10

I use a service provided by via Pörssisäätiö to screen stocks listed in NASDAQ OMX Helsinki. Currently the results of my personalized screen look like this:

Rank Company (Score)
#1 Technopolis (2,9)
#2 Citycon (2,8)
>>#3 Fortum (2,7)
>>#4 Orion (2,6)
#5 Sponda (2,6)
#6 Nokian Renkaat (2,5)
#7 Okmetic (2,4)
#8 PKC Group (2,4)
#9 Ponsse (2,3)
>>#10 TeliaSonera (2,3)

>>#23 UPM (2,0)
>>#79 Nokia (1,0)

Parameters used in screen (weight):
P/B 2012 (15%)
P/E 2011, 2012 (5%,5%)
Dividend yield 2011, 2012 (5%,10%)
ROA 2011 (10%)
ROI 3 year average (5%)
ROE 3 year average (5%)
Turnover increase in past 3 years, 2012 (10%)
Gross Margin (10%)
Profit Margin (10%)
Net Profit increase in past 5 years, 2013 (10%)

Our positions are marked with prefix ">>".

Fortum and Orion are value plays with attractive dividend yield. Besides these two, all others in top 5 are property investment companies. So far I haven't initiated any positions in them. They all seem to have quite different focus within Finnish property market. I haven't yet made up my mind which would be the most interesting one for me to consider.

Our positions outside of Top 10 are UPM and Nokia. UPM is mostly value play with low P/B and attractive dividend yield. Their main business is suffering from declining fine paper usage, but they do have also substantial energy business and vast forest holdings.

Nokia, well, does not probably need any introduction. Like UPM their main business is suffering and the whole company can be considered part value play (due to businesses other than smartphones) and turnaround bet (smartphones).

Saturday, November 24, 2012

Talvivaara is in trouble

In a country in which silence is preferable option to 'unnecessary' small talk, public demonstrations do not draw a whole lot of people unless something very upsetting has happened. The 3rd gypsum waste pond leakage in Talvivaara mine was such event. It came on top of many other incidents in the same mine. No wonder the “Stop Talvivaara” movement has gathered a lot of sympathy lately from the general public. The movement has collected close to 20,000 names into petition to close Talvivaara mine.

The political risk is getting larger and larger. Ville Niinistö, minister of the environment, reportedly has said to protestors that unless he was the minister he would have been among them on that day. You better believe that because he is the chairman of The Greens of Finland. Finnish Police is also investigating Talvivaara on three separate counts of suspected environmental crime.

Ville Niinistö, minister of the environment, speaks to protesters on 14th of November 2012. Picture by Hanna Nikkanen. Some rights reserved.

Talvivaara has approximately 52000 stockholders in Finland. Among them is husband of ex. minister of the environment Paula Lehtomäki of Centre Party of Finland with 51320 shares and their children with 3560 shares [Talouselämä 41/2012]. Talouselämä magazine also counted that so far they have lost  some 160,000 euros with those positions.
Among the biggest shareholders is Solidium, a wholly owned holding company of the State of Finland, with 8,89% of the shares. Pension insurance companies Varma and Ilmarinen own 8,71% and 6,15% of the shares respectively. The State of Finland pension fund owns 0,78% and The Local Government Pensions Instution 0,76%. All of these can be considered holdings for the benefit of general public in Finland.

Besides direct investments in Talvivaara, Finnish Government has high stakes in the mining sector overall. Finland has been consistently ranked as one of the best places in the world for mining investments. There is a mining boom going on in Finland. Finnish Government needs those investments because most mining prospects are in Northern and Eastern Finland where new jobs are badly needed.

Mining investments are made for tens of years and political stability and predictability are extremely important. Thus, it seems unlikely to me that extreme measures would be used such as closing the mine permanently. After all, The Greens of Finland is a rather small party with only 10 seats in the Parliament of Finland. This is not to say that there would not be MPs with sympathies towards “Stop Talvivaara” movement in other parties.
Production at the mine started in October 2008 and production ramp up is still ongoing. The current environmental permit is for 30,000 tonne annual capacity and does not cover uranium extraction. The company has been seeking both permit to increase annual capacity and permit for uranium extraction. Given the environmental problems, I doubt that they will get permission to increase volume. On the other hand with all of their production problems they won’t be near their full capacity any time soon.
The target for year 2011 was originally set to produce 30,000-35,000 tonnes of nickel. The company has lowered its guidance on Nickel production already twice this year (to 17,000 tonnes) It is unlikely that the company meets even that because their metals recovery plant has been suspended since November 4th 2012. The company told on 21st of November that it has been permitted to re-start the plant and it will ramp it up by 25th of November.
Even before the massive leakage from gypsum pond, the company had suspended ore production because unusually heavy rains forced the company to use the open pit mine to store some 1,7 million tons of excess water. This does not affect metal production potential short term because so much ore is stored in the heaps. However, it won’t certainly help them either.
The Talvivaara mining company will make this year net loss far bigger then the net loss of 10,5 million euros last year. Net loss for the first three quarters alone has been 44,5 million euros. At the end of Q3 (30th of September, 2012) the company had 87,3 million euros of cash and cash equivalents. Debt level stood at 601,9 million euros at the end of the quarter. Debt-to-equity ratio stood at 140,6%.
Analyst estimate according to Kauppalehti (kol 21.11.12) that the company might need up to 150 million of extra funding. Talvivaara’s management is admitting that their cash position is challenging on mid to long term. This means they will need more funding one way or another. This isn’t good news for the current shareholders.
I conclude my post with a quote from my previous analysis on Talvivaara:
"There is nothing Talvivaara can do about Nickel prices. There is, however, a lot it can do about environmental problems and bad press. If not handled properly these might become blocking points for uranium extraction and ramp up to full capacity (not to mention production expansion / mine area expansion)."

Full disclosure: The author does not have any positions in Talvivaara and there are no plans to initiate any in the immediate future.

Thursday, October 11, 2012

Comparison of offshore oil and gas drill contractors

About two yeas ago Seeking Alpha published my blog post titled The End Of Oil's Golden Age. That was my first article with them and so far the only one that have made to editor's picks list. I recommend reading it as a background for my interest in oil and gas sector and drilling contractors in particular.

Back then, the offshore drill contractors and rig owners popped up in my stock screens often since they (then) got the right stuff: Growing revenues, relatively low debt burden, excellent margins, low valuations in terms of P/E, P/B and price per cash flow. Back then I took a look at four companies listen in USA: Transocean (RIG), Diamond Offshore Drilling (DO), Noble Corporation (NE) and Atwood Oceanics (ATW). Since then I have added Seadrill (SDRL) and Ensco (ESV) to my list of companies to follow from this sector.

Summary of selected offshore drill contractors listed in USA (data source:

Compared to Fred Olsen Energy (listed in Oslo, Norway) these companies are much larger apart from Atwood Oceanics, which is of same size in terms of market cap. Compared to two years ago the debt burden of many companies have grown considerably. They seem to take advantage of low interest rates and have ordered new deep water drill ships and rigs.

Fred Olsen Energy compares quite favorably to these companies. It has lower P/E (2011) and far better ROE (Return on equity). P/B on the other hand is on the high side while P/S on the low side. Debt burden is about average (0.7x equity). Seadrill has by far the most long term debt (1.5x equity). That's too much for my taste. ATW, DO and ESV have least long term debt per equity (between 0.3 and 0.4 times equity).

Dividend yield isn't particularly good in the companies listed in USA. Only Seadrill offers excellent dividend at 8.6%. The next best, Ensco, is expected to pay 2,7%. These estimates, listed in, seem to assume that last year dividend level is kept also next year.

I used to hold some Noble Corp. stock, but sold that at some point of time. I continue to hold Fred Olsen Energy (see previous post).

Friday, September 28, 2012

Fred Olsen Energy and deep waters

It's been a while since I took a good look at Fred Olsen Energy (Oslo OSE: FOE), which according to company web site
"provides exploration and production services to the offshore oil and gas industry building on 150 years experience in shipping and more than 35 years in offshore drilling." 
Byford Dolphin oil exploration rig in dry dock at Invergordon (Scotland) on 2008 (source: User Jetset / Wikipedia)

We have had that stock now over 2 years in the portfolio. At the time of writing it had closed at 255 NOK about +44% above our purchase price of 176,50 NOK in Oslo Børs (stock exchange of Oslo, Norway). The yield has been good. They have paid 20 NOK dividend per share this year and last year making the yield 11,3% p.a. for the original investment. However, the company has stated to pursue strategy to pay a dividend of NOK 10 per share. In the last two years the company has paid extraordinary dividend of NOK 10 per share. A concervative future yield estimate is thus to be calculated with NOK 10 per share meaning 3,9% yield at NOK 255 stock price level.

Market cap of the company is NOK 17 billion (about USD 3 billion). P/E (2011) is 8,2. This assumes net result after tax to be NOK 2083 million (result for 2011). The company has been making about NOK 2 billion net result for last 5 years except for 2009 (2,7 billion) and for 2007 (1,4 billion). Nordnet gives the following financial figures for current share price of NOK 255:
  • ROE 28%
  • P/E 8,7
  • P/B 2,4
  • P/S 2,8 
The income statement for the first half of 2012 looks solid. With total revenues of 3348 million NOK the company delivered net profit of 984 million NOK. That's 29,4% out of revenue! The balance sheet looks OK to me. Most of the assets are tied into property, plant & equipment (drill ships and rigs etc.). There is enough cash to cover for twice the amount of current interest bearing debt. In general current assets are >50% bigger than current liabilities. Equity at 7667 million NOK is bigger than non-current interest bearing debt at 5231 million NOK. To me it seems the company is not overly leveraged.

Net cash flow from operating activities look good. However, the company has been making sizable investments in 2Q 2012 and therefore net change of cash has been negative. Dividend of 1325 million NOK paid in Q2 2012 is less than net cash flow from operating activities from 1H 2012 alone (1606 million NOK) so even the elevated dividend level of NOK 20 does not look high compared to cash flow.
The Company, subsidiaries and major owners

Fred. Olsen Energy ASA, headquartered in Oslo, Norway,  is a holding company and provides management services to the subsidiaries within the Group:

The drilling segment delivers practically all of the net result. The Engineering & fabrication segment (Harland and Wolff) is small in comparison.
The Dolphin Drilling companies form the drilling contracting business activities of Fred. Olsen Energy ASA.
 "Dolphin Drilling is one of the longest established independent drilling contracting companies in the offshore arena tracing its roots back to the earliest offshore exploration activity in the North Sea in the mid nineteen sixties. The Fred Olsen family’s interest pre-dates this with a history in shipping activity stretching over 150 years."
The Olsen family is a major shareholder (53.4%) via their holding companies:

The Fleet

Fleet summary. Information from company web site and annual report 2011.
The offshore fleet of Fred. Olsen Energy ASA with subsidiaries consists of two deepwater units and six mid-water semi-submersible drilling rigs in addition to one accommodation unit. The Group has two newbuilds under construction, an ultra deepwater drillship scheduled to be delivered in 3Q 2013 and an ultra deepwater semi submersible for harsh environment scheduled to be delivered in 1Q 2015.
Contractual situation looks pretty good. There are long contracts for both drill ships with Anadarko Petroleum Co. There is also long contracts for Byford Dolphin and Borgsten Dolphin. Rest are ending between Q4 2012 and Q1 2014 according to company web site.
Deepwater drilling vessels - semisubmersible and drilling ship (source: Wikipedia)
It's worth to note that Blackford Dolphin, the deep water semi-submersible drilling rig, was estimated to be worth 3459 million NOK at end of 2011 according to annual report. Alone that's about third of net book value of all their rigs and drillships. Basically over half of assets were tied to two deep water units and the ultra-deep water Bolette Dolphin drill ship under construction at end of 2011. With the ultra-deep water semi-submersible drilling rig targeted to be finished 2015 the company will have significant portion of company net assets in the deep water and ultra-deep water segments.
The definition of "deep water" seems to vary in the industry and has shifted over the years with technical advances. This company considers 1000-1750 feet mid-water, while U.S. government definition of deep water shifted from 1000 feet to 500 feet after Deepwater Horizon -accident in Gulf of Mexico. The 500 feet limit seems to come from the fact that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at about 500 feet. A government report from UK concluded this also to be an obvious threshold for deep water operations. According to this definition all the the assets of Fred Olsen Energy are "deep water" or "ultra deep".
Regardless of the definitions, it seems that the offshore oil exploration and production is moving to ever deeper depths. An interesting perspective is that 162 year old oil industry started deep water exploration in 1975 and production 20 years later in 1995. Anyway, deep waters is where the day rates are today the highest and that's also where the demand increasingly is likely to be for drill ships and rigs.

Thursday, August 2, 2012

Hard disk drive manufacturers poised to make a killing

Valuations of the two market leading hard disk drive (HDD) manufacturers Seagate (STX) and Western Digital (WDC) reflect the widespread belief that the days of HDD as the key solution for storing information are numbered.

To understand whether the demise of HDD is correctly predicted, I dug deeper into the following topics most commonly cited to be the reason for the depressed valuations of these companies:

  • Death of traditional PC
  • Shift to cloud
  • Solid-state drive (SSD) replacing HDD

Thursday, July 26, 2012

Asset Allocation

I track our asset allocation usually monthly. As said in the previous post, I have heavily increased our allocation to selected IT stocks this year. Therefore, I thought that it is good time to writen an update on where I believe our money will give the best returns given our time horizon and risk profile.

Asset Allocation

Stocks 91%
Gold 9%
Cash -
Bonds -

This kind of allocation means
1. our investment time horizon is decades long (hence my pseudonym "UltraLong" :-)
2. we accept high risk (high volatility)

If you are not familiar with asset allocation, then I recommend reading about it. For example, "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing" by U.S Securities and Exchange Commission.

The basic guides do not talk about gold. However, you can think it as cash that in long run will hold its value better than any other currency. Gold does not yield anything, but it should offset inflation in long run. It is also a hedge for very bad times. You can find more about Gold as portfolio diversificator from e.g. World Gold Council web pages. Gold has low correlation to many other asset classes. The correlation is especially low to stock indexes. Therefore, it makes good hedge and diversificator for a portfolio such as ours. However, you should be aware that our allocation to gold is a lot higher than recommended in several studies about asset allocation that I have seen. On the other hand, omitting cash and bonds is also against all rules of "safe" or "optimal" asset allocation.

I omit cash and cash-equivalents because the real returns (real = after inflation) there are typically negative or nonexistent. Also, we have hopefully long work careers ahead of us meaning we can continue to save for a long time still. This means our current investments represent only a fraction of our cumulative earnings between the day we started working and the day we retire.

I have to admit I haven't really studied bond investing that much. I know the basics and the fact that with ETFs and mutual funds you can invest quite easily to bond market and achieve diversification at the same time. If I would invest into bonds, I would probably go for corporate bonds. However, I prefer to be owner of companies rather than a creditor for the following reasons:
  • I don't believe that we are going to have decades long deflationary spiral in the western world. I rather believe authorities will do everything they can do avoid this and cause inflation.
    • Inflating debt away is the oldest trick in the book for countries with own central bank
  • Yeilds are at all time low. When they finally go up, bond values go down. Even if you are holding to maturity you may have poor yield vs. inflation or alternative investments.
  • Stocks are beaten so low that the yields are very attractive vs. bonds. Corporations with adequate pricing power can raise prices with inflation and as a bonus they might even grow.

Stock Allocation

Geographically our allocation is
  • Europe 43%
  • North America 39%
  • Emerging Markets 17%

Sector allocation
  • Information Technology 33%
  • Communication Service Providers 18%
  • Health Care 12%
  • Oil & Gas Production 11%
  • Low Emission Power Generation 9%
  • Mining & Exploration 7%
  • Other 9%

Since we own gold miners our combined allocation to gold and gold mining is 14,4% of all assets.

Our Top 5 holdings are at the time of writing (percentage marks "out of all assets"):
  • Nokia 7,8%
  • China Mobile 6,6%
  • Western Digital 6,1%
  • Intel 5,7%
  • Microsoft 5,7%

Please check "Note about risk profile" from the sidebar to understand better why we can take a lot more risk than what is recommended even for professional investors.

Wednesday, July 11, 2012

Portfolio update

In the past month I have been making some changes to our portfolio. I have sold shares in AstraZeneca and Lithium ETF. I wanted to increase our allocation to Information Technology sector and some other sectors needed to be pruned. This leaves 21 companies and 1 ETF to keep track of. That's plenty for me.

Our sector allocation has now tilted quite heavily to Information Technology, which has by far the largest allocation (29%). Other sectors are close to 10-15% range. It is good to note that I follow quite closely what famous value investors are doing. According to Dataroma they are also exposed to IT sector although they do seem to love financials even more. Currently our allocation to that sector is zero.

Microsoft and Cisco Systems are among the Top 10 most owned stocks, but they haven't been adding to those positions lately. Rather they have been going after Oracle, Google, Apple and HP in the last 6 months. Overall, the big companies in IT sector seem to attract value investors and I do agree with them that there is indeed value to be found from many companies in that sector.

Sunday, June 10, 2012

When the Euro crisis will end?

Not a day goes by that something is written about the "Euro crisis" in newspapers. Now it seems that Spain is joining Portugal, Ireland and Greece to ask for some sort of emergency funding. There seems to be speculation about the amount of money needed between tens of billions and 100 billion euros. Anyway - lot's of money.

I have lost track of all the "facilities" through which funds are directed to the countries in need. Also, it seems that there is a dangerous pattern of declaring "emergency over" after "stress tests" or simply spending XX billions on the problem. The confidence isn't just quite restored yet. I have no idea when it will be and have come to a conclusion that probably nobody knows fully what is ahead of us.

Greece started the show in 2010 with getting emergency funding worth 45 billion euros in March and additional 110 billion in May. Ireland followed with 67,5 billion euros late 2010 and then Portugal got 78 billion euros in May 2011. Last summer Greece came once more back and total funding to that direction has ballooned to 285 billion euros. So there is already one example of a country coming back for more.

Thus, it's a bit hard to believe 100 billion is going to solve all of the problems in Spain - a much bigger country in terms of population and economy than Greece. The s**t will really hit the fan if Italy comes in and completes the pejorative acronym "PIIGS" used by many to reference these countries.

Our defensive posture with regards to portfolio allocation looks better every day.

Source for emergency loan figures and timing: Helsingin Sanomat 9th of June 2012

Monday, May 14, 2012

About the Importance of Gardening

"There's nothing more important than gardening and even that isn't so important" - Chinese proverb

If you have a garden - small or large - you need to take care of it or have someone do it for you. Otherwise it does not take long for that garden to loose its beauty. You need to walk there and observe. You need to pick up fallen tree branches, take out the weed that contend with those nice flowers you have planted and so on.

Managing stock portfolio is much like managing a garden. You should review your porfolio at least once a year if not more often. When I look at companies in our portfolio, I ask myself that would our money yield better somewhere else. Also, I take care that there is enough variety and number of different stocks (diversification).

Selling is much more harder than buying. It is actually good because excessive trading causes most likely just expenses. It try to keep our taxable profits at minimum because we have 30% tax for capital gains in Finland. Therefore, at year end it is good to review the situation and consider taking tactical losses if possible*. Having even net loss is not that bad because it can be used to offset gains in taxation for the next five years in Finland. This might sound strange, but my goal is really to keep the snowball rolling with minimum interference.

*Whether you can do this without it being interpreted as tax avoidance depends on where you live. In Finland there are certain rules that you should follow. For example, I have understood that to be on the safe side you should not buy back the stock the same day you sold it.

Thursday, May 3, 2012

Sold Talvivaara and BYD

Time for filing annual tax returns. In 2011 we sold more stocks at a loss than at a gain. Overall we posted a small net loss. Most of losses in recent years have come from Nokia, Talvivaara and BYD. Selling at a loss is always very hard to do.

I decided that we should exit completely from Talvivaara and BYD. The remaining positions were too small to make any difference in the portfolio and on the other hand I feel Nokia has best chances for turnaround out of these three. So all chips in the "turnaround" category will go to Nokia.

Thursday, April 19, 2012

JNJ out NOK in

Stock markets, particularly the ones in USA, offered spectacular ride up during the first quarter of the year 2012. U.S. markets raised above pre-crash levels of 2007-2008. European markets did also very well - apart from crisis countries and my home country: Finland. The poor performane of the Finnish market is probably due to following three reasons:
  • There are many export driven cyclical companies in the Finnish stock index (OMX Helsinki 25)
  • Nokia, which still is one of the biggest companies by market cap, has performed poorly
  • Despite of it's AAA-rating for goverment bonds Finland is still a peripheral country very far from the financial centers of the world. It seems that foreign money that left after 2008 hasn't come back to the market and even continues to flow away.
The contrarian and the opportunist in me say that this is exactly the time to bring some of the money back to home from abroad. Therefore, I have decided to exit one position in U.S. (Johnson & Johnson) and reduced the position in a few others (such as Chevron). Johnson & Johnson has had it's share of quality problems and the yield is far less than what I am able to get from corporations closer to home.

Therefore, I increased our positions in Fortum and TeliaSonera before they paid their dividend. I also established a new position in Nokia after the earnings warning they issued (wiped out some 15-20% of it's value). Fortum and TeliaSonera are solid cash cows whereas Nokia is a turnaround bet. For Finlands sake I really hope I am right. Nokia is that important - still. It's now trading close to book value and it still has quite a big pile of cash (even after colossal Q1 losses).

Thursday, March 22, 2012

Preliminary Economic Assessment (PEA) of the Norra Karr released by Tasman Metals

Tasman Metals Ltd (TSX.V : TSM; Frankfurt : T61; NYSE-AMEX: TAS) is a Canadian mineral exploration and development company focused on Strategic Metals in the European region. Today they released results of Preliminary Economic Assessment (PEA) of the Norra Karr heavy rare earth element (HREE) and zirconium (Zr) project in southern Sweden.


  • New "In Pit" mineral resource estimate of 41.6 Mt at 0.57% TREO with 51% HREO/TREO% and 1.70% Zr2O (Indicated), and 16.5 Mt at 0.64 % TREO with 49% HREO/TREO% and 1.70% Zr2O (Inferred);
  • $1,464 million before-tax value (NPV at 10% discount rate) based on conservative basket price of US$51 per kg versus current China FOB basket price of US$184.85
  • $5.3 Billion in revenue over the first 20 years
  • 40 year mine life
  • Initial capital expenditures of $290 million
  • Before-tax payback period of 2.6 years
  • Low start-up capital costs due to the excellent existing infrastructure at Norra Karr
  • Proximal to operating ports with rapid access to the European market

70% of the projected economic value of the project (86% of TREO revenue) is expected to be derived from the production of Norra Karr's four rare earth elements: dysprosium, terbium, neodymium and yttrium.  Here is a summary of the most critical rare earths based on my earlier article "Critical Materials For Clean Energy Economy":

As you can see this project has potential to supply the most critical of the rare earth elements. If you are interested to read more about this company I recommend reading analysis what was done before the release of PEA, but still capture the essentials of the project risks and reward potential:

The author of this arcticle was long Tasman Metals at the time of writing. Tasman Metals should be considered as high risk investment. As with all this type of investments, one must prepare for potential loss of entire capital invested.

Friday, March 16, 2012

Hard-to-believe news from GB

Two headlines from Great Britain caught my eye this week:
It was quite hard to believe that either one is true, but both seem to be seriously planned by authorities in GB. The 100-year bond is of course a very nice way for the government to finance itself and maintain deficits for a long time. But what kind of morons would buy them at very low rates? Unless we are going to have very low inflation or even deflation for the next 100 years those papers will be worth a tiny fraction of their value when they are due. And meanwhile you are lucky if you are even compensated for the inflation itself.

The "NewBuy" scheme on the other hand shows that nothing has been learned from the subprime crisis. It's not exactly "NINJA" scheme ("No Income No Job or Asset" -  and you still get a mortgage), but it's certainly creating risks to the system. If you only have to put down 5% and government is going to guarantee the rest you may loose interest in servicing the debt if the housing market collapses 10%, which is not a big correction. Like in U.S. people may walk away and let the banks (or in this case the goverment) handle the remaining mess.

The scheme seems to be based on expectation that the house prices go only to one direction: up. This assumption combined with granting loans too loosely caused the subprime crisis in U.S. Combine a house market price correction with economic downturn (job losses) and you get a disaster.

Thursday, March 1, 2012

Analysis Of Consumer Gold Demand

The year 2011 was yet another positive year for gold. It ended the year 9% higher in terms of U.S. dollars despite of increased price volatility. However, gold demand grew only 0,4% in the year 2011 compared tothe year before. On the other hand, consumer demand for jewellery, bars and coins grew 7,2%. These demand categories accounted for 84,8% of total demand in 2011.
To determine where this demand growth comes from I analyzed consumer demand for gold in selected countries and regions based on data recently released by World Gold Council (WGC).

India and Greater China (China, Hong Kong, Taiwan) accounted for over 50% of total demand for gold jewellery, coins and bars. Europe and VIST (Vietnam, Indonesia, South Korea and Thailand) are the next biggest hoarders of golden items.

Comparison of consumer demand for the precious metal in 2011 to the year before reveals a mixed picture. Consumer demand decreased in India, Middle East and USA while dramatically growing elsewhere in the world.

Changes in consumer demand have a big impact on the price of the yellow metal given the importance of consumer demand in the overall demand picture for physical gold.

Disclosure: Long physical gold via various instruments.

Monday, February 20, 2012

Gold Fever - still on

My first blog post was titled "Gold Fever!" (posted on February 12th, 2010). I wanted to go back to that article to look if anything has changed in two years.

The price of gold is now significantly higher than in early 2010. My feeling is that we might have a gold bubble forming, but we have not yet seen the mania phase of the bubble. Two main facts supporting this are:

1) Inflation adjusted gold price in U.S. dollars is far above the levels where it has traded in the last 110 years. However, it needs to be kept in mind that the gold hasn't traded freely during that time period. Gold ownership in USA was illegal between 1933 and 1975. The gold price in U.S. dollars was fixed until 1971. The first bubble in gold was formed during 1971-1980. This followed the liberation of gold and also was a period of high inflation. At the moment, inflation is low.

2) Gold prices have risen for 11 consecutive years and the record high gold price (over $1900) in September 2011 was not that far away from the peak of the previous bubble. The monthly average for January 1980 was $678 ($1919 in 2011 dollars) and all time high was $850 ($2406 in 2011 dollars).

There are many people looking out for exit. This has already led to volatility (wild price changes) and this likely will continue as greed and fear alternate in the minds of the speculators and investors. The last bubble resulted in much faster appreciation (you may call that "the mania phase") and much higher price in real terms than what we saw in September 2011. Therefore, gold still might have long way to go (upwards). How high it goes and whether it bursts in the same way as before remains to be seen.

It all comes down to supply and demand of gold. The demand side looks strong. World Gold Council recently reported that in 2011 investment demand for gold hit record of 1640,7 tons. India, China and Europe were the main drivers of investment demand, which comprises the purchase of gold bars and coins as well as exchanged-traded funds.

Inflation and especially expectations for future inflation will have a big impact on the price of gold in any given currency. For example, purchasing power of the U.S. Dollar has been declining steadily for the last 110 years, except for a few deflationary periods (most notably after 1929).

[You might want to check my old article written for Seeking Alpha titled "Riding the Second Gold Bubble" which review the last 110 years of gold price history as well as supply and demand]

In fall of 2011 we sold part of our gold position. We remain exposed to both the gold itself and to two of the biggest gold miners out there (Newmont Mining and Barrick Gold). Overall, our exposure to gold price continues to be much bigger than what is typically recommended for diversification purposes (2-5%). My investment thesis into gold remains unchanged from what I wrote in my first blog post: "There are many reasons to own gold or any tangible things right now. In my mind, two of the biggest are fear of inflation and fear of another, a far more serious financial meltdown than experienced so far."

Two years ago all eyes were on Greece and they still are. However, now it seems to be much more widely accepted that the problem isn't just Greece or any of the so called "PIIGS" countries. Most of the Western Europe along with USA and Japan has big problems. Huge piles of debt, chronic budget deficits, chronic trade deficits, unemployment and so forth. Politicians go for the we-have-to-grow-our-way-out-of-this -story as they always do. Secretly, they probably hope central bank bails them out because most of the factories have gone East and the prospects of growth are quite limited in the manufacturing sector at least.

Therefore, like so many times in history, countries will resort to money printing in one form or another. Any other way to cover the liabilities and pay back debt is just too painful. I believe this will take place eventually in Europe also. The only reason we have "PIIGS" crisis is that they can't resort to money printing ("quantitative easing" as they call it in U.S.). They no longer have that option after they joined eurozone. They don't have own central bank that can do the trick and Germans don't let them off the hook via European Central Bank (ECB)- for now. Eventually ECB is the only one that can bail out the banks and the countries in Europe.

This is where the yellow metal comes into play. Even though gold is not used broadly as currency right now, it has been used as such in history and may be used once more. It continues to be the ultimate benchmark for currencies. That is why central banks hold it. In the West, central banks have always kept a significant part of their reserves in gold whereas in the East emerging countries have very little gold. Thus, there may be plenty of central bank purchases in the years to come as emerging countries continue to diversify into gold. According to World Gold Council, central banks continued to be net buyers in 2011 (439,7 tons up from 77 tons the year earlier).

The problem with gold is that it does not yield anything. Central banks don't seem to care because it is the ultimate reserve for them. In fact, when interest rates are low, gold is an attractive alternative to traditional bank savings (cash) for anybody. Jeffrey Currie, the head of Goldman Sachs commodity research, reportedly said in Goldman Sachs Global Strategy Conference in London in January 2012: "We will continue to be long on gold until we can see an absolute turn in the rate cycle, which we don't see happening any time soon." [source: Dow Jones Newswires]

The author was long gold and gold mining companies at the time of writing.

Tuesday, January 17, 2012

Portfolio update

Our portfolio is allocated currently 91% to stocks and 9% to gold.

Geographical allocation of stock portfolio:
  • North America 46%
  • Europe 42%
  • Emerging Markets 12%
Sector allocation of stock portfolio:
  • Information Technology 21%
  • Health Care 19%
  • Communication Service Providers 15%
  • Mining & Exploration 13%
  • Low Emission Power Generation 12%
  • Oil & Gas 11%
  • Other 9%

Thursday, January 5, 2012

Portfolio performance 2009-2011

I track the performance of our portfolio against index investing. I have chosen MSCI All country world (ACWI) index as our benchmark index. Our performance during 2009-2011 has been as follows.

Our portfolio is currently defensive (less risky) and less volatile than the ACWI index. Therefore, it has underperformed in bull market and overperformed in bear market. So far (starting from end of 2008) it has produced exactly same results as investment into passive index would have resulted.

My post from a year ago discusses results from years 2009 and 2010. While updating the calculation to include year 2011 I found a couple of errors in the calculation so results for those years are now somewhat different from the previous update.

Our benchmark index 2007-2011 (based on MSCI All Country World Index) 

I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.

About the "benchmark investment"

I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 0.5% per transaction and 0.5% per year.

The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.)

The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.

About calculating the yearly returns

The yearly return of the index and the "benchmark investment" will be different due to addition of money into the brokerage accounts during the year. The yearly returns are simply calculated as
[balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]