–Thanks to the rise in rates, credit card interest rates are 20% higher than this time last year. And it means, with current balances, Aussies are paying about $500 million in interest on stuff they already bought. Is it too late to buy into the Visa IPO?

–By the way, today’s Daily Reckoning turned into a rather in-depth look at the fundamental trends in the Aussie economy. If you want the share market news and some trading analysis, we recommend you amble on over to Money Morning. Today’s DR has a big task: to determine Australia’s role in global economy history. If that’s not your style, go straight to the weekend and pass our passionate discussion of the terms of trade.

–But before passion, something more mundane. What is so annoying about the credit card headline?

–Well, it suggests that credit card debt has actually declined. It hasn’t. It’s just growing less fast. This is like those ridiculous announcements that periodically emanate from the bowels of the U.S. Government about the size of the Federal deficit.

–In the months that the deficit grows less fast than the month before, you see headlines like, “Deficit shrinks.” Of course it’s deliberate deception (a lie, if you like). If a tumor grows less fast it doesn’t mean it’s less dangerous. It’s still cancer (nearly all debt is malignant). And growing less fast isn’t really a qualitative improvement.

–The goods news for Glenn Stevens is that high interest repayments on credit cards will eat into domestic consumption. The bad news is that the higher rates actually led to lower repayments according to the latest RBA figures. Repayments in February fell by 7.9% from $18.21 billion to $16.71 billion. That was for the month, by the way.

–You may have felt cheated that we did not spend more time, as we promised, digesting the hard truths published in the Reserve Bank’s Financial Stability Review last month. But one chart did come to mind in light of yesterday’s credit card news. It’s the climb in household interest repayments as a percentage of disposable income.

–Not surprisingly, it’s on the rise. Granted, the combined number includes many older homeowners who are willing to carry higher debt loads later in life. But the simple truth is that paying interest on debt is not a good way to accumulate wealth. Never has been. Never will be. Simply not possible to get rich by spending the bank’s money.

–Let’s put it this way: unless wages rise (something that would probably cause the Reserve Bank to put up rates again), Australians on the margin of the boom will have to use their credit cards to finance essential consumption, and they will pay dearly to do so. Either that, or they will have to reduce consumption. “If we do not discipline ourselves,” the old saying goes, “life will do it for us.”

–But there are congratulations in order. So congratulations Australia! You’re getting a $30 billion raise.

–Reserve Bank economists now reckon that the recent coking and thermal coal deals inked between Aussie sellers and overseas buyers will haul in another $30 billion to the economy this year. That is not the kind of news the RBA wants to hear while it’s busy putting out inflationary bush fires in the economy. But facts are facts.

–Thirty billions dollars in coal and iron ore earnings, where will it go? To producers? To investors? To mining service companies like Walter Diversified Services (ASX:WDS)?

–While you think on that, let’s talk about “terms of trade” for a moment. “Terms of trade” is one of those terms of the trade that gets throw around by economists all the time. But what does it mean?

–The simple definition is this: it’s the ratio between export prices to import prices. If you get more for what you sell and pay less for what you buy, your terms of trade improve. And guess what people? Thanks to this particular moment in history, Australia gets a lot more for what it sells and pays a lot less for what it buys (except for crude oil).

–The chart below is taken from a 2005 Reserve Bank research paper called “Long-Term Patterns in Australia’s Terms of Trade,” by Christian Gillitzer and Jonathan Kearns. If you’d like to read the whole thing, you can find it here.

When you get right down to it, though, the resource sector has a much better chance to grow earnings this year and next than the financial sector. The resource boom is, “generating an enormous amount of income for the Australian economy and it is not obvious that it is going away any time soon,” Reserve Bank governor Warwick Mckibbin told David Uren in today’s Australian.

Treasury economist David Gruen agrees. He points to the larger contributions to global growth from countries like China, India, Brazil, and Russia. “At this stage, there is every indication that this pattern of relative contributions to world growth will be repeated in 2008.”

The big drivers are agricultural exports (recovering from the drought) and mineral and energy exports, driven by Asian growth and high global energy prices. The charts below from ABARE show the total dollar value of select Aussie exports to various countries in 1996-1997 (the grey line) and 2006-2007 (the orange line).

Gold to India, iron ore to China, aluminium and thermal coal for power to Japan. What’s not to like about that earnings picture? Lucky country indeed.

Barring a total collapse in resource prices-something we addressed earlier this week-we agree with the basic thesis that these sectors and these mineral, energy, and farm exports will drive earnings growth in the resource sector. But what we’re after is what to do about it.

Deeds, not words!

We feel more optimistic about the smaller resource stocks in the market that we have at any time since we moved to Melbourne in 2005. The combination of bad news at Opes and the gloomy outlook from Bernanke makes for a lot of negative sentiment and frankly, despondence, hopelessness, despair and (if we’re really lucky) capitulation. That’s perfect.

Not that we are taking pleasure in other people’s misfortune. But this really is the time when you want to be a buyer: when other investors must sell. You have a relatively positive earnings outlook for select commodities (especially energy and energy alternatives). And you have an open playing field, where most investors have fled to cash and blue chips. You also have a lot of forced selling (see Opes note below).

The risk is obvious. Markets as a whole could go down. But as we’ve learned, even in down markets, companies that grow earnings tend to do well. Going against the earnings trend isn’t easy. But it does happen.

We’ve acquired a new research tool at the Old Hat Factory and have been putting it through its paces to prove the point to you. We asked Gabriel to run a simple report on the best performing ASX-listed shares over the last 52 weeks with a market capitalisation over A$100 million.

We excluded the micro-caps not because we don’t love them (they were, in fact, our first love in 1998 when we ran a Penny Stock Tip sheet in America), but because we wanted to prove that you can still make money in stocks even if you aren’t trading illiquid penny dreadfulls.

Top Performing ASX shares with a mcap of A$100m or better in the last 52-weeks

Forget Macquarie Bank. The real millionaire factory in Australia is resource prices, West Australia and all that gold, iron ore, and uranium!

“Minemakers is a little explorer, mostly a mine developer,” Diggers and Drillers editor Al Robinson said as we hunched over the desk, scanning the results for a little penny stock gold.” It’s also a phosphorous play. Phosophorous prices are way up with global fertilizer prices. Yeah… that’s a good little story. Lots of earnings potential.”

You’ll see a lot of other miners on the list. There’s one share tip from the Australian Small Cap Investigator on the list. We aren’t saying which one, out of respect for paid up subscribers.

We will tell you it has something to do with coal, which has lately been in the news owing to the fact that Australia gets 80% of its electric power from coal and that oil is still above US$100 and looking like it will stay there for quite some time.

You also have a few iron ore plays on the list. Mount Gibson jumps out because just this week Australia’s Takeovers panel quashed an attempted takeover of the company due to what the panel said were, “unacceptable circumstances.”

Chinese steel-maker Shougang loses out on the decision. But the panel is not trying to discourage Chinese companies from investing directly in Australian companies. In this particular case, Shougang already owned a sizable position in Mount Gibson due to its stake in Hong Kong-based APAC Resources Ltd. which owns 20.2% of Mount Gibson’s shares.

Under Australian law, a shareholder must make a formal takeover bid once it acquires more than 19.9% of a target’s shares. Shougang already had a 9.3% stake in Mount Gibson, courtesy of a January deal with Russia’s Gasmetal Holdings Ltd. Shougang’s association with APAC would have given it a back-door holding larger than 19.9% in Mount Gibson, triggering the necessity for a takeover bid.

So this bid didn’t go through. But don’t expect it to be the last. Sinosteel is still pursuing the first ever hostile Chinese bid for an Aussie company with its $1.2 billion offer for Midwest. And keep in mind that Mount Gibson produces a small amount of ore, just six million tons (compared to 120 million for Rio Tinto).

The desire by Chinese steel markers for Aussie ore is a long-lasting one. It should animate the juniors in the iron ore sector for the next few years. There are lots of good trades and investments to be made. And not just iron ore, but coal, bauxite (for alumina and aluminium), and other Aussie minerals. It will be a good time to own tangible assets, or the shares in takeover targets.

By the way, we’ll keep playing with our new research tool and let you know what we find as we find it.

Finally, we don’t have anything to ad to the Opes story that you can’t read in the other papers. It’s shocking, though, that’s for sure. Today’s Financial Review reports that the liquidation of the Opes’ $1.2 billion portfolio has affected almost one quarter of the stocks listed on the Australian Stock Exchange.

“Australia and New Zealand Group is already almost a third of the way through its sell-off of 677 different securities, including shares, options, and warrants in 579 companies ranging from blue chips to market minnows.”

The legal system is firing up, with Opes client’s seeking to block the sale of their share portfolios. These investors are challenging whether ANZ and Merrill Lynch actually own the shares. At least five companies went into trading halts yesterday as ambiguity over who owns big blocks of their shares set in.

What a mess. Word for the week: transparency. Earnings transparency this year will come from companies with real assets on the balance sheet and rising prices for those assets. Yes, it sounds so simple a fifth grader could figure it out. But right now, keeping it simple-in a world of complex financial instruments-is not a bad strategy.

Dan Denning
The Daily Reckoning Australia

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