Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to Know, Point 1: Rarity

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to Know, Point 2: Applications

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to Know, Point 3: Supply

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

The Market

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals (TSE:AVL) has gained 120%, Arafura Resources is up 75%, Rare Element Resources has added 72%, and Lynas Corp. (ASX:LYC) is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

Regards,
Doug Hornig

Source: Why All the Fuss Over Rare Earths?

Before we get into the ins and outs of this sale, we need to clarify what it means to actually buy one-fourth of the Internet. Of course, you can’t just own something as large and independent as the Internet. But you can buy a portion of its traffic.

We’ve been recently writing about international telecoms. If you bought up enough of these Internet Service Providers you could potentially own enough Internet traffic to constitute a quarter. But there will soon be another way you can invest in the traffic with just a single click.

About 50% of all Internet traffic is from file sharing– people sharing music, videos, games, and every other type of file you can think of. Regardless of how you feel about Internet piracy, 50% of all bandwidth on the net is made up of this type of activity.

Here’s where the story really starts heating up…

The Pirate Bay: 2009 Has Already Been One Hectic Year

Half of all file-sharing traffic is hosted on a single website. That’s a fourth of all Internet traffic in one place. That site is called The Pirate Bay.

TPB was launched in 2003, less than one and a half years after Napster—the pioneer in music file sharing— was forced to shut down because of court rulings.

TPB operates in Sweden, free from initial U.S. laws. But over the past several years, the European Union and many individual member-countries have cracked down on e-piracy.

In 2006, Swedish police raided TPB’s headquarters, temporarily shutting down its server. April of this year was an even worse time for the organization. Founders Peter Sunde, Fredrik Neij, Gottfrid Svartholm and Carl Lundstrom were sent to prison for one year and slapped with a $3.6 million fine.

TPB’s Next Giant Step Forward

With the founders in jail and facing serious fines, another Sweden-based company, Global Gaming Factory, announced plans to purchase TPB for $7.8 million. GGF intends to turn TPB into a legal, fee-based website. Users would have to pay a monthly fee to share files. This money would then be used to pay copyright fees for each file transfer.

This, again, might conjure up images of Napster, which was bought by Roxio Inc at bankruptcy auction. Roxio rebranded it as Napster 2.0, which began to offer legal, paid transfers. Best Buy acquired Napster last year for $121 million, but is struggling to see profits.

GGF’s plans for TPB, however, aren’t as small as Best Buy’s were for Napster. GGF, almost immediately after announcing its plans to buy TPB, declared its intent to take the website public… on Nasdaq.

If all the legal and technical aspects of this deal work out as expected, TPB’s intial public offering will take place sometime in 2010. This gives us less than 16 months to plan.

But before we start setting aside cash for this IPO, we need to take a serious look at what this deal will look like.

Why You Should Not Buy Pirate Bay… At Least With What We Know Now

It’s safe to assume TPB’s 25-plus million users aren’t all going to start paying the monthly fees. Instead, we can expect more than 75% of these users to stop sharing files. Possibly as little as 10% of TPB’s current user base will be left when GGF starts requiring fees.

This transition is expected to come very soon. On August 27, GGF is holding a press conference to go over the details of this reorganization, as well as its plans for the IPO.

GGF is also working on deals to turn TPB’s enormous share of Internet traffic into a second revenue stream. By setting up deals with ISPs, GGF will trade promised bandwidth usage for cash.

ISPs are starting to sell bandwidth to customers instead of offering unlimited packages. This means that users that transfer a large amount of data packets will have to pay considerably more than those that just us the Internet to check their email.

With this transition from monthly subscriber to pay-as-you-go, ISPs will have an opportunity to make more money off bandwidth use. GGF promises that TPB will provide this.

However, we’re not sold on this business model. Napster 2.0 has not been able to mount a significant attack on powerful rivals such as (NASDAQ:AAPL) Apple’s iTunes store. Even web giant Google (NASDAQ:GOOG) has not been able to effectively monetize its $1.65 billion purchase of the world’s most popular video sharing site, YouTube.

GGF’s plan might seem enticing to some—don’t buy into the hype. Music and movie pirates will go somewhere else for their illegal downloads. Avoid this IPO at all costs.

Sincerely,
Jim Nelson

Source: How You Can Own a Quarter of the Internet… And Why You Don’t Want to

The two emerging market nations – both members of the BRIC group (Brazil, Russia, India, and China) – will each welcome a major new IPO to their respective stock markets.

The fact that they’re debuting on the same day is purely coincidental, but the story here is that both are very significant not only to their own countries, but could also underpin the emerging market area.

Let’s take a look at these IPOs in the context of the broader emerging market topic… the effect this often volatile but flourishing pack of nations is having on the global economy – and how you can hitch a ride…

Emerging Markets Rebuilding Momentum

In the excellent movie “Wall Street,” Michael Douglas’s slimy Gordon Gekko character famously proclaims, “Greed is good. Greed works.”

Some equally unscrupulous Wall Street characters lived by this mantra. But they became so fat and bloated that they clogged the arteries of the entire financial system. Greed was most definitely not good – and it certainly didn’t work.

When the system toppled over, little was spared. Certainly not emerging market nations, which were unable to withstand the worldwide financial earthquake. While their GDP growth is rapid and their economies are flourishing, they’re still raw in terms of crucial elements like infrastructure, and are more susceptible to volatility.

So when the U.S. sneezed, the world caught Wall Street’s swine flu (ironically caused by swines in the first place). Emerging markets fared just as badly (or worse in some cases) as the U.S. and other global heavyweights like Japan and Europe.

But the big new IPOs in China and Brazil signal that the tide is gradually turning and emerging markets are rebuilding their momentum…

China’s 9-Month IPO Itch

The fallout from the global meltdown crushed China’s Shanghai Composite stock market by 60%, prompting regulators to impose a 9-month ban on new IPOs.

But on Monday, small-cap Chinese drug maker Guilin Sanjin Pharmaceutical Co. will end it by debuting on the Shenzhen market, the smallest of China’s exchanges. The move comes on the back of a scorching 58% climb for the Shanghai Composite this year, amid confidence that the government’s multi-trillion yuan of stimulus money will help the flagging manufacturing sector and trade market.

After a 9-month IPO absence, the decision to “start small” with the Guilin launch is a good one (the firm will offer 46 million shares). A mass relaunch, with bigger, more heavily hyped companies could put too many shares on the market at once – and high-profile disappointing debuts could knock confidence. When the ban was imposed, 37 companies had received IPO approval, so this may kick off a new wave.

Meanwhile, in Brazil…

Brazil Goes Big… And Lula Bangs The BRIC Drum

Like China, Brazil’s stock market is also up big this year. Not as big as Shanghai’s 58% surge, but the 35% year-to-date gain for Sao Paolo’s Ibovespa is still impressive.

Besides, Brazil is expected to take advantage of that run by notching up the biggest IPO of 2009 so far – and the biggest in its own history, too.

On Monday, credit card firm Visanet SA will hit the stock market – and is estimated to rake in $3.6 billion. That will thrash 2009’s current highest IPO – China Zhongwang Holdings, which launched on Hong Kong’s Hang Seng with $1.2 billion raised.

IPOs like these signal that the BRIC economies are once again on the move – with Brazilian president Luiz Inacio “Lula” da Silva banging the drum when leaders of the four nations met in Russia last week.

Quoted by Reuters, Lula proclaimed: “The good news is that rich countries are in crisis and emerging countries are making a huge contribution to save the economy and, consequently, save the rich countries. Wealthy countries are no longer the only ones that account for the world’s production capacity and consumption.”

That’s true. But how much of it is attributable to emerging markets?

Redressing The Global Imbalances… BRIC-Style

The BRIC meeting last week was a chance for the four leading emerging market nations to come together and plot their triumph over the mammoth, industrialized economies.

Okay, not quite. But in the first summit of its kind, the four countries definitely did discuss using their existing strength to enhance their fortunes on the global market even further.

In short, that means addressing the balance of the global financial system – a debate that included ideas on how to create more diversity away from the U.S. dollar as the world’s dominant currency and give the BRIC nations better representation on the global stage.

Or, as Lula da Silva and Russian president Dmitri Medvedev respectively put it, to “change the political and trade geography of the world” and “create conditions for a more just world order.”

Medvedev argues that you can’t have a balanced, successful global system if most of the markets are priced in U.S. dollars. He’d like to redress that imbalance by having Russia buy bonds from the other BRIC nations in return for them upping their ruble reserves.

But with the Russian ruble, Brazilian real, and Indian rupee down 35%, 25%, and 35% this year respectively, those currencies aren’t exactly blowing the dollar out of the water.

So can the BRIC succeed with its plans?

These Davids Won’t Slay Goliath… Yet

According to Reuters, the BRIC nations currently account for about 15% of the global economy.

In addition, while the U.S. racks up GDP of about $14 trillion per year alone, the BRIC nations’ combined total is only about $9.4 trillion. And the GDP per capita, poverty levels, and infrastructure in these countries are significantly worse than in the U.S., with America doubling the output of the BRIC countries combined.

So the BRIC group clearly has a long way to go to usurp the big boys. But Goldman Sachs predicts that by joining forces, it’s possible that the BRIC nations could surpass the G7 in 20 years time, with China’s economy climbing above the U.S.

However, with China’s GDP almost surpassing the combined total of its three fellow BRIC members, the group itself is imbalanced. In addition, the BRIC is not a formal union. All four countries have substantial differences and while they remain heavily tied to the U.S. and other big nations in terms of trade (with India and Russia receiving U.S. aid, too), there’s no way any of them want to rattle the saber by laying down the gauntlet. Not while they also hold almost one-third of U.S. Treasuries.

What they do have in their favor at the moment, though, is GDP growth…

An Emerging World Of Growth

China: 9%.
Russia: 8%.
India: 6.7%.
Brazil: 5%.

Those were the GDP growth totals for the BRIC nations in 2008, compared with the U.S. economy’s contraction of more than 6%. And even the BRIC’s current impressive pace is a slowdown from the red-hot growth seen before that.

What’s more, that growth isn’t artificially stimulated by government printing presses alone. The economies are growing in their own right.

This year, China and India are expected to grow by 7.2% and 6.2% respectively, with China accelerating to pre-global meltdown levels of 8% and 9% during the third and fourth quarter.

So with that, some investment options for you…

Investing In The BRICs

For the sake of diversity and ease of investment, I’m going to focus on ETFs here.

If you want a broad emerging market play, take a look at the iShares MSCI Emerging Markets ETF (NYSE: EEM).

For investments in the specific BRIC nations combined, consider these:

~ iShares MSCI BRIC (NYSE: BKF)

~ SPDR S&P BRIC 40 (NYSE:BIK)

And for investments in the specific BRIC nations individually, take a look at the following:

~ China: iShares FTSE/Xinhua China 25 Index (NYSE: FXI)

~ India: PowerShares India (NYSE:PIN) or WisdomTree India Earnings (NYSE: EPI)

~ Brazil: iShares MSCI Brazil Index (NYSE: EWZ)

~ Russia: Market Vectors Russia ETF (NYSE: RSX)
Best regards,

Martin Denholm

Source: Monday Will Be a Big Day for These Two Emerging Market Nations

The times, they are a-changin’! These days, you could become 51% owner of Playboy Enterprises, Inc. (NYSE:PLA) for less than $50 million. I’m not sure what you’d do with half of Hef’s robe or half of his harem of nubile blondes. But it sure has a certain ring to it!

If you wanted to become half-owner of Marvel Entertainment, Inc. (NYSE:MVL), however, you’d have to shell out $1.35 billion! Comic books are now worth 27 times as much as the well-written articles and witty cartoons that I hear are the sales engine of Playboy magazine.

The interesting part of this is that the demographic both businesses used to appeal to are nearly identical: Adolescent and post-adolescent male virgins.

Only that Playboy’s original audience apparently has outgrown the franchise. While Marvel’s demographics steadfastly refuses to grow up.

Of course, it’s never too late to have a happy childhood.

But there’s a lesson in it regarding what’s shaping up to be the most titillating IPO this year: After dragging their feet for over a year, “adult” social networking company FriendFinder Networks—which absorbed Playboy’s competitor Penthouse a while ago—filed it’s Form S1 with the SEC
on May 18.

The company remains heavily loss-making as free networking and porn sites are eroding what’s left of its market share. Whatever fizz there will be in the actual offering will be media-generated.

The proposed ticker for this stock is NYSE:FFN, which unfortunately remains taken by an unrelated company, the initial amount of the offering (filed last December) was $460 million.

It looks like a prime candidate to shorting the day after the IPO is launched.

Source: Playboy’s (NYSE:PLA) Numbers Don’t Add Up to Much in Regard to the FriendFinder IPO

Even more so, considering that last week’s debut of Digital Globe (NYSE: DGI) – a provider of satellite imagery used in Google Maps and Microsoft Virtual Earth – garnered interest reminiscent of the IPO heydays in the late 1990s.

Heck, it broke into Google’s Hot Trends list, meaning it was one of the fastest-rising search terms in the world. (That’s no small feat considering it meant beating out pop culture search mainstays Britney Spears, Ashton Kutcher’s twitter record and Desperate Housewives spoilers to name a few).

However, I’ve learned hype seldom translates into profits in the IPO space. In fact, I revealed that I was skeptical about the Digital Globe IPO from the outset.

Sure enough, the aftermarket performance only confirmed my suspicions. Despite pricing above the projected range at $19, and rallying in the first few moments of trading, the stock is now in negative territory.

Nevertheless, the buzz is building about another tech IPO this week. But it, too, should be avoided. Let’s take a look at why. Then I’ll share my proven formula for sifting through the IPO hype to find sure-fire winners.

Tech IPOs: Cancel Your Reservations at OpenTable

On Thursday, the tech IPO, OpenTable (Nasdaq: OPEN) a provider of online reservation services for restaurants, will begin trading.

As a frequent user, I’ll concede it’s a convenient service. In a few keystrokes I can guarantee a table at my favorite sushi restaurant, instead of waiting on hold forever or getting an answering machine. And it’s free.

Don’t worry. This isn’t some dot-com company with a clever idea and no revenue stream. It makes money by charging restaurants one-time installation fees (avg. $1,200), monthly service fees (roughly $260) and $1 for every reservation.

A novel concept, for sure. That’s probably why so many investors want a piece of the deal.

Yesterday morning, underwriters increased the pricing range by 31% to $16 to $18. Such a big bump only happens when a deal is oversubscribed.

Why The OpenTable Tech IPO Will Be A Dud

Don’t be so quick to book a seat at this tech IPO, though…

• We all know the restaurant industry relies on the consumer to thrive. In such an abysmal spending environment, OpenTable’s growth initiatives will certainly be hampered.
• Speaking of growth, it’s limited. OpenTable already counts 9,500 of the 30,000 reservation-taking restaurants in North America as customers.
• The best IPO returns come from companies with endless growth potential… Think Starbucks (Nasdaq: SBUX), Chipotle Mexican Grill (NYSE: CMG), or Wal-Mart (NYSE: WMT) in their infancy.
• Plus, barriers to entry for new competitors are low. And consumers can switch allegiance with a click of the mouse, meaning market share can erode before any efforts to combat it can be concocted.
• Making matters worse, the company’s struggled with profitability, reporting operating losses in four out of the last five years.
• If that wasn’t enough, the valuation is completely out of whack. At the midpoint of the proposed pricing range, shares would be valued at 6.4 times 2008 sales. The average company in the S&P 500 only trades at 1.8 times sales. Even more glaring, OpenTable’s initial price-to-earnings ratio would be a whopping 106!

Even the village idiot knows that’s frothy.

Don’t overlook what insiders are doing either. They’re cashing out 1.4 million shares, equal to almost 50% of the total offering. On average, insiders cash out less than 30%. Seems like they’re tipping their hand about the company’s shaky growth prospects.

We’ll be getting our answers regarding OpenTable shortly. Regardless of whether it soars or dives, the fact that it successfully debuts will usher in more IPOs in coming months.

Three Steps to IPO Success in Any Market

Here are three key steps that I would insist on before buying IPOs in any market:

• Profitability. Sounds obvious, but most companies that flop in the aftermarket lack earnings. Insist on at least two years of profitable operations.
• Long-Term Growth Potential. The reason IPOs can be so darn profitable is because they represent the opportunity to invest in the infancy of a company’s growth cycle. Accordingly, focus on companies with verifiable long-term growth potential. Stick to companies with a market potential that points to a decade or more of heady growth.
• $50 Million or More in Annual Revenues. Research out of the University of Florida confirms revenues are a good predictor of stock performance. The key threshold is $50 million for the 12 months prior to an IPO. Companies below that level underperformed the stock market by a margin of 15% for the next three years. Those above it outperformed.

One more thing, IPOs are just like any other investment. Ultimately, fundamentals win out in determining share prices. So, after confirming the three characteristics above, take some time to dig into the underlying business. The stronger the fundamentals, the greater the profit potential.

Good investing,

Louis Basenese

Source: Tech IPOs Are Back… But Don’t Buy This One

For almost five decades, Indonesia held a unique position as the only Asian member of the OPEC oil-exporters’ cartel. When it joined OPEC in 1962, it was Southeast Asia’s undisputed energy giant. But yesterday marked the end of an era for the country. Indonesia has formally withdrawn from the oil cartel.

You see, the country’s oil production hit a peak in 1976. And In the early 90’s it was still producing about 1.7 million barrels per day. But ageing oil fields and a lack of investment has seen falling production since 1995. The country now produces about 800,000 barrels per day and it’s been a net oil importer since 2005. Its days in OPEC were obviously numbered.

It’s big news in the oil industry, but I think that the country’s withdrawal from OPEC is really a bit of a non-event — at least from an investor’s point of view. Indonesia is still a major energy exporter. The country is the world’s biggest exporter of thermal coal, which is widely used in the power sector. It is the world’s second biggest exporter of liquefied natural gas (LNG) after the Gulf state of Qatar. And it has recently overtaken Malaysia as the world’s biggest producer of palm oil as well.

Global oil demand is expected to increase by 1.03 million barrels per day this year. And about 70 per cent of that additional demand is going to come from Asia. But it’s not just oil. Asia’s growing economies are fuelling demand for just about all forms of energy. And Indonesia is well placed to profit from it.

Coal is gold…

The country is sitting on about 90.5 billion tons of coal. And demand for the stuff is surging. In fact, Indonesian companies are now selling coal to Japanese buyers at double last year’s prices. So, investors have been flooding into the sector. Indonesia’s biggest coal miner, Bumi Resources, has seen its share price soar by about 431 per cent in the last year. Its market cap is now $16.4bn

Now the country’s second and third biggest coal miners are planning on floating on the markets as well. Number two producer, Adaro Energy, is planning a Rp12,000 billion ($1.3bn), public offering. That will make it the biggest IPO in Indonesia’s history. And it’s going to be the world’s 8th biggest IPO this year.

Adaro has already pulled in top international investors. 64% of the company is controlled by two Indonesian strategic investors. But 36 per cent of the shares are owned by major global investors, including Goldman Sachs, Citigroup and the Government of Singapore Investment Corporation.

And demand for the IPO has been huge. In March, the company announced that it planned to raise $500 million. Then, earlier this month, they raised that to about $1 billion…and then $1.3 billion…

The Adarco IPO is scheduled for next month. The country’s second biggest coal miner Indika Inti Energy plans on raising $300 million through selling an 18 per cent stake in an IPO shortly before the Adarco float. Both these IPOs are probably going to do well. Investors and speculators who missed out on Bumi Resources’ rally will probably try to get in early this time… a move I see as being quite sensible.

Bumi Resources is one to watch…

The two new coal IPO’s might take some of the wind out of Bumi’s sails. And if we see that happen, a fantastic buying opportunity will present itself.

Just consider: China is building new coal-fired power plants at a rate of about one per week! And then there is India. Asia’s other giant plans on adding more than 400,000 Megawatts of new capacity by 2030 — and the bulk of that is going to be powered by coal. So, the coal story still has a long way to go. In the months to come there could be moves to be made… and a second chance for anyone who missed out the first time around.

I’ll keep you posted.

Regards

Manraaj Singh
Profit Hunter
Editor

PS If you liked what you read here — you can become one of my regular subscribers and receive all our new Profit Hunter recommendations the moment we make them.

Source: Careful Timing Could Mean Big Profits From The Worlds No.1 Coal Exporter

It wouldn’t have been a bad idea. In the last year, the junior Alternative Investment Market (Aim) index has fallen around 14 per cent while the FTSE 100 is down only 6.5 per cent. Admittedly, you’d have been better off in cash – you’d have made 5 per cent there. But, relatively speaking, at least the experts were right.

Now, however, it’s all the other way around. If you are looking for fundamentally cheap investments, you need to be looking at Aim where the average price-earnings (p/e) ratio has fallen to a mere 6.3 times.

There are 1,600 companies listed on this market, so there are obviously huge variations within this – miners and oil companies trading on p/e ratios of 20-plus and the odd outlier, such as fashion super-success ASOS (LON:ASC), trading on 40 times. Even so, talk to a small-cap fund manager of any kind, and he’ll be quick to point to a pile of favourite stocks all throwing off cash yet selling in the market for the bargain prices of 4r or 5 times earnings.

One example is AT Communications (LON:ATCG), a perfectly respectable telecoms company on a historic p/e of 5 times and a prospective p/e for 2008 of a mere 4.75 times.

So just why are there so many apparent bargains about? One answer might be, tax.

Until recently, capital gains on Aim-listed stocks were taxed at only 25% of the normal rate for higher-rate taxpayers, as long as you held the stocks for two years – so an effective rate of 25% of 40%, which is 10%. Now, however, you pay 18%, just like anyone investing anywhere else.

Then there is inheritance tax to consider. Certain Aim stocks are immune from inheritance tax. But now that couples are able to leave their nil-rate bands to each other (automatically combining their tax- free allowances) perhaps fewer people feel the need to bother with the kind of estate planning that Aim provides.

Of course, there is – as there should be – more to this than just tax. There’s also general risk-aversion. Smaller companies tend to be more geared to the domestic economy than larger multinational companies so, when things turn down, their shares inevitably suffer more than most.

And things are turning down in the UK – big time. The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to “melt up” – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.

However, an annual survey of the market from Baker Tilly and Faegre & Benson, entitled “Taking Aim”, throws another kind of light on the way things have changed in the market.

Back in 2005, there were 335 initial public offerings (IPOs) on Aim, raising an average of £17m each. In 2007, there were 82, but the average amount raised was a massive £231m. In some ways, this might look like a good thing – more money was raised in total. But for real smaller companies it might not be.

Why? It suggests, says John Glencross of Calculus Capital, that the London Stock Exchange (LSE) and the companies that work as brokers to Aim-listed companies are more interested in marketing Aim as a home “to foreign companies seeking an international listing, where the amounts involved are very large, than to growing UK companies which typically want under £10m”. A number of last year’s listings were also large funds of one sort or another, or property-related companies.

For these overseas companies, and the brokers getting paid for bringing them to the market, Aim also presents an opportunity for a form of regulatory arbitrage. Its relatively light regulation and less-than-arduous listing requirements make it an easier place to get a fundraising away – and earn those commissions.

This makes sense, of course, in that both the LSE and the brokers are looking to make money, and you make more from big listings and secondary fundraisings than small. But it does make it hard for small companies to get their hands on funding.

This might be the key to the low-looking valuations. Right now, a small company, however good, doesn’t really have anywhere to go to get money to expand. The banks are closed or upping their rates; the debt markets have never been small-cap friendly; and if they only want a few million, Aim isn’t suiting them very well either.

At the same time, liquidity has disappeared from the market itself. Spreads are wide and volumes are low. So buying and selling stakes in listed companies has become little easier than buying and selling in private companies.

The combination of these two factors means that, right now, being listed on Aim isn’t really all that different to being a private company.

And what do private buyers pay for private companies? It depends on all sorts of issues but, in general, the answer is around five times profits. Look at it like this and maybe the seemingly cheap stocks rattling around Aim aren’t so cheap after all.

It would be nice if there were something to be done about all this – small companies are incredibly important to the UK economy. But, as it probably won’t be, I think we can expect the sector to continue to be starved of both funding and investor interest. Both are compelling reasons not to leap in just yet.

Source: Why You Should Stay Away From the Alternative Investment Market

“You think anyone who wasn’t actually hip deep in the new issues market day in and day out could dig up all that killer dirt, know all those names inside and out, and have such a strong roster of winning trading ideas week after week? Faking that level of expertise would be impossible. It’d be like pretending to be a PGA golfer or a five-star chef… The proof is right there in the pudding.”

Believe me, the trader behind Cash McDash is very real. And as Cash reveals this week, part of the secret to his information flow is “playing the game” — scratching the backs of his i-banker contacts so that they regularly scratch his back in return. The game can be rough at times, but the rewards are worth it… and you and I benefit by getting to ride shotgun on Cash’s info and expertise.

So without further ado, read on for this week’s peek into Cash’s world…

Warm Regards,

JL

JL: So, ready to get back to the action after that long holiday weekend?

CASH: You bet. Last week was pretty sobering, though… not only because of how the broad averages traded, but more specifically because of how the new issues market turned south.

JL: Right, you mentioned that late last week — the trouble brewing in IPO land. That discussion wasn’t on the record, though, so how about filling in the blanks for our readers?

CASH: Sure. To start with, our last on-the-record chat covered the shippers, and how the entire shipping sector had experienced broad strength. TBSI was poised to offer more stock to the public in order to raise capital, but there was some concern (from yours truly) about the shippers as a group being overextended and due for a pullback.

JL: And it looks like your concerns were validated.

CASH: Yup. That pullback in the shippers happened in a major way last week. It’s not surprising to see a white-hot sector give up some ground, but it was a bit surprising how fast it happened.

JL: So what type of exposure did you end up having? Hopefully you didn’t give up all of last week’s gains. I know you were pretty pumped about still making money despite all these curveballs being thrown at you.

CASH: Good risk management is a trader’s lifeblood over the long term, and I’ve had enough hard lessons to know to keep out of trouble. But yes, I did give up a little bit of ground. It put me slightly down on the week but a far sight better than what the S&P lost.

JL: So was TBSI a big part of the equation?

CASH: No, actually it was another shipper that got under my skin and stuck me with some red ink. This is a name that I had previously traded in and out of for a handsome profit. Picture a mature company, with an established business plan, that traded from below $50 to above $80 over the course of about eight weeks.

JL: Sounds like a nice move. What was the company?

CASH: Genco Shipping (GNK). The first time around was a nice win for me, but about two weeks ago I closed the position as the stock seemed to be getting ahead of itself.

JL: If you left the party early you must have booked some profit. How did you end up involved again this week?

CASH: Well, as you could probably guess, Genco issued more stock in a secondary, and I ended up getting a slug of it from my guy Marty at Morgan Stanley. (Marty not being his real name, of course. I always change the name — not to protect Marty, but to protect me.)

JL: Understood. So why did you take the stock from Marty? Or maybe I should ask first how much stock you took from Marty.

CASH: Well, I�m not going to give you specific numbers — just in case Marty or one of his friends read Taipan Daily — but I’ll tell you it was less than the number of Visa IPO shares he got me. Marty has a huge book of business, and because he generates a lot of commissions for Morgan Stanley, he often gets preferential treatment when it comes to getting good shares in hot demand.

JL: Sounds like a good guy to have on your team.

CASH: He certainly is. And he likes me. But one of the problems with having a big book of business is that he has a lot of clients begging him for the same deals that I want.

JL: Ah, competition. So you’re in a position where you need to endear yourself to him — stay in his good graces.

It seems that European stocks are at their cheapest levels in six years and the French and German stocks top the list of bargains on the continent.

According to Bloomberg, the XETRA DAX and France’s CAC 40 are the least expensive of the world’s 10 biggest markets. But let’s not get carried away just yet… markets are often said to be cheap when stocks have fallen, rather than the preferential scenario where huge profit growth has been missed by the market. We’re seeing the prior here, falls in earnings and a bearish turn in sentiment.

First-quarter corporate profits in Western Europe dropped 25%, even worse than US firms! “The U.S. has been at the epicentre of the problems, but the shockwaves are more felt here in the euro zone. Cheap valuations are a direct result,” said fund manager Franz Wenzel.

Despite this, the contrarian club is unshaken… is it time to buy?

Well, according to Anthony Bolton, the negativity can act as a cloak to sneak in and pick up the real pearls. It is always difficult to buy recovery stocks, but it’s when stocks are at their most unloved is where the biggest rewards can be had. Do your buying in a bear run, and superior returns can be yours.

It’s this belief that propelled Warren Buffett onto a shopping tour of Europe in recent weeks, with a focus on Germany.

“We would like more family owners of Germany businesses who, when they feel some need to monetize their business, to think of Berkshire Hathaway,” said Buffett.

“We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from sterling in the U.K. because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar,” added the world’s most successful investor.

And he might be onto something… Ben Traynor at the Fleet Street Letter tells me that companies in the French and German markets are trading at a 40% discount to those in the American S&P 500. It’s a market packed with right bobby dazzlers.

So, why the weakness?

Profit warnings left-right-and-centre is why. Not just in banking, neither. Nokia, SAP, InBev, Roche are all firms that have fallen short of expectations through the tumultuous earnings season. It’s not just poor headline figures, but weak outlooks that really put the fear of god into investors. Commodity prices and inflation is soaring, knocking input costs while demand is set for a tumble as buyers grapple with the increasingly pricey Euro.

Though it could have been a lot worse. Earnings in the first quarter fell 18% but were odds-on to fall 23%. And, if you strip out the performance of financial firms like UBS and Deutsche Bank, the first quarter would have actually been in-the-money.

Big banks still see Europe slightly higher for the year, and back in double-digit growth for 2009. Too optimistic? Reasons to be cautious? Probably, but given the discount that shares on the continent trade at, it looks to be worth the risk.

We tend to find more value opportunities in a bearish market, and this is no exception. Whilst it can be emotionally difficult to pick up companies that have been receiving a bad press, if you can justify the purchase in value and growth then you go with your convictions.

Deutsche Bahn steams into the picture

And here’s the newest stock on offer… Deutsche Bahn, Europe’s biggest rail group, is en route to be one of the biggest stock market listings of the year, set for a £6.4 billion initial public offering (IPO).

The German rail operator is set to list on the DAX with Deutsche Bahn itself to control most of the consideration with a 25% stake selling in the IPO. The launch is set for the end of the year and should reassure investors that there is still a market, and hopefully an appetite for new listings amid the credit crunch.

Nonetheless, I’m not a fan of IPOs. I subscribe to the Ken Fisher school of thought that IPO should stand for ‘It’s Probably Overpriced.’ This is based on the frequent share price capitulations that follow the initial ‘stabilisation’ or honeymoon period &mdahs; where newly listed companies shares are bought by investment banks to prop up the price in the early days. When this support subsides, the shares invariably take a tumble.

More important than the investment case of Deutsche Bahn is that, like Visa in the US, the gesture will give heart to the investment community. It serves as evidence of life after the credit crunch. When shares are trading as cheaply as they are now, it may be the best time to stock-up on shares across the border.

The sharp cookies over at The Fleet Street Letter have not been MIA on European opportunities… our portfolio includes a Paris-listed gem that has outperformed the market by nearly 30% since our tip in 2007. With property rights in the South of France, it has profited from high-net-worth individuals and looks set to continue…

Theo Casey Source: The Value Investor’s Stock Market

He upholds the Code of Ethics and Standards of Professional Conduct. She knows why GIPS standards were created and to whom they apply. He has acknowledged his obligation to act in an ethical manner and to encourage others to do the same, acting with integrity, competence, diligence, and respect. The letters CFA indicate that this individual is committed to putting the investor�s interest first at all times.”

This was an ad issued by the CFA Institute. There are more than 90,000 CFAs in the world, according to the website of the CFA Institute which is headquartered in Charlottesville, Virginia.

While browsing through the internet I came across this comment: “None of the star analysts implicated in the Wall Street scandal that led to the $1.4 billion settlement – Merrill Lynch’s Henry Blodgett, Salomon Brothers Inc.’s Jack Grubman, and Morgan Stanley’s Mary Meeker – had the CFA designation, according to CFA Institute records.” Of course, that was written a few years ago so I don�t have any idea if any CFAs were involved in the recent sub-prime and mortgage mess.

The star analysts listed above were research analysts hired by the large broking houses like Merrill Lynch, Salomon Brothers, and Morgan Stanley to cover the then-booming technology and internet sectors. These analysts, investigations indicated, were writing wonderful stories on companies because their employees (the brokers) paid them very well to write stories and not necessarily what they really felt about the companies. So, for example, in one memorable quote one of these analysts wrote, in an internal email, that the company was actually rubbish but, because there was a “transaction” happening, they were writing nice things about the company.

The “transaction” was a reference to a public offering that was due to come out which, when successfully placed with the public and the investors at large, would result in a nice fee for the broking house. And this nice fee would result in a nice bonus for the research analyst writing the wonderful story to support the wonderful IPO.

But – though I am not a betting man, as such – even though there were no CFAs involved in the “star analyst” scandal, I can bet that there were quite a few MBAs involved in that failure and in the recent sub-prime and mortgage crisis.

That�s because of what they teach us (I am an MBA, too) at these business schools. We are treated like the chosen ones, some sort of saviours to mankind�s problems. And we can solve them all in case studies in classrooms. And then, once we have done that we move on to mastering the art of making money. We MBAs are the ambassadors of capitalism – the science of being selfish and looking after our own interest – and sometimes disguised as the interest of The Company – is turned into an art. Capitalism is the given framework and we are taught to worship it. And further its cause. At any cost.

Don�t get me wrong, there are many not-so-rich MBAs out there who believe in ethics and goodness and fairness. But, on balance, all the folks involved in some scandal or the other tend to be MBAs. This could be a sign that it is so easy to get an MBA that anyone who wants it can get it (so the course may not teach you greed and scandalous behaviour but the course selection process does not have the ability to check your background well).

Like a good friend from New York told me many years ago: “The closer you get to the money, the more it stinks”. But – stink or no stink – many of us MBAs are out there hovering around for the kill.

Putting money matters into the hands of most MBAs is like giving a terrorist the key to a nuclear reactor. You know there will be a blow up – it�s only a matter of time. And you know the damage will be huge.

And this is probably true for many CA�s too. In an Indian context, tax avoidance is seen as another version of tax planning. And there are many CA�s in this business. And in the fund distribution business, too. And not all of them act in an ethical or correct way.

So does the university that award the MBA take back the MBA degree?
Does the institute that awards the CA degree take back the CA certificate?

A friend asked me once, what I would do after I stopped spending my time trying to enlighten and educate on money matters. I told him I would like to set up a university where we granted MBAs to students with an understanding that, if they misbehaved, the MBA degree would be withdrawn.
I don�t think many people would enrol in my university; so that may not be a good business proposition.
But, think about it.

What if every MBA or CA degree could be withdrawn and the penalty along with the withdrawal would be a return of all the wealth created from the time the person graduated with the MBA or CA degree.
Knowing the selfish nature of the focus of this twist in capitalism (one with a punishment for a crime committed) chances are that the behaviour of those MBA students would be a lot different.
I doubt the degree holders would sell all those dud mutual fund products; or write glowing reports on IPO�s that are junk; or sit on a panel and tell television audiences how the next IPO their company was leading was going to head into 4-digit numbers very soon.

Come to think of it, if the people who grant the degrees cannot punish the recipients of their degrees, how useful are these degrees?

And if these same people enter the industry of financial services or work with companies that tap the financial markets, maybe SEBI should lay that down as Rule #1: “If you enter this industry and you are caught lying or cheating or indulging in fraudulent practices, we will take away all the wealth you have. And you have no recourse to a court that takes 25 years to decide whether you are guilty or not. Your fate will be decided by a jury comprising of the investors you serviced. If you agree to this rule, stay on in this industry otherwise find employment somewhere else.”

A lot of people would leave this industry in a hurry – this would be an automatic wealth enhancement for most investors! A one-time “exit dividend” followed by the calm and peace of blissful, fair advice.

Think about it – but don�t dwell on it.
Get back to reality quickly.
Because the reality is that every day there are another 100 MBAs hired by some finance company somewhere in the world – and many of them are out to get you!

Source: An Ethical Degree