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Why Municipal Bonds Are Stumbling
These usually safe, tax-exempt investments have become unlikely victims of the subprime mortgage fallout.
By Jeffrey R. Kosnett
December 4, 2007
Municipal bonds generally keep a safe distance when financial firestorms threaten to wreak havoc in other areas of the bond marketplace. But now some triple-A rated tax-exempts are getting thrown into the dreaded subprime mortgage inferno.
The problem isn't that falling real estate values or growing default rates among mortgage holders are causing fiscal problems for state and local governments or school or public utility districts. Municipalities have plenty of ways to cope with budget shortfalls before they get remotely close to defaulting on their debt.
If you're a buy-and-hold, income-oriented investor who owns individual tax-exempts rated single A or better, there's no reason to sell. And there's no reason to avoid new issues.
But total-return investors and holders of bond funds, especially the leveraged kind, do have something to worry about. Municipals are the second-worst-performing class of bond in 2007, barely ahead of corporate junk bonds, and things could get worse.
The problem. The weak performance is tied to concerns about the health of bond insurance companies, relatively obscure entities that go by such acronyms as Ambac, FGIC and MBIA. These companies insure roughly half of all the tax-exempt bonds outstanding for the eventual repayment of principal and any missed interest payments.
On their own, these bonds would typically merit a triple-B or single-A rating, perhaps occasionally, a double-A rating. The insurance upgrades them to triple-A status in the eyes of the market. This allows state and local issuers to pay less interest on their bonds.
Saving money on interest, not compensation for potential defaults, is the real purpose of muni-bond insurance. Claims are rare, and what few there are usually stem from embezzlement and other forms of fiscal chicanery, not general financial market risks.
Because defaults are rare, the "financial guaranty" industry is enormously profitable -- or at least the bond part of it. But bond raters Moody's, Standard & Poor's, Fitch Ratings and A.M. Best, as well as some bond analysts, are now examining the bond insurers closely.
They want to know to what degree the insurers could be exposed to losses from their secondary business of guaranteeing collateralized debt obligations and other pools of asset or mortgage-backed securities.
If the insurers lose their triple-A status because of losses in these assets, the municipal bonds they guarantee will also lose their top rating. Prices of those bonds would drop because their yields would reset to the higher level of a lower-rated bond.
It is this prospect that explains why many insured munis have been losing value even as prices of Treasury bonds seem to rise almost every day.
The situation still may not deteriorate enough to force the ratings agencies to cut anyone's triple-A status. But "this has become a credit story and there's significant fear in the markets whenever there's a credit story. That's a fact," says John Miller, a municipal bond manager for Nuveen Investments.
Another bond trader, who asks to remain anonymous, says insured municipal bonds are trading for 5% less than they should be worth because of a belief, which he shares, that Ambac and MBIA will need to raise new capital or suffer a notch or two cut in their ratings.
The stocks of both Ambac and MBIA, which issue the bulk of the municipal bond insurance, have plunged. That means they can't easily raise money by selling new shares or convertible bonds. In a pinch, they might be pressed to copy Citibank and find a rich partner.
The ratings agencies are caught in the middle. S&P and Moody's took all sorts of grief for being too slow to downgrade subprime mortgage securities. They're in no mood to wink at another fiasco, but they also don't want to send the municipal bond market into a needless downward spiral.
Both S&P and Moody's offer their analyses of the bond insurance situation on their public Web sites. That tells you this is serious because such reports are usually only available to paying subscribers and the press.
The market speaks. Bond investors are weighing in. Their conclusion appears to be that the insurers' problems are serious. As a result, the cost to bond holders is mounting.
Normally, Miller says, the difference in yield between a bond that's rated AAA (S&P) or Aaa (Moody's) on its own merits and an insured bond is 0.08 to 0.12 percentage point. Over the past couple of months, as the insurers' condition has become an issue, this spread has widened to as much as 0.45 percentage point.
To put it another way, that means that an insured, triple-A highway or sewer bond is being priced as if it were an uninsured muni rated between single-A and double-A.
This stealth downgrade doesn't affect the security of the principal or interest payments. But it's a significant loss of value for bondholders.
Currently, there are about $2.5 trillion to $3 trillion in municipal bonds, half of which are insured. The average yield now for a 20-year insured bond is 4.3%. Assume that those bonds would yield 4% if there were no questions about the health of the insurers. The difference in price works to about 4 cents per dollar on a bond due in 2027.
That may not seem like a lot, but it's a big loss in such a stable category, and the losses could get bigger if the ratings agencies turn up their rhetoric or actually downgrade the insurers.
Another sign of pressure is the action in leveraged closed-end municipal bond funds. Although these funds don't invest exclusively in insured bonds, the discounts between the funds' share prices and their net asset values are widening -- a sign that investors see extra risk.
Discounts for four leveraged and insured funds--- Insured Muni Income Fund (PIF), Nuveen Premier Insured Muni (NIF), Morgan Stanley Insured Muni (IIM) and BlackRock Insured Muni Income Trust (BYM) -- have widened considerably since last summer. Their share prices are down by 7% to 12% in six months.
By the standards of a bear market in stocks, these losses aren't horrific. There may even be a bright side to the insurers' travails: More munis may come to market without insurance, meaning higher costs for taxpayers but better yields for bond buyers.
Still, this is about the worst performance spell for muni bonds since 1999. That it came out of left field and at a time when so many investors covet safety and stability is dismaying.
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This page printed from: http://www.kiplinger.com/columns/balance/archive/2007/balance1204.html
All contents © 2007 The Kiplinger Washington Editors
Pimco - Bill Gross - Banking System Failing???
Bill Gross manages $111 Billion in bond funds and I was shocked to read what he wrote in his December address on the Pimco web site. Here is a sample:
"What we are witnessing is essentially the breakdown of our modern day banking system, a complex of levered lending so hard to understand that Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August. My PIMCO colleague, Paul McCulley, has labeled it the "Shadow Banking System" because it has lain hidden for years—untouched by regulation—yet free to magically and mystically create and then package subprime mortgages into a host of three-letter conduits that only Wall Street wizards could explain."
Bill Gross is not some gold bug, or gloom and doom book writer, he is a mainstream bond fund guru, I am taking this seriously. Please take time to read the entire story:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+December.htm
Investment Outlook
Bill Gross | December 2007
The Shadow Knows
The woven tangled web of subprimes has claimed more than its share of victims in recent months. Homeowners by the hundreds of thousands, to be sure, but also those that created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages," but which by a masterstroke of marketing genius were given a more respectable imprimatur. "Skim milk masquerades as cream," warned Gilbert & Sullivan a century ago and sure enough, modern day subprimes packaged into financial conduits with noms de plume such as "SIVs" and "CDOs" pretended to be AAA rated cubes of butter. Financial institutions fell for the charade hook, line, and sinker and now we all suffer the consequences. Defaults are rising, the dollar’s sinking, and good Lord—even Google’s stock price is going down. Something must really be wrong here.
It is. What we are witnessing is essentially the breakdown of our modern day banking system, a complex of levered lending so hard to understand that Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August. My PIMCO colleague, Paul McCulley, has labeled it the "Shadow Banking System" because it has lain hidden for years—untouched by regulation—yet free to magically and mystically create and then package subprime mortgages into a host of three-letter conduits that only Wall Street wizards could explain.
As I’ve noted before, it is certainly true that this shadow system with its derivatives circling the globe has democratized credit. And as the benefits of cheaper financing became available to the many, as opposed to the few, placating and calming waves of higher productivity and widespread diversification led to accelerating economic growth, incomes, and corporate profits. Yet, as is humanity’s wont, we overdid a good thing and the subprime skim milk has soured.
Still, to equate rancid milk with a breakdown in the modern-day banking system is a bit much, don’t you think? Aren’t our central bankers coming to the rescue with lower interest rates and doesn’t Treasury Secretary Paulson finally have a plan to steady Citibank and friends with a "Super" SIV as well as a bailout plan to fix subprime yields and keep homeowners in their homes as opposed to on the streets? They do, but what may be needed more than cheap financing or SIV bailouts is a return of confidence to a shadow system built on fragile foundations. Financial conduits supported by a trillion dollars of asset-backed commercial paper were constructed on the basis of AAA ratings that whispered—nay shouted—that these investments could never fail: no skim, just crème de la crème. Now, as the subprimes undermine these structures and the confidence in them, it is a stretch of the imagination to suggest that 75 basis points of interest rate cuts by the Fed will bring back the love. As the commercial paper market shrinks by hundreds of billions a month, central banks worldwide are facing a giant stress test of the modern-day shadow banking system. The publicized and photographed overnight "runs" on Countrywide and the UK’s Northern Rock in mid-August were nothing compared to what’s taking place in the shadows of the real banking system. Credit contraction, with its inevitable companion of asset destruction, is spreading with the speed of an infectious bacterial disease.
How does one protect "deposits" during a run that no one can see? To be blunt, what does this mean for your pocketbook? Commonsensical analysis has only to ask what investments did especially well during the shadow’s formation in order to understand where future losses may lie. Home prices have been the obvious first hit—down 5% nationwide already, with perhaps another 10% to go over the next several years. Following in lock-step have been financial stocks with subprime exposure to be joined in short order by consumer-based equities as jobs and disposable income falter. These investments thrived as the shadow worked its voodoo and now its curse will sap money from the pockets of any and all who believed in its black magic. Importantly, add to the list of investment victims the strength and viability of our national currency. The SIVs and CDOs of years past supported the dollar at unrealistic levels as foreign investment in the hundreds of billions powered into our markets. Now with confidence waning, the visible but unphotographable run away from George Washington into the Euro, the Yen—anything but the dollar—is underway. Protecting an American-made pocketbook should begin by understanding that purchasing power is more likely to be enhanced via investments in strong, not weak, currencies.
And too, as the shadow unravels, bond investors have been barraged with a host of changing relationships that present a tantalizing menu of attractive arbitrage possibilities against U.S. Treasuries—the star "flight to quality" performer in an environment where almost all bonds are viewed with suspicion. Even Agencies, the step-sisters to Cinderella Treasuries, have been avoided due to billion dollar write-offs at Freddie and FNMA. Swaps—in third place on the quality ladder, yet still reflective of LIBOR yield levels offered by the world’s best banks—provide 70+ basis point premiums or more to Treasuries across almost the entire yield curve. Agency-guaranteed mortgages, reflecting higher levels of assumed volatility, present 150 to 175 basis point pick-ups. What appear then, to be strikingly low yield levels for U.S. Treasuries, are not being reflected by the rest of the U.S. high-quality bond market. Fed ease has lowered Treasury yields, but for the rest of the market—the segment that influences the bottom line of U.S. corporations, homeowners, and consumers—not much has changed. Those that claim that the current cycle of Fed ease will inevitably—and shortly—lead to vigorous economic growth do not really have their ears to the ground or their eyes on their Bloomberg screens. The Fed needs to bring Fed Funds levels down steadily and significantly more in order to counteract the contraction of the shadow banking system which has imposed, and will continue to require, higher risk premiums for non-Treasury securities in an increasingly risky financial environment.
The ultimate destination of Fed Funds is dependent on the state of the domestic economy which, in turn, will be influenced by the direction and level of U.S. housing prices. Chairman Bernanke and his divided band of governors will have to feel their way along this treacherous path with canes in hand—not totally blind, but significantly hampered by a lack of historical context which might point the way to the ideal rate via precedent as opposed to feel. Nonetheless, there are theoretical guidelines which may help to validate or invalidate current assumptions reflected in Fed Funds futures contracts which currently forecast an ultimate floor of 3¼% sometime late in 2008. Traditionalists would point to the "Taylor Rule" which formulaically computes a neutral Fed Funds yield based on divergences of real GDP and inflation from "potential" and "target" levels. Since these levels are somewhat variable and subjective, there is no one number that a computer can spit out, but nonetheless, using reasonable assumptions, neutral Fed Funds levels somewhere in the 4% "+ or –" range are produced. Assuming the Fed would have to drop below neutral to stimulate a faltering economy, the 3¼% Fed Funds futures forecast does not seem unreasonable.
My own methodology incorporates historical cyclical evidence as well as a rather commonsensical conclusion based upon the evolution of the leverage-wrapped shadow system described in opening paragraphs. First of all, history would point out that Fed easing cycles during prior recessionary or near recessionary economies have invariably dropped to 1% Fed Funds rates when calculated on a "real" or inflation-adjusted basis. With PCE core levels at 2%, a destination of 3% would therefore be a reasonable current target. Secondly, one can easily compute a "neutral" real Fed Funds level by simply averaging the spread between funds and core inflation over a period of time long enough to incorporate the ups and downs of cyclical influences on inflation and GDP. Such a history should produce the real Fed Funds level required to keep the economy growing at a reasonable non-inflationary rate typical of the last decade—a logic quite similar to that incorporated in the Taylor Rule.
The average real short-term rate using this methodology over the past 8 years has been 1½%. Commonsensically, this 1½% real rate is the neutral rate that has pumped life into our new finance-based economy with its complicated shadow banking system. It is logical to me therefore, to assume that 1½% is the neutral rate required to keep the future Shadow oiled and properly functioning. If so, then 2% core inflation and 1½% real Fed Funds require a drop to at least 3½% just to maintain current momentum. To restart a near recessionary economy we may need to eventually go down to 3% or lower.
Forward-looking bond investors should understand that the shadow banking system has been built on leverage and cheap financing and that to keep it from imploding, a return to Fed Funds levels closer to those of 2003 may be required. While the Fed is not likely to repeat its 1% "deflation insurance" levels of that year, current Fed Funds futures which predict a 3¼% bottom are not likely to be correct either. Standby for a tumultuous 2008 as the market struggles to move from the shadows back into the sunlight of sounder banking and financial management, accompanied by Fed Funds levels at 3% or lower.
William H. Gross
Managing Director
I have CXPO, TXCO, and POE.V
These are my 3 oil/gas stocks for 2008. I have nearly 40% of all of my portfolio total in these 3 stocks. What do they all have in common? Top and bottom line growth, , low share count, low debt, increasing reserves, and low risk of more need to dilute from here going forward. There are now 6.5 billion people on the planet and we are all consuming plenty of energy. Much of the oil is in some really risky parts of the globe. Granted, POE is in Thailand, at least it's not the Congo, Russia, or certain S. American Countries. I am taking a longer view than next month and willing to bet that we are headed for higher energy prices, not lower. Global banks are cutting interest rates again and it looks like "re-flation" of the money supply is getting underway again. Canada, and England cut last week, we will cut Monday, and the Euro Zone will buckle soon. Flood the globe with paper money and energy and commodities are going up.
I can't wait for all 3 of these companies to post 4th Q earnings!
I can hear Wall Streets' cry for the new year..."LOWER RATES IN '08!!!!"
Bring it on, I'm ready with a boat load of energy and commodity Jr's!
Good Luck All!
Kipp
CXPO.OB Top AND Bottom Line Growth!
Look at these numbers. One more quarter and the market will wake up to yet another Bob's buy and mold special!
http://finance.yahoo.com/q/is?s=cxpo.ob
Kipp
KCL - Option update #2
From the most recent financials.
Saskatchewan Potash
Pursuant to an Option Agreement dated May 15, 2006 and amended May 10, 2007
with Invictus Minerals Corp., ISX has agreed to acquire up to a 100% interest in the
Saskatchewan Potash Property (the “Property”) comprised of 97,239 acres located in
Southern Saskatchewan for the following consideration:
– staged cash payments totalling $3,000,000 ($750,000 of which has been paid);
– incurring exploration expenditures totalling $1,000,000;
– issuance of $1,000,000 worth of common shares of the Company; and,
– issuance of 500,000 warrants exercisable at $1.00 to acquire 500,000 common
shares prior to May 29, 2008
The Company has paid $10,000 to acquire an option to purchase a 2% gross
overriding royalty on the Property and has paid $100,000 towards the purchase price.
KCL - Option
So far I found this:
Saskatchewan Potash
Pursuant to an Option Agreement dated May 15, 2006 with Invictus Minerals Corp.,
ISX Oil has agreed to acquire up to a 100% interest in the Saskatchewan Potash
Property (the “Property”) comprised of 97,239 acres located in Southern
Saskatchewan for the following consideration:
– staged cash payments totalling $3,000,000;
– incurring exploration expenditures totalling $2,500,000;
– issuance of $1,000,000 worth of common shares of the Company.
Subsequent to April 30, 2007, the terms of the Option Agreement were amended
(refer to Note 9).
During the year ended April 30, 2007, the Company paid $10,000 to acquire an option
to purchase a 2% gross overriding royalty on the Property for cash consideration
$200,000. Subsequent to April 30, 2007, the Company paid $100,000 against the
purchase price.
KCL (ISX) - Option???
What are the details on the "option" as described below from the website?
ISX Resources is a Canadian-based resource company engaged in the identification, acquisition, exploration and development of advanced resource properties. ISX has a solid balance sheet and experienced technical and corporate management to advance its current project to the next level. The primary interests of the company include an option to acquire 100% of a 97,240-acre Potash Exploration permit in Saskatchewan, Canada.
KCL - Pink Sheet Ticker??? I can't find a .pk on the new ticker. Anyone have it??
Kipp
Sulfuric Acid is in global short supply.
This is the time of year I travel to state agricultural trade shows. The fertilizer, chemical, and ag equipment folks all exhibit their wares. My company supplies micronutrient zinc fertilizer and we import manganese from China. Our sulfuric acid price has nearly doubled and spot prices have gone from $50-60 to $250+. Thus we need to raise our prices. (We use sulfuric acid to dissolve zinc oxide, converting it to zinc sulfate.)
Sulfuric acid is produced AND used by smelters. There are different processes at different smelters. In the case of sulfide ore, the ore is "roasted" thus oxidizing the metals, and the sulfur gas is converted to sulfuric acid. The resulting roasted ore is referred to as "calcine". The sulfuric acid is then pumped into a dissolving process where the calcined metal oxide goes into a sulfate solution. This liquid then goes through a purification process. The "pregnant" metal solution is then "plated" out in an eloctrolitic plating process. Anyway, there is now a shortage of sulfuric acid and prices are rocketing.
We need to look into our investments in the metals and mining companies and watch out for the ones that are exposed to the shortage. Any company using sulfuric acid to "leach" metals could have a problem.
I will try to get more info and post this weekend.
Kipp
Bobwins - ISX to KCL, I get it!
KCL must be for KCl - Potassium Chloride. The market won't get it but the fertilizer guys will.
N-P-K is the way fertilizer guys talk. 10-34-0 is 10% Nitrogen, 34% Phosphate, and 0% Potassium. 5-5-5 is called "Triple Nickel". 52-0-0 is "Urea".
Kipp
Surprise Canadian Rate Cut
It has been painful to lose the 11% holding Canadian stocks. If we cut rates next week the CAD should strengthen.
http://biz.yahoo.com/fxcm/071204/1196779037679.html?.v=1
POE.V can now be metioned here as it is profitable. POE is hiting gushers in Thailand and is a favorite on the VMC Jr. Energy board.
Kipp
Fertilizer!
Agrium to acquire UAP Holdings for $2.65B
December 03, 2007: 08:33 AM EST
(Too bad there aren't many microcap opportunities in fertilizer. Bobwins has a wildcard posted on the Food and Agriculture board trading at $2.00.)
NEW YORK, Dec. 3, 2007 (Thomson Financial delivered by Newstex) -- Agrium Inc. (NYSE:AGU) (TSX:AGU) Monday said it plans to acquire UAP Holdings Corp. for $39 a share in cash and an estimated $487 million of assumed debt, for a total of about $2.65 billion.
The all-cash purchase price represents a 30% premium over UAP's closing price of $29.91 on Friday. Agrium said.
The deal is expected to slightly add to Agrium's per-share earnings in the first year, and significantly add to earnings thereafter.
The companies expect to complete the transaction in early 2008.
Agrium shares closed at $57.84 on Friday.
Agrium to acquire UAP Holdings for $2.65B
December 03, 2007: 08:33 AM EST
NEW YORK, Dec. 3, 2007 (Thomson Financial delivered by Newstex) -- Agrium Inc. (NYSE:AGU) (TSX:AGU) Monday said it plans to acquire UAP Holdings Corp. for $39 a share in cash and an estimated $487 million of assumed debt, for a total of about $2.65 billion.
The all-cash purchase price represents a 30% premium over UAP's closing price of $29.91 on Friday. Agrium said.
The deal is expected to slightly add to Agrium's per-share earnings in the first year, and significantly add to earnings thereafter.
The companies expect to complete the transaction in early 2008.
Agrium shares closed at $57.84 on Friday.
panic about the dollar - link to the "Economist" story:
http://www.economist.com/opinion/displaystory.cfm?story_id=10215040
This is such a complex topic for all of us. The bottom line is we do have inflation, and we will have more with a weak dollar.
Another fact is that only 10% of US jobs are in manufacturing. Besides grain, I am asking myself; what is it exactly we will be exporting due to our weak dollar?
Kipp
panic about the dollar - link to the "Economist" story:
http://www.economist.com/opinion/displaystory.cfm?story_id=10215040
This is such a complex topic for all of us. The bottom line is we do have inflation, and we will have more with a weak dollar.
Another fact is that only 10% of US jobs are in manufacturing. Besides grain, I am asking myself; what is it exactly we will be exporting due to our weak dollar?
Kipp
AYSI - Chart
Looks like I need to do some reading!
http://stockcharts.com/charts/gallery.html?AYSI
Thanks!
Kipp
No deflation stories in the press that I can find. Only shortages and declining inventories of food, energy, and metals, leading to higher prices globally. The only thing in surplus inventory seems to be paper money of all kinds, not just USD.
I continue to be attracted to what the world needs more of, and shying away from what it pas plenty of.
Kipp
China gears up to become world's biggest operator of nuclear plants
By Dune Lawrence and Alan Katz
Bloomberg News
Friday, November 30, 2007
BEIJING: China, its safety reputation tattered by lead paint in toys, cancer-causing chemicals in seafood and antifreeze ingredients in toothpaste, is gearing up to become the world's biggest producer and operator of nuclear plants, and a nuclear exporter.
The country plans to build about 30 reactors by 2020, at a cost totaling 450 billion yuan, or $61 billion. It could add as many as 300 eventually, said an official from Atomic Energy of Canada.
Deals signed this year with Westinghouse Electric and Areva will put the Chinese in position to copy the latest technology. Its biggest threat may be as a competitor in selling nuclear plants at home and abroad costing $3 billion to $5 billion. The Chinese atomic industry may follow the copy-and-compete blueprint laid out by local makers of cars, drugs and coal-fired power plants.
"The driving force is self-reliance," said Howard Bruschi, Westinghouse's former chief technology officer, who helped spearhead the company's efforts two decades ago to get a foothold in China. "I don't kid myself that they want to make their own designs and develop them and export them."
The country of 1.3 billion people needs clean sources of electricity to fuel the world's fastest-growing major economy. At the same time, as China is poised to pass the United States as the biggest producer of gases that contribute to global warming, it is under pressure to curb emissions. A round of United Nations negotiations on climate change opens next week in Bali, Indonesia.
The Chinese program took another step forward Monday when Anne Lauvergeon, chief executive officer of Areva in Paris, signed an €8 billion, or $12 billion, contract to sell two European pressurized water reactors and a long-term supply of uranium to China Guangdong Nuclear Power Group. President Nicolas Sarkozy of France and President Hu Jintao stood at the table.
In July, Westinghouse clinched a $5.3 billion deal with China's State Nuclear Power Technology and partners to build four of its new AP1000 reactors. The contract was the company's first for a nuclear reactor since 1987 and its first in China.
Officials of both Western companies said they agreed to transfer technology to local suppliers, meaning China can become a discount competitor. Chinese officials themselves cite Western criteria - safety and cost - for deciding whether Westinghouse's model will become a blueprint for future plants.
"In principle, the absorbed, redeveloped AP1000 technology from Westinghouse will be the dominant technology for China's future nuclear industry development," said Yu Zhuoping, a State Nuclear Power Technology adviser. "But we need to wait and see the real costs, safety, reliability and operational performances of these four reactors before making further conclusions."
That position contrasts with China's safety record in other industries. In nuclear power, international manufacturers are using China as a proving ground to demonstrate to potential U.S. customers that new reactors are safer than older designs. What's more, Chinese suppliers may help make nuclear power competitive with cheaper energy sources like coal and natural gas by bringing down the price of components.
"In the Western world, we talk about nuclear renaissance, but in China it's not a renaissance," said Gavin Liu, Westinghouse China's chief representative. "They're working on the nuclear project on a day-to-day basis, accelerating the whole development process. It's important to build the first AP1000, no matter where we build it, and China's market demand puts it into the best position."
Driving China's nuclear push is the skyrocketing energy demand of its power-hungry heavy industries. This year China became a net importer of coal for the first time. It is the third-biggest buyer of foreign oil behind the United States and Japan.
The Chinese economy will expand by 11.3 percent this year, the fastest pace in 13 years, the World Bank forecasts. Air pollution causes more than 400,000 premature deaths annually in China, the bank says. Those deaths and related diseases cost 157 billion yuan in 2003, or 1.2 percent of gross domestic product.
The reactor orders were part of China's plan to regain some energy independence. The nuclear power program here was just getting started in 1986 when the Chernobyl reactor in Ukraine melted down, bringing the industry to a halt in much of the Western world. That made the Asian nation a prime market for reactor makers.
In 1988, Bruschi of Westinghouse held his first meeting in Beijing, where he sketched out a new atomic plant design, a forerunner to the AP1000. A December wind flapped through a hole where a window should have been, kicking up dust from a coal pile outside. About 40 Chinese engineers huddled in quilted coats, taking notes and encouraging Bruschi to gulp tea for warmth.
Over the next 12 years, he made 60 trips to China, eating fried scorpions and honing his chopstick skills by picking up peanuts. "Time runs at a different speed in the Far East," said Bruschi, now a consultant to Westinghouse.
The efforts paid off with the July contract, which put Westinghouse back on the industry map.
Last year, as the company moved closer to a preliminary deal, Toshiba of Japan bought Westinghouse from British Nuclear Fuels for $5.4 billion, 68 times the cash price in 1999 when CBS sold the unit. Shaw Group of Baton Rouge, Louisiana, and other partners have since taken stakes.
Company officials and industry experts who have worked in China say they are impressed by people's know-how and desire to meet strict safety standards.
"China will be very disciplined about safety," said Andrew Brandler, chief executive of CLP Holdings, the largest Hong Kong utility and a partner in operating the first atomic reactors in China, at Daya Bay. "Their focus is very clearly on safety. They recognize that one incident anywhere will set the industry back decades."
The country already has 11 commercial reactors in operation. Most were built in partnerships with Areva's predecessor, Framatome; the Canadian AECL; and ZAO Atomstroyexport of Russia. There are also three domestically designed reactors.
"Last year, in just one year, China added almost 100 gigawatts of new coal plants, so you can believe that in 45 years China needs and can build 300 gigawatts of nuclear power," said Yang Ruan, chief representative and director of technical programs in China for AECL.
Accidents killed 4,746 coal miners last year in China, according to the official Xinhua press agency. That was more than 100 times the U.S. total.
Alan Katz reported from Paris.
Iron ore set to surge
By Jesse Riseborough
Bloomberg News
Wednesday, November 28, 2007
PERTH: China, the largest steel maker in the world, will increase iron-ore imports as output is peaking at mines in the country, bolstering prices that have tripled in five years, Macquarie said.
"What is going to be crucial in driving the international demand for iron ore is what happens to domestic production in China," Jim Lennon, a senior commodities analyst at Macquarie, said Tuesday in Perth. "Already this year we have seen signs of the Chinese exhausting their potential to grow. It is inevitable over the next few years that production will start to peak and fall off."
BHP Billiton, Rio Tinto and Vale do Rio Doce, who supply 75 percent of the iron ore in the world, are planning to expand existing mines and dig new ones with prices tipped to rise as much as 50 percent next year, according to Macquarie and Goldman Sachs JBWere.
The booming Chinese economy is on course to exceed $3 trillion as early as this year, tripling in the space of a decade.
The country is importing more materials including iron ore, crude oil, zinc, copper and aluminum, driving up prices for the commodities.
Annual demand for iron ore in China may rise to more than 1 billion tons, from about 713 million tons this year, as demand for steel continues to rise, Lennon said.
"The reason why you are hearing all these announcements about expansion from BHP, Rio, Vale, is I think they are making the bet that the domestic market in China will fall by several hundred million" tons over the next 10 years, Lennon said. "That will then lead to an accelerated requirement for imports of iron ore."
Chinese domestic iron-ore production doubled over the past three to four years to about 330 million metric tons this year, Lennon said.
Investment in new mines has declined and the grade of iron being produced from existing mines has dropped, he said.
Demand for the ore will reach 829.5 million metric tons next year as the nation adds steel making capacity, Lian Minjie, the general manager of Sinosteel's mining unit, said Nov. 15.
Demand will reach 958.1 million tons in 2010, with 10 percent growth in 2008 and 5 percent growth in 2009.
China, which produces one third of the steel in the world, may add 100 million tons of steel capacity by 2010. The government has called on local mills, including Anshan Iron & Steel and Panzhihua Iron & Steel, to produce more iron ore locally.
Contract iron-ore prices, which are set for 12-month periods, have risen for the past five years on increased demand from China, and may gain 50 percent next year, Macquarie said last month. The price could rise more than 50 percent due to recent gains on the spot market, Goldman Sachs JBWere analysts said Nov. 21.
The price of iron ore arriving at Beilun, where the largest steel maker in China receives shipments, rose 4.2 percent last week to 1,500 yuan, or $203, a metric ton, the highest since the data began being collated by Bloomberg in June 2006.
Prices will rise substantially next year, Rio's Sam Walsh, the chief executive officer of Rio's iron-ore unit, said Monday in London, where the company is based.
Tom Albanese, Rio's chief executive officer, approved the construction of two new iron-ore mines in Australia this week, and increased the company's global output target to 600 million tons at a cost of $26 billion.
That is more than four times the 2006 output of 133 million tons of the ore.
BHP, bidding $128 billion to take over Rio in the biggest mining merger in the world, has approved a $2.2 billion expansion to increase iron-ore output in Western Australia by 20 percent to 155 million tons as early as 2010. The third-largest iron ore producer in the world started a preliminary study to almost double output to 300 million tons.
Vale plans to spend $10 billion on an iron-ore project in the Amazon to help meet surging Chinese demand for steel.
China is scouring the globe to secure supplies of raw materials to feed demand for goods like autos and appliances. Baosteel, the biggest steel maker in the nation, plans to buy rivals to triple production capacity by 2012.
Global steel output is rising at 17 percent a year, which will support a gain of 35 percent in iron ore prices next year, Credit Suisse analysts said in a Nov. 8 report.
Soyabeans to stoke food price inflation
By Javier Blas in London
Published: November 28 2007 20:50 | Last updated: November 28 2007 20:50
Policymakers already concerned about the relentless rise in global food inflation are facing more bad news in the shape of soaring soyabean prices.
Soyabean prices have risen to their highest level in 34 years, boosted by strong Chinese demand and fears that current prices are not high enough to swing acreage from corn to soyabeans in the US, the world’s largest producer.
In Chicago, soyabean prices this week hit $11.14 a bushel, the highest level since July 1973, helped by rising demand from the biofuel industry as crude oil prices approached $100 a barrel and also by worries about the Brazilian crop – the world’s second largest – after dry weather in Mato Graso state, the key producing area. Soyabeans traded on Wednesday at $10.85½ a bushel.
The price jump threatens to resonate through the supply chain, boosting meat and poultry prices because soyabean is used largely for animal feed, analysts warned.
The surge in soyabean costs – coupled with price increases in other feedstock, such as wheat and corn – could prompt some farmers to abandon production of pork, beef and lamb amid mounting losses, paving the way for higher meat prices in the future.
Food inflation is already a big concern for policymakers in developed and developing countries. German inflation has just hit 3 per cent for the first time since at least 1995 on higher food and energy costs while Chinese inflation has surged to a 10-year high.
Together with corn, rice and wheat, soyabeans are one of the world’s key crops. About 80 per cent of the harvest is processed into soyameal and cakes for livestock feeding, while the other 20 per cent is converted into oil for human consumption (and more recently also to feed the biodiesel industry).
Peter Thoenes, an oilseeds specialist at the UN Food and Agriculture Organisation in Rome, said that Brazil and other South America soyabean crops were now key to offsetting the shortfall from the US, after farmers in the world’s largest soyabeans-growing region converted some of their acreage to corn.
“Any unfavourable weather in South America could spark a price hike,” Mr Thoenes said.
The lower soyabean crop coupled with higher demand for animal feed and for biodiesel production has led to a fall in global inventories, with the stock-to-use ratio at the lowest level for at least five years, according to FAO estimates.
Currently stocks are equivalent to 10 per cent of annual demand.
Gavin Maguire, of Iowa Grains in Chicago, said: “Surging demand combined with the lingering effect of reduced US production in 2007 make complete inventory depletion a real possibility.”
The Chinese government has recently encouraged soyabean purchases, reducing temporarily the import tariff from 3 per cent to 1 per cent in an effort to bring down local prices. Beijing hopes the measure, which expires in late December, will boost pork production, after a disease earlier this year killed millions of pigs.
World Oil, the Hamburg-based consultants, yesterday said additional large-scale Chinese purchases were “likely in the near to medium-term”. China is the largest world importer, acquiring about 40 per cent of the world’s traded soyabeans, followed at a large distance by the European Union and Japan.
Earlier this year soyabeans became the latest victim of the agricultural market’s turf war, after US farmers responded to higher prices for corn in late 2006 by increasing the acreage they devoted to corn to the highest level in over 60 years.
That increase led directly to a sharp reduction in soyabean acreage and, to a lesser extent, wheat and cotton.
The soyabean-planted area in the US dropped this year by about 16 per cent to 63.7m acres, according to the US Department of Agriculture. The acreage fall, together with lower yield productivity, cut soyabean supply to 2.6bn bushels, down 19 per cent from last year’s record production.
Lewis Hagedorn, agriculture analyst at JPMorgan in Chicago, said: “Soyabeans need to purchase back acreage from corn ahead of next spring’s planting season.”
So far, it is unclear if current record prices will be enough to convince farmers to switch crops because corn prices for next year’s harvest season remain high.
CBOT December 2008 corn, the futures contract that corn farmers use to measure the profitability of their crops, is trading at $4.25 a bushel, well above current spot prices of about $3.80 a bushel. Meanwhile, CBOT November 2008 soyabean, the benchmark for next year’s crop, trades currently at $10.20 a bushel, below spot prices.
Although the corn to soyabean price ratio has recovered from last year’s low of 1.8 times – prompting farmers to abandon soyabeans in favour of corn – at 2.4 times it is not high enough to convince farmers to move back to the oilseed, according to analysts.
Mr Maguire said that if corn prices remain close to $4 a bushel, then soyabeans will need to scale the $12-a-bushel mark “in order to establish the key 3-to-1 ratio that would bring about a ramp-up in soyabean production”.
Copyright The Financial Times Limited 2007
Japan Urges China to Allow Faster Yuan Gains (Update1)
By Keiko Ujikane
Dec. 2 (Bloomberg) -- Japanese Finance Minister Fukushiro Nukaga urged Chinese leaders at a meeting in Beijing to allow their currency to appreciate at a faster pace, joining calls from governments in Europe and the U.S.
Nukaga and five other Japanese ministers met with Chinese officials including Vice Premier Zeng Peiyan yesterday.
``I have asked China to consider letting the yuan rise at the fastest possible pace,'' the minister told reporters after the so-called High-Level Economic Dialogues. ``The Chinese side responded that it will deal with the issue with flexibility.''
European officials visiting China last week said a stronger yuan would help tame inflation that's running at the highest rate in a decade, and shrink its trade surplus. China's Premier Wen Jiabao said China would stick with a policy of ``gradualism.''
Group of Seven finance ministers and central bankers meeting in Washington in October singled out China, saying it should make the yuan more flexible to help resolve global trade imbalances.
The yuan has risen about 10 percent against the yen and 12 percent versus the dollar since China scrapped a peg to the U.S. currency in July 2005. The Chinese yuan, which is now linked to a basket of currencies, has fallen about 7 percent versus the euro.
``China should gradually move toward a free exchange rate,'' said Xinyi Lu, chief strategist of the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo.
`Improving Flexibility'
Japan welcomes China's policy of ``improving flexibility of the Chinese currency,'' according to a joint communiqué released late yesterday in Beijing. The talks were organized in April by Japan's then Prime Minister Shinzo Abe and China's Wen.
China will use a combination of monetary policy measures to step up lending controls and ensure steady and balanced growth, Finance Minister Xie Xuren said at the same economic meeting yesterday.
``We will continue to take gradual steps to increase the flexibility of the currency exchange system and strengthen the independence of the currency policy and adjustment mechanism,'' Xie said, in comments posted today on the Commerce Ministry's Web site.
Nukaga, who met European Central Bank policy maker Christian Noyer in Tokyo on Nov. 27, says China's strong economy and expanding trade surplus merit more yuan flexibility.
The Chinese economy, the biggest contributor to world growth, expanded 11.5 percent in the third quarter, increasing pressure for faster appreciation and higher borrowing costs to curb inflation. Consumer prices rose 6.5 percent in October from a year earlier, matching a decade high in August, a government report showed last month.
ECB President Jean-Claude Trichet said on Nov. 28 it is in China's interest to let its currency rise faster.
China in grip of inflation
Amid hard times, leaders trying to reassure citizens
By Evan Osnos
Tribune foreign correspondent
November 25, 2007
BEIJING
When the prime minister of China, the mayor of Beijing and a throng of well-clad aides tromp into a muddy Beijing alley, people pay attention.
And not just residents, but economists around the world.
Prime Minister Wen Jiabao and his entourage set off into Beijing's back streets one morning this month, in search of "genial informal discussion" with "people facing hard times," as the state press put it. His visit was intended to broadcast the government's commitment to defusing the leading complaint on the Chinese street this fall: inflation.
The highest inflation in more than a decade is frustrating citizens and unnerving political leaders who are mindful that rising prices have been a volatile factor throughout Chinese history. China's inflation is also a growing international concern. For years, cheap Chinese imports have helped control inflation in the U.S., but if Chinese exports get more expensive here, they could, in turn, drive up inflation abroad.
Investment concerns
On another economic issue of foreign interest, China's top trade envoy on Friday sought to ease concerns abroad that Beijing is restricting foreign investment to protect its companies. Vice Premier Wu Yi's comments reflect complaints by foreign companies that China is limiting investment in certain industries, despite free-trade pledges.
"The position of the Chinese government to value FDI [foreign direct investment] and attract more foreign capital won't change," Wu told an audience at an American Chamber of Commerce in China dinner. "China's door will be open forever."
At home, China's economic policymakers are seeking to defuse complaints not about limits on foreign investment but about the cost of day-to-day life.
The premier's much-photographed walkabout highlights a central dynamic in China's political balance: The public permits the Communist Party to rule without opposition as long as the regime continues to improve the standard of living. Indeed, facing 11 local residents, Wen said that ensuring a thriving country and prosperous population is "the party and government's duty."
China's consumer prices soared by 6.5 percent in October, compared with a year earlier, matching a rise in August that was the highest in 11 years. Housing is also on the rise, with home prices growing by a new monthly record of 9.5 percent in October despite government efforts to slow the boom. Driving the increase in day-to-day goods was a 17.6 percent leap in food prices, which draw particular ire in China because people spend a relatively high portion of household income on food. The price of pork, for instance, soared by nearly two-thirds in October, largely because of the pig disease known as blue ear, which has hit the Chinese countryside.
"I have to cut spending on non-essential food. My family is eating cabbage, potatoes and carrots every day," said Zhang Mei, a 46-year-old worker, filling her basket at the Triangle Free Supermarket in Beijing. "We have nowhere to complain. Where can we go? You don't even know where the gate [of government] is. If you have the time to complain, you better use the time to find another job."
The issue was grimly illustrated earlier this month when three shoppers at a supermarket in the inland city of Chongqing were killed in a stampede of customers fighting over bottles of specially priced cooking oil. The discount of 20 percent amounted to $1.50 a bottle.
In 1989, inflation was also one of the factors that drove demonstrators into Tiananmen Square.
Economists and executives in China say the increases reflect soaring prices worldwide for oil, grain and other commodities. Those price spikes are rippling through the production chain with no obvious end in sight.
"For us, chickens eat corn, and petroleum products make the packaging," said James Rice, chief of China operations for Tyson, the world's largest meat producer. "Nothing is coming down and, if anything, it's going to get worse."
How far will it go?
China-focused economists are divided about how far inflation is likely to go. Stephen Green, a Shanghai-based economist for Standard Chartered Bank, said he doesn't expect China's inflation to spiral out of control and affect global markets, but that doesn't assuage the anger of Chinese consumers feeling the pinch.
"The only thing that's moving up significantly is meat prices," Green said. "If you're in the urban areas, your income has been going up 5 or 10 percent a year, so you got used to being able to buy more meat and more food, but all of a sudden that's not the case."
So far government efforts to stabilize prices have not solved the problem. In September, the government barred price increases on a wide array of items under state control, from electricity to parking. Regulators have also raised interest rates five times this year and may do so again before year's end, but those steps have produced little effect.
Moreover, economists suspect that prices are likely to climb still higher before the end of the year. The September price controls prevented refiners from passing on higher crude oil prices to consumers. Refiners simply cut their production of gasoline and diesel, leading to long lines at the pump and a new round of complaints.
Chinese authorities had no choice but to relent. They permitted an increase of about 10 percent in the price of gasoline and diesel. And that, manufacturers say, is likely to push up the price of other goods -- extending the cycle of rising prices.
"It looks like inflation is here to stay," Rice said.
The credit crunch could crush the euro
Worth reading the UK problem:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/02/ccliam102.xml
Inflation/Deflation
I like our weekend debates here and will add my 2 cents.
Deflation - If the interest rates are lowered, and "liquidity" is dramatically increased, WITHOUT raising prices, the result is deflation. Once the terrible inflation cycle of the late '70's was broken, interest rates gradually went down, liquidity and stock markets went up, commodity prices went down and inventories of commodities piled up. Very little investment was made in commodity infrastructure.
Inflation - Liquidity gets pumped up while interest rates are held low, WITH rising prices. As the prices go up, interest rates are eventually increased, liquidity contracts. Pain is the result for the prior deflation and inventories are worked off.
What makes this period so different than the past is the developing economies of B.R.I.C. They may take up the slack in commodities and our recession will not be one of excess inventories, rather this time it will be financial recession. A liquidity contraction due to the mistakes made by really greedy "smart" guys polluting the debt instruments with toxic waste. Instead of the liquidity the FED is going to pump into the system going to productive investments, it is going to bail out the greedy bankers and hedge funds. We are going to see a blizzard of US dollars thrown at the debt and banking markets.
I see big time deflation in housing prices in the US and Europe, at the same time they increase in B.R.I.C. Energy/grains/metals will continue to be consumed by the developing world, AND the U.S. due to this being a financial recession. Inventories of most commodities are nearer all time LOWS than highs. Our employment #'s will stay strong mostly due to our population demographic, there will be plenty of us working on main street while the lay offs are on Wall Street and in the Banks.
Gold is a slave to no government. It is used as a hedge against inflation and a store of value during times like we are in now. I think the price will hold up while we go through some rough sledding in the financial markets. All of the printing presses around the world are running 24/7.
I have invested heavily in energy/grains/metals/gold and silver. It just feels way better holding the things the world needs vs. paper.
I wish everyone here well, no matter what your opinion. Please share your opinions!
GOOD LUCK!
Kipp
TXCO New Presentation
http://www.txco.com/presentation.html
I am at a tradeshow in Fargo. No time to really look this over but had a minute to post. More later...
PS - Fertilizer tight due to shortages of sulfuric acid.
Kipp
THOMPSON CREEK ANNOUNCES REVISED RESERVES AND
NEW 10-YEAR MINE PLAN FOR THOMPSON CREEK MINE
• Part One of the reserves re-evaluation of Thompson Creek Mine’s potential shows measured and indicated resources of 391.5 million pounds of molybdenum at a cut-off grade of 0.03% Mo, and proven and probable reserves of 213.5 million pounds assuming a molybdenum price of US$10 per pound.
• Drilling has begun under and outside of the existing pit and Part Two of the reserves re-evaluation is to be completed in 2008.
• The new mine plan for the next 10 years projects total molybdenum production of 192.1 million pounds.
Thompson Creek Metals Company Inc., one of the world’s largest publicly traded, pure molybdenum producers, today announced new estimates for mineral resources and reserves and molybdenum production at its open-pit Thompson Creek Mine in Idaho.
“The new reserves estimate represents the first of a two-part reserves re-evaluation of Thompson Creek Mine’s potential and will be followed up with additional drilling that is expected to lead to a second revision of the reserves estimate in 2008,” said Kevin Loughrey, President and Chief Executive Officer.
“This first part of the reserves work essentially evaluates the existing pit and previous drilling results on the basis of a molybdenum price of US$10 per pound and updated costs, compared to the previous evaluation at a US$5 per pound price,” Mr. Loughrey stated.
“Most of the previous drilling, done 25 years ago, stopped at the level of 6,000 feet above sea level. The mine owners at the time had enough information to justify production and chose not to drill any deeper. Preliminary indications suggest the deposit continues below the 6,000-foot level. In order to confirm the continuity of the deposit, we are currently engaged in exploration drilling at the bottom of the pit. We also intend to carry out some drilling activity outside of the pit to determine the extent of resources on the land we own around the pit.”
The updated mineral resources and reserves were estimated by Scott Wilson Roscoe Postle Associates Inc. (“Scott Wilson RPA”) in accordance with the CIM Standards.
The updated estimates represent increases for contained molybdenum in measured and indicated resources of 5.6%, in inferred resources of 163%, and in proven and probable reserves of 26.3% compared with the previous estimates.
Scott Wilson RPA estimates that Thompson Creek Mine’s proven and probable reserves are 98.8 million tonnes with an average grade of 0.098% Mo containing 213.5 million pounds of molybdenum. The estimate is as of September 30, 2007.
These reserves consist of proven reserves of 39.2 million tonnes at an average grade of 0.104% Mo and probable reserves of 59.5 million tonnes at an average grade of 0.094% Mo.
The estimates are based on a pit design including Phases 6, 7 and 8, using an assumed molybdenum price of US$10 per pound (with exterior access) and updated costs.
The reserves were based on Scott Wilson RPA’s revised estimate of measured and indicated mineral resources, which totals 232.1 million tonnes with an average grade of 0.076% Mo and contained Mo of 391.5 million pounds, using a cut-off grade of 0.03% Mo. This includes measured resources of 69.6 million tonnes with an average grade of 0.087% Mo, and indicated resources of 162.5 million tonnes with an average grade of 0.072% Mo.
Scott Wilson RPA also estimated additional inferred resources of 139.5 million tonnes with an average grade of 0.043% Mo and contained Mo of 132.2 million pounds.
The new estimates of mineral resources and reserves were carried out by William E. Roscoe, P.Eng., and John T. Postle, P.Eng., of Scott Wilson RPA, both of whom are qualified persons as defined in National Instrument 43-101. Messrs Roscoe and Postle have reviewed and approved the contents of this news release.
Scott Wilson RPA also reviewed the Company’s new 10-year mine plan and concluded that “the production targets, mine operating cost forecasts, and the capital cost forecasts are reasonable.”
The mine plan calls for production of 194.9 million pounds of molybdenum in the 10.25 years from October 1, 2007 to December 31, 2017 (192.1 million pounds for the 10-year period 2008 to 2017).
Details of the Scott Wilson RPA report will be available when a National Instrument 43-101 technical report is filed on SEDAR in due course.
The previous estimates for the mine, also compiled by Scott Wilson RPA in 2006 with an assumed cut-off grade of 0.04% Mo, showed measured and indicated resources of 178.6 million tonnes with an average grade of 0.094% Mo and contained Mo of 370.6 million pounds. Measured resources were estimated at 55.7 million tonnes with an average grade of 0.104% Mo and contained Mo of 127.9 million pounds, and indicated resources were estimated at 122.9 million tonnes with an average grade of 0.09% Mo and contained Mo of 242.7 million pounds. In addition, inferred resources were estimated at 34.5 million tonnes with an average grade of 0.066% Mo and contained Mo of 50.2 million pounds. Based on a molybdenum price assumption of US$5 per pound for molybdenum, proven and probable reserves were previously estimated at 64.5 million tonnes with an average grade of 0.119% Mo and contained Mo of 169.1 million pounds. Proven reserves were estimated at 28.1 million tonnes with an average grade of 0.123% Mo and contained Mo of 76 million pounds. Probable reserves were estimated at 36.4 million tonnes with an average grade of 0.116% Mo and contained Mo of 93.0 million pounds.
The previous estimates of mineral resources were estimated by William E. Roscoe, P.Eng., and the previous estimates of mineral reserves were estimated by John T. Postle, P.Eng., both of whom are qualified persons as defined in National Instrument 43-101.
Hank, CXPO.OB, TXCO, POE.V
Look at TXCO and POE.V to add in addition to your CXPO purchase. You can search previous posts here for good DD.
Kipp
Pan Orient Energy Corp. (TSX VENTURE:POE) -
NOT FOR DISSEMINATION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
L44H-D1 (60% WI & Operator)
Deviated well L44H-D1 has reached a total measured depth ("MD") of 1,217 meters, 866 meters true vertical depth ("TVD"), at a subsurface location approximately 700 meters north (this was incorrectly stated as south in the November 19 press release) of the oil producing L44-H well location. The top of the main volcanic was penetrated at a depth of approximately 1,016 meters MD (755 meters TVD) with over 200 meters measured thickness (111 meters true thickness) of the target volcanic reservoir penetrated. The drill bit was still within the main target volcanic reservoir when the decision was made to terminate the well. L44H-D1 is the structurally highest volcanic reservoir penetration within the Na Sanun East field encountered to date. Total drilling fluid losses of 9,385 bbls at rates of 100 to 260 bbls/hr were observed while drilling through the main target. Wiper trips at 1,155 meters MD and 1,217 meters MD resulted in oil to surface.
Testing is anticipated to be completed within the next 2 weeks.
NS6-D1A Sidetrack (60% WI & Operator)
The Aztec #7 rig has been on standby, awaiting pump repairs, since setting casing just above target on deviated well NS6-D1A. These repairs are expected to be completed shortly with total depth anticipated to be reached within 5 days of the continuation of drilling.
WICHIAN BURI-1 "DEEP" (60% WI & Operator)
The Aztec #14 rig is expected to rig up and drill ahead within 8 days on the moderate risk, high impact WB-1 (Deep) exploration well, located 25 meters west of the original WB-1 well. WB-1 (Deep) will be targeting an approximately 220 meter thick volcanic at a depth of 1,503 meters. This interval was penetrated by the original WB-1 well in 1988, resulting in severe lost circulation with approximately 20,000 bbls of drilling fluid losses that were associated with very high mud gas readings while drilling through the potential volcanic reservoir. Subsequent sidewall cores taken over this interval indicated oil staining. This deeper volcanic zone was never properly evaluated by the earlier operator as the shallower, conventional F sandstone reservoir tested oil at 500 bopd.
Drilling is anticipated to take approximately 21-28 days to completion.
This is Oct. Home Sales Data Reporting Week.
This news will influence the dollar. Here is the calendar of economic news for this week:
http://biz.yahoo.com/c/e.html
Kipp
Forex Currency News Site Link:
http://www.dailyfx.com/
This site has great news, charts, and information on currency movements.
Kipp
Forex Currency News Site Link:
http://www.dailyfx.com/
This site has great news, charts, and information on currency movements.
Kipp
Hank, SST.V is one more that I (we) like. It held up well during this last sell off. It is a spin off from CS.TO. If you look at Silver Wheaton, they are using the same business model. The idea is to seperate silver assets from base metal assets, silver gets a P/E of 20 and the base metals are typically 5 P/E. Just search it on this board and you will find a detailed explanation.
Kipp
Hank,
Those all look good to me. I would also look to add EXN.V. They are in production and we have talked about them here a bunch. High grade silver with lots of lead and zinc to lower cost to near $0.00 for the silver. They are drilling out the property and keep adding to reserves.
The base metals depend on B.R.I.C. and other developing counties and if they can pick up the slack from a US slow down.
Good to have you on board with the "metalheads'!
Kipp
Bolivia Tax on Miners UP 12.5%!
(I see a trend developing!)
LA PAZ, Nov 23 (Reuters) - Bolivia's Congress approved a reform to the mining tax code late on Friday that will substantially increase taxes on mining companies operating in the South American country.
Mining ministry spokesman Alfredo Zaconeta told Reuters the reform means mining companies will have to pay 37.5 percent of their income to the Bolivian state, up from 25 percent in the past.
The decision will affect several major global mining companies working in Bolivia, including U.S.-based Apex Silver Mines Ltd. (SIL.A: Quote, Profile, Research) and Coeur d'Alene Mines Corp. (CDM.TO: Quote, Profile, Research) (CDE.N: Quote, Profile, Research).
The tax reform also broadens the scope of the Complementary Mining Tax (CMT) -- which acts like a royalty -- to include minerals that currently do not pay the levy, like indium and wolfram.
Zaconeta said the royalty tax will be directly proportional to the price of the mineral in the international market.
Currently, it ranges from 1 percent to 10 percent.
The reform also aims to close a legal loophole that grants miners hefty discounts on income tax payments, Zaconeta said.
After taking office as the country's first president of indigenous descent in January 2006, leftist President Evo Morales drastically raised taxes on natural gas operations and nationalized reserves of the fuel.
He has repeatedly pledged to carry out similar reforms in the mining sector.
The tax hike and efforts to revitalize state-run mining company COMIBOL are at the heart of government plans to tighten the state's grip on Bolivia's vast reserves of tin, zinc, wolfram, lead, silver and gold. (Reporting by Eduardo Garcia; editing by Louise Heavens)
US Dollar New Carry Trade Currency!
(This should trouble anyone sitting in cash, Kipp)
Dollar Displaces Yen, Franc as Favorite for Funding Carry Trade
Nov. 26 (Bloomberg) -- Using the dollar to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market.
A basket of currencies including the British pound, Brazilian real and Hungarian forint financed with dollars returned 17 percent this year, compared with 9 percent when funded in yen and 7 percent in Swiss francs, according to data compiled by Bloomberg. Falling U.S. interest rates and increasing volatility in the yen and franc are making the trade even more appealing.
``With the dollar giving the appearance of being in free fall, it increases the attractiveness of using the currency to fund investments,'' said Avinash Persaud, chairman of London- based Intelligence Capital Ltd., which advises hedge funds that manage more than $89 billion. ``That process will only add more fuel to the decline.''
The last time the U.S. currency was used for so-called carry trades was in 2004, when the Federal Reserve's target rate for overnight loans between banks was 1 percent, said Niels From, a strategist at Dresdner Kleinwort in Frankfurt. Since then, it has weakened 18 percent on a trade-weighted basis, according to a Fed index. The International Monetary Fund says the dollar made up 64.8 percent of central banks' currency reserves in the second quarter, down from 71 percent in 1999.
Investors are borrowing dollars and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4 percentage points more than the Bank of Japan's and 1.75 percentage points above the Swiss National Bank benchmark. In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two.
Housing Slump
Speculation against the dollar increased as the worst housing slump since 1991 forced policy makers to cut the benchmark rate twice to keep the economy out of recession. The currency depreciated in five of the past six years leading central bankers from the Arabian Peninsula to China to diversify their reserves and increase holdings of non-U.S. assets.
The dollar dropped 1.2 percent last week against the euro to $1.4837, and has weakened 12 percent so far in 2007. The U.S. currency has depreciated 10 percent versus the yen this year, including 2.5 percent last week to 108.35 yen. It fell to a record 1.089 Swiss francs on Nov. 23.
Investors may switch more than $100 billion of borrowing from yen or francs into dollars in the next two years for carry trades said Jens Nordvig, a strategist with New York-based Goldman Sachs Group Inc., the biggest U.S. securities firm by market value.
Real, Won, Pesos
The value of futures contracts held this month by hedge funds and traders betting against the dollar was a record $33.9 billion more than contracts that profit from a gain, according to New York-based Morgan Stanley, the second-biggest U.S. securities firm.
Pacific Investment Management Co., which oversees the world's biggest managed bond fund, is selling dollars against the Brazil real, Mexican peso, Korean won and Singapore dollar.
``When we think about currencies on a three- to five-year basis we're very bullish on emerging markets versus the U.S. dollar,'' said Andrew Balls, who helps manage $80 billion for Newport, California-based Pimco. ``That view is only reinforced when you look at interest-rate differentials.''
The real rose 18.5 percent this year and Singapore's currency strengthened 6.4 percent, while the won was little changed. The Mexican peso fell 1.4 percent, the only one of the 16 most-traded currencies to do worse in the foreign exchange market.
Interest Rates
Pimco, a unit of Munich-based insurer Allianz SE, expects the Fed to lower borrowing costs to around 3 percent, from 4.5 percent. Policy makers have reduced the rate by 0.75 percentage point since Sept. 18.
Interest-rate futures on the Chicago Board of Trade show investors see a 58 percent probability that the U.S. benchmark will drop to 3.75 percent by March 31. Switzerland's key rate is 2.75 percent and Japan's is 0.5 percent.
The dollar produced a positive carry, the combined gain from the difference between interest rates and changes in foreign exchange, against 20 of the 24 most actively traded emerging market currencies this year, Bloomberg data show. The franc was positive against 12 and the yen versus 14.
Using a currency to finance bets can drive down its value. Former Japanese vice finance minister Hiroshi Watanabe said in May that one reason the yen had fallen to a record low against the euro was because it was funding about $500 billion of carry trades.
Attracting Speculators
The dollar attracted speculators when the Fed cut the target rate from 6.5 percent in 2001 to 1 percent in June 2003 and kept it there for a year, said Dresdner Kleinwort's From. When the Fed started to raise borrowing costs, traders fled. The U.S. rate surpassed the European Central Bank's benchmark in December 2004, helping the dollar gain almost 13 percent versus the euro the following year.
Strategists say the U.S. currency will recover because the economy is adding jobs and producing faster inflation, limiting the Fed from reducing borrowing costs. The dollar will rebound to $1.42 per euro and to 113 yen by the end of June, according to the median forecast of 41 analysts surveyed by Bloomberg.
The Fed will probably cut its target a quarter-point to 4.25 percent in the next three months and leave it there through 2008, according to a separate survey from Nov. 1 to Nov. 8. The U.S. economy will accelerate to a 2 percent annual growth rate next quarter, from the current 1.5 percent, the survey showed.
``We're actually bullish the U.S. dollar,'' said Jack McIntyre, who helps manage $25 billion at Brandywine Global Investment Management LLC in Philadelphia. ``As long as the world doesn't fall off a cliff, we will see people continue to play the carry trades and the yen will be the premier funding currency.''
`Safer Source'
The dollar is becoming more attractive for speculators concerned that higher volatility will reduce profits from bets funded in yen. An increase in price swings dents returns by raising the risk that gains from the spread between interest rates will be erased by foreign-exchange losses.
The yen appreciated 8.7 percent against the dollar since Oct. 15 as implied volatility on one-month dollar-yen options climbed to 14.97 percent from 7.47 percent. Dealers quote implied volatility, a gauge of expectations for currency moves.
``The dollar becomes a safer source of funding'' as volatility rises, said Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depot et Placement, which manages $151 billion.
US Dollar New Carry Trade Currency!
(This should trouble anyone sitting in cash, Kipp)
Dollar Displaces Yen, Franc as Favorite for Funding Carry Trade
Nov. 26 (Bloomberg) -- Using the dollar to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market.
A basket of currencies including the British pound, Brazilian real and Hungarian forint financed with dollars returned 17 percent this year, compared with 9 percent when funded in yen and 7 percent in Swiss francs, according to data compiled by Bloomberg. Falling U.S. interest rates and increasing volatility in the yen and franc are making the trade even more appealing.
``With the dollar giving the appearance of being in free fall, it increases the attractiveness of using the currency to fund investments,'' said Avinash Persaud, chairman of London- based Intelligence Capital Ltd., which advises hedge funds that manage more than $89 billion. ``That process will only add more fuel to the decline.''
The last time the U.S. currency was used for so-called carry trades was in 2004, when the Federal Reserve's target rate for overnight loans between banks was 1 percent, said Niels From, a strategist at Dresdner Kleinwort in Frankfurt. Since then, it has weakened 18 percent on a trade-weighted basis, according to a Fed index. The International Monetary Fund says the dollar made up 64.8 percent of central banks' currency reserves in the second quarter, down from 71 percent in 1999.
Investors are borrowing dollars and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4 percentage points more than the Bank of Japan's and 1.75 percentage points above the Swiss National Bank benchmark. In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two.
Housing Slump
Speculation against the dollar increased as the worst housing slump since 1991 forced policy makers to cut the benchmark rate twice to keep the economy out of recession. The currency depreciated in five of the past six years leading central bankers from the Arabian Peninsula to China to diversify their reserves and increase holdings of non-U.S. assets.
The dollar dropped 1.2 percent last week against the euro to $1.4837, and has weakened 12 percent so far in 2007. The U.S. currency has depreciated 10 percent versus the yen this year, including 2.5 percent last week to 108.35 yen. It fell to a record 1.089 Swiss francs on Nov. 23.
Investors may switch more than $100 billion of borrowing from yen or francs into dollars in the next two years for carry trades said Jens Nordvig, a strategist with New York-based Goldman Sachs Group Inc., the biggest U.S. securities firm by market value.
Real, Won, Pesos
The value of futures contracts held this month by hedge funds and traders betting against the dollar was a record $33.9 billion more than contracts that profit from a gain, according to New York-based Morgan Stanley, the second-biggest U.S. securities firm.
Pacific Investment Management Co., which oversees the world's biggest managed bond fund, is selling dollars against the Brazil real, Mexican peso, Korean won and Singapore dollar.
``When we think about currencies on a three- to five-year basis we're very bullish on emerging markets versus the U.S. dollar,'' said Andrew Balls, who helps manage $80 billion for Newport, California-based Pimco. ``That view is only reinforced when you look at interest-rate differentials.''
The real rose 18.5 percent this year and Singapore's currency strengthened 6.4 percent, while the won was little changed. The Mexican peso fell 1.4 percent, the only one of the 16 most-traded currencies to do worse in the foreign exchange market.
Interest Rates
Pimco, a unit of Munich-based insurer Allianz SE, expects the Fed to lower borrowing costs to around 3 percent, from 4.5 percent. Policy makers have reduced the rate by 0.75 percentage point since Sept. 18.
Interest-rate futures on the Chicago Board of Trade show investors see a 58 percent probability that the U.S. benchmark will drop to 3.75 percent by March 31. Switzerland's key rate is 2.75 percent and Japan's is 0.5 percent.
The dollar produced a positive carry, the combined gain from the difference between interest rates and changes in foreign exchange, against 20 of the 24 most actively traded emerging market currencies this year, Bloomberg data show. The franc was positive against 12 and the yen versus 14.
Using a currency to finance bets can drive down its value. Former Japanese vice finance minister Hiroshi Watanabe said in May that one reason the yen had fallen to a record low against the euro was because it was funding about $500 billion of carry trades.
Attracting Speculators
The dollar attracted speculators when the Fed cut the target rate from 6.5 percent in 2001 to 1 percent in June 2003 and kept it there for a year, said Dresdner Kleinwort's From. When the Fed started to raise borrowing costs, traders fled. The U.S. rate surpassed the European Central Bank's benchmark in December 2004, helping the dollar gain almost 13 percent versus the euro the following year.
Strategists say the U.S. currency will recover because the economy is adding jobs and producing faster inflation, limiting the Fed from reducing borrowing costs. The dollar will rebound to $1.42 per euro and to 113 yen by the end of June, according to the median forecast of 41 analysts surveyed by Bloomberg.
The Fed will probably cut its target a quarter-point to 4.25 percent in the next three months and leave it there through 2008, according to a separate survey from Nov. 1 to Nov. 8. The U.S. economy will accelerate to a 2 percent annual growth rate next quarter, from the current 1.5 percent, the survey showed.
``We're actually bullish the U.S. dollar,'' said Jack McIntyre, who helps manage $25 billion at Brandywine Global Investment Management LLC in Philadelphia. ``As long as the world doesn't fall off a cliff, we will see people continue to play the carry trades and the yen will be the premier funding currency.''
`Safer Source'
The dollar is becoming more attractive for speculators concerned that higher volatility will reduce profits from bets funded in yen. An increase in price swings dents returns by raising the risk that gains from the spread between interest rates will be erased by foreign-exchange losses.
The yen appreciated 8.7 percent against the dollar since Oct. 15 as implied volatility on one-month dollar-yen options climbed to 14.97 percent from 7.47 percent. Dealers quote implied volatility, a gauge of expectations for currency moves.
``The dollar becomes a safer source of funding'' as volatility rises, said Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depot et Placement, which manages $151 billion.
MSGI - I sold most of my base metal stocks in late spring and took a good part of the summer off. I started buying the heck out of gold, silver, oil, natural gas, and a little fertilizer and moly. Sitting on cash felt a little hazardous watching the dollar plunge. I was getting really po'ed with all of the gloom and doom posts a year or so ago, but have since done a 180. It looks to me like we are going to puke up a trillion $ or so in mortgage, CDO, and SIV losses, and another huge amount of residential real estate "wealth effect" loss due to plunging home prices. The markets may gain in "points", Dow 15,000 sounds good, but if gas is $6 a gallon and Milk is $10, have we really gained anything? There is a reason gold is at $830 today. I heard tonight talk on Bloomberg that our USD is the next "carry trade" currency of choice. Borrow dollars, buy commodities, watch the commodity price rocket, pay loan back with depreciated dollars. The way the FED is printing the USD there will be plenty available to trade. If you had moved your cash into the Canadian dollar or Euro you would have made north of $500,000. We are having our savings confiscated by inflation and most people don't even realize it. POOF!
We have some good inflation/weak dollar plays over on the Jr. Energy and Metals boards.
Good luck in whatever you do with your cash, at least you have it to work with!
Kipp
Don Coxe - Crisis for Consumer/Global Financial System. INVEST IN PRECIOUS METALS, COMMODITIES, ENERGY and BASE METALS!
Coxe's radio address:
http://events.startcast.com/events/199/B0003/#
I deployed most of my reserve cash in Canadian listed gold and silver Jr's this past week. We may take a little more heat but the world is waking up to the fact energy and metals are worth much more than the paper coming from global printing presses running 24/7. The Canadian dollar pulled back last week and gave me a "bonus buy". The Loonie will strengthen against the USD and give us extra return.
One interesting point Coxe makes is NOT to sell base metal stocks. He says there will be buy-outs of any good base metal companies that get beaten down.
Good Luck!
Kipp
farwest - O&G Jr's
I think the Jr's that have reserves, are profitable, and are putting cash to work to drill new wells are a great investment. Big oil, as Bobwins pointed out, can't pencil a return on huge projects. Our little drillers, TXCO, CXPO.OB and POE.V, are going to clean house. I also have an eye on AEZ in Wyoming. They may get the eye of a mid-cap like EnCana.
Good Luck! You will be rewarded when the market figures out where the "real" money is flowing.
Kipp
Bobwins - The shocker for me is that $225 billion was spent in 2005 and production has not gone up at all.
My Jr's are all using high tech 3D and new drilling technology to go after the oil and gas. It is way more expensive than anything used in the past.
The days of cheap oil are gone.