-- Posted Thursday, 19 April 2007 | Digg This Article
Gualfin, Argentina
Thursday, April 19, 2007
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*** Less hot water than a garden hose in the Maryland summer…ideal conditions for solar power…
*** Is the Chinese economy growing too fast? Attend the Agora Financial Investment Symposium in Vancouver and find out for yourself…
*** Bill might make some money on his ranch after all…and more!
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Our architect, Nick, came up to the ranch a few days ago. He called the solar engineer to try to figure out what was going wrong with our solar hot water system. We are at almost 8,000 feet - nearly on the tropic of Capricorn - with clear skies and the strongest sunlight we have ever seen. We have a whole bank of sleek, modern hot water heaters behind the house; but as near as we can figure, they are producing less hot water than a garden hose in the Maryland summer.
Well, Nick got on the phone to the solar power engineer, and then went behind the house to turn a few valves. Ever since, we've had plenty of hot water. "Go ahead," we told Elizabeth generously. "Take a hot bath…use as much hot water as you want."
The water comes down from the Andes. There is no meter to the house. If we don't use it, it flows down into the pasture. The sun shines on the hot water collector…if we don't use the hot water it just sits there. Whether we use it or not, the price is the same.
And then, there's the electrical system, which has worked flawlessly since we've been here. The sun hits the solar panels, which charge up a bank of large batteries, which give up plenty of juice. The only trouble is you can't run large appliances - except for one refrigerator/freezer. And those LED lights are cold and unattractive.
The whole system cost $75,000. All you have to do is to clean the dust off the panels from time to time and replace the batteries every three years or so. What's the payoff? No power bills. What's the rate of return on that? We don't know, but if the utilities would cost $500 per month, the implied rate of return is 8%. Of course, up here the sun is so bright that conditions are ideal for solar power. And since there is no power grid…or any source of fossil fuels within range…we had no choice anyway.
But the nice thing about it is that the system works whether we have any money or not. It's…well…like having savings. If you have to pay $500 a month, it means you have to get $500 a month from somewhere. It is as if you had to pay a mortgage. Unless you have a stock of money somewhere…you have to work and you have to earn…just to pay your utility bills. In fact, at a marginal tax rate of 34% you have to earn about $750 in pre-tax income in order to have enough money.
So the real rate of return, figured on a post-tax basis, is around 12%. Not bad. And it's…well…almost guaranteed. Where else can you get a deal like that?
The only thing that would reduce your rate of return would be a big DECREASE in the cost of utilities. Not very likely in our opinion. On the other hand, a big INCREASE in the cost of utilities would be an implied greater rate of return on your investment.
Besides, if we are ever ruined financially, we can hitchhike out to the ranch and still take a hot bath.
Let's see if our currency counselor has anything to report…
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Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:
"Overnight, China posted their first quarter GDP. I'm chuckling right now, because once again the economists, and market observers got China all wrong!"
For the rest of this story, and for more market insights, see today's issue of
The Daily Pfennig
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*** A note from U.S. Global Investors:
"The U.S. stock market appears to be rattled by today's reports that China's economy may be growing too fast and that the government will respond with an interest rate hike that will hurt commodities demand.
"Not everyone has such a dire outlook.
"Here's some perspective from CLSA Asia-Pacific Markets:
"'You can continue to ignore the official GDP growth number for 1Q07 - 11.1% - as Beijing is stuck with working from the political fiction (too high) they've been issuing for the past few years. The economy IS picking up, but after three years of slowing. By our calculations, growth is accelerating a bit from a rate of 8-9% last year, rather than double-digit figures. Today's numbers do not signal overheating, or the coming of government tightening measures. We will see more of the quality control measures (or token tightening) that were implemented over the last year, with one more small interest rate hike and a few more increases in bank reserve ratios to come. But these are designed to raise the cost of capital to a more rational level.'
"And here's a longer-term outlook from the Reserve Bank of Australia, which issued its monthly bulletin today. Australia is the world's leading exporter of iron ore and coal, two commodities much in demand in China and other fast-growing nations:
"'While increased supply will exert some dampening influence on prices, the rapid growth in world demand for metals and other resources appears to be showing little sign of abating. … There are good reasons to believe that strong demand, from emerging economies in particular, may continue for several decades.'"
China has some amazing investment opportunities available to savvy investors right now…in fact, our annual Agora Financial Investment Symposium is completely dedicated to investing in the Far East. All of your favorite DR editors will be there - and the event is filling up fast! The Symposium is taking place in one of our favorite cities, Vancouver, British Columbia, July 24-27. Secure your spot now, and get the early bird discount.
Call Agora Travel at 800-926-6575 for all the details…
*** As for raising cattle, yesterday, Francisco announced that the price had gone up.
"Don Bill," (we love it when he says that), "I just heard from some friends that cattle were bringing 2.6 pesos per kilo. Last year, we sold them for 2.2 pesos. This year, we're going to make some money."
Herewith, a brief introduction to the cattle business:
We went over the accounts with Francisco. Just as being an NFL quarterback looks easy to a plumber, raising cattle looks easy to an economist. Each cow produces about 0.6 of a calf. Down on good land, the ratio is more like 0.9. But here, the pumas, the condors, the cold, or the drought tend to carry them off before they can be shipped off to market. The whole farm is littered with the bones of dead cows. Big. Small. And in between. The drought of 2002 killed hundreds of cows, Francisco told us.
"It's a hard place to raise cattle," Francisco explained. "It's too high…too dry…and too wild. But it's all you can do here. I tell people that the condors kill the calves and they don't believe me. But they do. They attack them just after they are born, before they can run away. One of two of them kill the baby calf…then the rest come down to feed on it."
While the output is thin, so are the costs. The cattle are not fed. They are not kept in pens. Nor do they get any medication…other than government-required vaccinations. They're on their own. The only costs are the expense of employing the gauchos who look after them, which isn't much. And each calf weighs in at about 120 kilos when it is sold. So you can do the math.
Plus, up in the hills, the local people who live on the ranch have a deal where they pay us a percentage of the animals that they raise, in lieu of rent. As we understand it, we get 16% of the goats, sheep and llamas. It doesn't amount to much, since there is little market for these animals, but they are tasty when cooked over an open fire.
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The Daily Reckoning PRESENTS: There are certain commodities that are staples of trading…beef…sugar…soybeans, etc. Kevin Kerr asserts that all investors should know these sectors and be very comfortable with them. Read on…
STANDBY COMMODITIES
by Kevin Kerr
A year ago, the average choice grading steer fetched around $85.50 per cwt to the meat packer. (The abbreviation "cwt" stands for hundredweight. Hundredweight simply means "per 100 pounds specified weight." It is always qualified as the type of weight used for cattle.)
Two weeks ago, the average was $94.44 cwt, an increase of $3.32 over the previous week. Translation: Prices for cattle in the cash market are climbing fast and they will most likely continue to do so. Demand is the driver. As more countries reopen their markets to U.S. beef, demand will increase. Meat packer margins are hovering at break-even levels. Right now, tight cattle supplies and plentiful inexpensive feed will likely result in a firming up of the cattle price. This holds true especially for cattle producers and feedlot operators.
Then, of course, there's avian flu. If one case of bird flu migrates to the United States and infects one person, people will swear off poultry and head right to the meat aisle in the supermarket. In reality bird flu is not actually spread by eating poultry, but often in trading perception is reality and just the threat of bird flu is enough to get the general public to shun poultry. Even though eating it isn't the cause of the illness, the general public won't differentiate. And who would want to bite into a chicken of death when they could opt for a nice juicy steak?
What mad cow? Typically, market participants have a short memory, so it's important to act on fear while it's still in full swing. The cattle and meat markets in general are the butt of many jokes in the investment world - Hillary Clinton's infamous cattle trade comes to mind, as does the aforementioned question about pork bellies. Truth be told, the meats are a good agricultural market with solid fundamentals and can be a great learning market for the novice trader - just make sure no one knows you're a novice.
In 2006 I carried October live cattle positions and made some very good profits on the 86 call options, and later on the 88 call options. The cattle market is a volatile one and relatively illiquid, so it can be a difficult market if you're just starting out. You may want to avoid it until you get some experience.
The coffee, sugar, and cocoa markets are near and dear to my heart. These three commodities are also known as the tropicals, because most grow in the tropics, or softs, I guess because they're all soft in texture. But whatever you want to call them, these are some of the best performing and least understood or talked about markets. I spent much of my early career running between the pits of the coffee, cocoa, OJ, and sugar markets, and let me tell you, these are markets that trade like no others. Gold and oil may get the lion's share of the sound bites and headlines, but if excitement is what you're looking for, these markets have it.
Sugar, for example, is one of my favorites. It is growing exponentially in demand as a result of ethanol production and being widely used in foodstuffs; meanwhile the supply is shrinking due to factors such as European subsidies being curtailed. Sugar is likely to double in a couple of years, in my opinion, and the writing is already on the wall. Much the same can be said for markets like cocoa and coffee.
Worldwide demand is sucking up supplies faster then these commodities can be harvested. I know the coffee market well - very well, in fact. It's one of the first markets I traded when I started out in commodities 18 years ago. It's also one of the fastest-moving and most volatile markets, which means it's loaded with opportunity for you to make a lot of money. This is a good example for talking about one of the best features of trading commodities: the ability to short a market just as easily as going long. That's correct - unlike equities, you can short commodities futures just as easily as going long.
A market like coffee is particularly important because of its volatility but also because a new Starbucks pops up on every corner from Maine to China and every farmer who could possibly grow coffee beans is doing so, resulting in a glut of beans on the market. Even Juan Valdez, from the TV commercials, hung up his sombrero in 2006. Coffee is thus one of those markets you can play from both directions to get maximum profits - something futures allow you to do, with astounding results.
Cotton gave this maniac trader his start. My first full seat was on the New York Cotton Exchange (now the New York Board of Trade). My badge was 8015 QUEST, as in Jonny Quest. (I was young and had blonde hair and a dog named Bandit; when the guys on the floor found out I had done cartoon voiceovers as a kid, the name just stuck. Everyone gets a nickname down there, and it usually isn't something you'd choose for yourself.)
In any case, cotton is an "old boy" market, much like cattle or the grains - not old as in stale, but old in that it has been around a very long time and the people who trade it have been doing it a very, very long time. Cotton is a great market to trade, but you must understand the fundamentals at work and the differences between old crop and new crop. This simply means that two different cotton crops are produced each year in cotton, and you must make sure you know which crop you're looking at and then make your decisions based on that. Cotton is one market that's crucial not to underestimate and, much like the ocean, never turn your back on. Trust me, I worked in there for a number of years.
Right next door is another very active market, especially in the winter and during hurricane season: orange juice. Orange juice is a perfect market for learning about fundamentals the hard way. Many of you have seen the movie Trading Places, with Eddie Murphy and Dan Aykroyd. If you haven't seen it, do - it will give you a good laugh. The movie was filmed on the old World Trade Center trading floor and was about trading OJ, but the reality stops there (or does it?). Actually, with tongue in cheek, I can say that it's probably a fair depiction of the old trading pits.
Today, however, the OJ market is tightly controlled by supply and demand and is certainly ruled by weather factors - not just winter hard freezes, either. It may surprise you to know that hurricanes in Florida are the biggest factor influencing this market, not only before the hurricane hits but after, too. The main concern is citrus canker; after the winds and rain die down, this fungus can develop on the crop. Fundamental information like this is important to know and take into consideration when initiating a position.
Every market is different, so you must study the fundamentals for all of them. For example, you must understand what soybean meal is used for as opposed to soybean oil. Soybeans are used for biofuel, among many other things, so nowadays soybean prices more closely parallel those of crude oil and heating oil than those of the regular crop reports.
Keep in mind that these markets move on the basis of supply and demand. Right now, the demand for soybeans is picking up in a big way due to biofuel consumption, which in turn relates to how high heating oil prices are. It's not hard to connect the dots to identify what affects a specific commodity, but sometimes you've got to do a little research first. Biofuel is used primarily for home heating, and as ethanol is derived from corn, biofuel is derived from soy. The bottom line is that you must know, inside and out, the basics about whatever commodity you choose to trade, whether it's rough rice or natural gas.
More importantly, you need to know new factors that may affect a particular market - and these can change.
Regards,
Kevin Kerr
for The Daily Reckoning
Editor's Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation's top commodities gurus, Kevin's expert opinions are routinely featured in the country's premier media outlets.
To learn more about Kevin's commodity trading service, see here:
Resource Trader Alert
The above was taken from Kevin's newly-released book, A Maniac Commodity Trader's Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider's view of what he calls "the last bastion of pure capitalism on Earth." Whether you're a novice or an experienced trader, Kevin's down-to-earth, clear-cut guidance will make you more savvy, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you. The book is available for pre-sale here:
A Maniac Commodity Trader's Guide to Making a Fortune
-- Posted Thursday, 19 April 2007 | Digg This Article
