Don’t expect to get any mortgage relief tomorrow. That’s the message from the Government. The banks are being coy. They can afford to be as everyone else is arguing on their behalf.

We’ve written before that we aren’t in the habit of telling people how to run a business. So we won’t break that habit. The individual banks should be in the best position to know what is and isn’t affordable for them to do.

But, it does seem as though they have been given a free kick. The expectation is that the banks won’t lower interest rates tomorrow if/when the Reserve Bank of Australia (RBA) cuts the Cash Rate by either 0.25% or 0.50%. Chances are that the banks will pass something on. It probably won’t be the whole lot.

The interest rate markets have priced in a 95% certainty of a 0.50% rate cut.

But considering all the talk of them potentially passing on nothing, a cut of 0.12% will be dressed up as extreme generosity by the banks.

Don’t get us wrong. We have questioned for some time how wise it is for the RBA to be cutting rates while inflation remains so high. Does the RBA really need to cut rates or is it just pandering to the share market?

An Interest Rate Cut That Won’t Make a Difference
We are a little bit confused about the rationale for cutting rates. Is it to reduce the funding costs for banks? Or is it to prevent the economy from falling into a recession?

Either way we can’t see that it is going to do anything to address the problems. Supposedly the problem in the credit markets is twofold. First is that banks are reluctant to lend to each other and to clients. Second is that they cannot get an accurate price for various credit securities held on their books.

An interest rate cut by the RBA wouldn’t seem to be the solution to either of these issues. Sure, it has the potential to give them access to funding at a marginally lower rate, but unless the banks are prepared to take on more risk by writing new loans then all it does is add to the banks’ bottom line.

Are banks prepared to take on additional risk? Anecdotally the answer seems to be no.

Considering we have been told by the banks, regulators and government that Australian banks are superbly capitalized then cutting rates would hardly likely to have much impact.

The cheapest energy usually wins. That’s what history tells us anyway. Coal, oil and gas have always been cheaper than the rest. We had big North Sea reserves churning out black goop all through the 90s. The cheap oil kept other energies from getting started.

Now we have $94 oil in a global recession. That’s how scarce things are. But governments and central banks worldwide are flooding the global economy with money. French leader Nicholas Sarkozy is proposing a 300 billion Euro bailout now. Central banks worldwide have been flooding the economy with new money all week.

The problem? They’re like a smallish 6-year old trying to negotiate a full-size fire-hose. They can’t quite control where the liquidity goes.

It’ll go where it’s treated best. Some will head to gold or safety.

But some of it (combined with high levels of saved Asian cash) will probably return to the energy sector through speculators at some point. Peak oil will still be around when the banking crisis is over.

That’s a while away yet. But it’s time to start looking through ideas now. And the alternative energy sector has developed a lot since the last round of cheap money.

Ausra’s an interesting company. It isn’t listed, unfortunately. But we like the idea at face value. Its solar panels are cheaper than the expensive, mainstream photovoltaic technology.

Giralia Resources NL (ASX:GIR) is an exploration company with projects in Australia, Indonesia and USA. The company is mainly focused on exploration for precious and base metals.

Like many of the resources and metals-related stocks of the materials sector of the ASX, GIR has been hammered in the past quarter. It lost two-thirds of its value between early July and end of September.

The reason is that the financial crisis that may lead to a global economic crisis threatens investors. They expect a slower demand from emerging countries and this weighs strongly on base metals prices, and therefore on base metals explorers and producers.

Of course a further decline is possible in the coming months. Especially if more bad news convinces investors that the economic slowdown is worse than expected.

However there are currently opportunities for a technical rebound in obviously oversold stocks. This is the case here with GIR.

Click to Enlarge

It hit a long-term support line two days ago, on September 30 (point D on the chart). This support has been valid for more than one year now. It is built by the higher lows posted since August 2007 (points A, B and C). It’s a strong basis for the upcoming price development, as the negative momentum has lost most of its power. A consequence of this bearish trend completion is that the technical oscillators left their “oversold” area.

The Relative Strength Index (RSI) and the Money Flow Index (MFI) have indeed bottomed and have already started to curve upward. By crossing above their respective signal line, they have just triggered bullish alerts yesterday.

A retracement of the 66% decline occurred between June and September (points E and D) is therefore expected. The first intermediary resistance line might be the 23.6% Fibonacci ratio, but the main target for a rebound after such a fall is likely to be directly the 38.2% ratio, around $1.65. Yesterday the price closed at $0.99.

Fortescue Bounces for the Second Time this Year

Three things happened in the iron sector this week you should know about.

One: Fortescue (ASX:dipped below $5 for the second time this year. It bounced for the second time this year too. We haven’t taken a serious look at the company today. So that’s no prediction or recommendation. Just a fact you might be interested in.FMG)

Two. BHP (ASX:BHP) got approval from the ACCC on the Rio (ASX:RIO) bid. More on how that fits in below.

And three: Chinese companies decided to boycott Vale’s (NYSE:RIO) demands for higher iron prices.

Let’s deal with number three first. Vale must have been feeling sheepish it didn’t ask for more money when it was negotiating iron contracts mid-year. It got around 20% less than Rio or BHP.

So now it’s reneging. Last month it raised iron prices without asking. By no less than 20%. It’s like a restaurant charging you $20 for a $17 plate of spaghetti after you’ve ordered it. “Sorry. You know how inflation is these days.”

It’s really not surprising that China finally got fed up. Marketwatch reports that Chinese steel firms are boycotting Vale, the world’s biggest iron miner. They’re looking for alternatives.

Alternatives, eh? What do you get when you take Vale out of the iron sector? It’s a pretty simple equation.

Iron ore production - Vale = Australia.

BHP and Rio Move Closer to Merger

There’s an obvious problem with that, though. Top line players in Australia don’t actually have any advantage. Vale’s asking for more. But Rio and BHP have already asked for more and gotten it.

The three big guns hunt in packs. Contract negotiations fall into place pretty quickly once one big gun gets a price. We read somewhere about the possibility of an ‘iron OPEC’ earlier in the year. To be honest, the world already has one. It’s just not official yet.

A tale of two big mining industry takeovers: one with a realistic result, the other where fairyland still rules. The realistic one was Xstrata, the most acquisitive mining group in the world pulling its $US11 billion ($A12.6 billion) bid for Lonmin, the big platinum miner based in South Africa, but headquartered in London. In Australia, BHP Billiton welcomed the decision by the competition regulator not to block its 3.4 share bid for Rio Tinto, and BHP and Rio shares stormed higher. A case of desperate investors here not understanding the changes happening overseas, or eternal optimists, led by the BHP board? Xstrata said it does not intend to make a takeover offer for Lonmin because of “extreme volatility and uncertainty in the financial markets”. The “lack of clarity and certainty regarding the future availability of credit introduces significant risks” into financing for any bid, Switzerland-based Xstrata said in a statement. Xstrata is believed to have lined up a $US15 billion (around $A19 billion) loan from a group of banks to finance its proposed 33 pounds ($A73-a-share) offer and refinance existing debt. Xstrata had to commit to the bid by tonight, our time, or withdraw. It chose the latter staged a very prudent retreat. After pulling the bid, it snapped up more than 14% of Lonmin for just over 19 pounds a share  and now has an all but controlling 33%. It’s not the only big international bid to have been killed off by the credit crunch and lending freeze. Last month a private equity group called off a $A4.2 billion offer for UK events publisher, Informa and HSBC bailed out of a year-long effort to buy 51% of the Korean Exchange Bank for $A8 billion after failing to get the deal finalised and with worries about the global outlook. Xstrata had built up a 10.7% in Lonmin, but refused to buy any more, even as its target share price sank under the proposed offer price, a good sign of the concern Xstrata was having about the outlook for finance and for commodities. It snapped up the extra shares after the bid was withdrawn and Lonmin’s price fell. Despite that Xstrata’s price fell 1.9% in London by the close. Lonmin replaced its CEO on Monday without warning. Ian Farmer, formerly the chief strategic officer is the new boss and he will drive the company’s review of its existing operations and performance. Bloomberg estimates that Xstrata has spent about $US28 billion in four years on acquisitions, boosting sales eightfold. It has also ended attempted transactions. The company broke off talks to buy Brazil’s CVRD (Vale), the world’s biggest iron-ore exporter, in April. Xstrata also terminated moves to buy Australia’s WMC Resources in 2005 and Canada’s LionOre Mining International last year after higher bids from rivals. In Australia, the market was dragged higher by the news that the ACCC would not oppose the proposed BHP Billiton bid for rival Rio Tinto

Rio shares surged, up $A10.50, or 12.43%, at $95.00, after hitting a high of $98.60. BHP Billiton shares were up $A1.75 or 5.6% at $32.75, after hitting a high of $33.40. The 3.4 BHP shares for every 1 Rio share offer was worth $111.35, a still substantial premium to the actual Rio price and a sign of continuing market scepticism.

But BHP shares tumbled 4% in London on the Xstrata news and the worsening outlook for commodities and the global economy.

The ACCC noted that its review of the planned merger had raised “significant concerns”.

“While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market,” chairman Graeme Samuel said in a statement.

BHP said in a statement:

“BHP Billiton today welcomed the decision by the Australian Competition and Consumer Commission that it does not object to BHP Billiton’s proposed acquisition of Rio Tinto.

“We are very pleased to have received notice that the ACCC will not object to our proposed acquisition of Rio Tinto.

“We have long believed in the benefits of the combination of BHP Billiton and Rio Tinto. Our strategic rationale has always been based on the combined company having an incentive to produce more products, more quickly, to deliver to customers.” BHP Billiton’s Chief Commercial Officer, Alberto Calderon, said.

“Confirmation that the ACCC does not object satisfies the Australian merger control pre-condition of BHP Billiton’s proposed offer for Rio Tinto. In July, the U.S. Department of Justice also announced it would not oppose the transaction. The offer remains subject to the pre-conditions as disclosed in Appendix 1 of the announcement on 6 February 2008.”

The ACCC said in August that market inquiries had raised concerns the merged entity might lessen competition for iron ore and drive up prices of the valuable commodity.

Rio Tinto is the world’s second biggest producer of iron ore, while BHP Billiton is the third largest.

“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers,” Mr Samuel said.

Strong opposition to the merger has emerged from steel makers in Asia and Europe amid concerns a combined entity could have enormous control over global iron ore and other resource commodity prices.

“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing,” Mr Samuel said.

The European Commission, the EU’s antitrust regulator, resumed its assessment of the proposal late last month after suspending its investigation in August, to await further information from BHP Billiton.

The commission is expected to rule on the proposed transaction on January 15, 2009.

That is likely to be the deciding factor in whether the bid goes ahead.

BHP says it has a “committed banking financing facility” from a group of banks lead by Barclays Capital, BNP Paribas, Citigroup Global Markets, Goldman Sachs International, HSBC, Banco Santander and UBS.

UBS is a basket case, Santander is bedding down Alliance and Leicester and the parts of Bradford and Bingley it bought at the weekend, Citigroup is coping with taking over Wachovia in the US, Barclays Capital is swallowing most of the US business of Lehman Brothers and Goldman Sachs is coping with being a fully regulated bank and not an investment bank.

And on top of that, there’s hardly any lending going on and won’t be in the New Year if the bid gets the big tick and happens.

An Investment Philosophy for the Next Leg Up in the Resource Boom

If you think of Australia as a stock, it looks like a pretty good play. Assets on the balance sheet this year have ballooned by 25%, or $32 billion. Earnings this year are set to rise by over 40% to more than $200 billion. It sounds as though the company is doing rather well.

The assets we’re talking about are new investment in resource projects. The earnings are mineral exports. They’re both good indications that Australia is feeding the world’s developing powers, and getting paid handsomely for it. It’s one of the best businesses in the world.

Meanwhile our share market is down 30% from its high. Our currency has fallen around 19% from its high too. Australia the country is undervalued on the global stage.

The fall hasn’t come without reason. But as credit markets have unwound, Australian investments have suffered more than those in the US or Britain. Yet Australia the country is backed by tangible assets that have real value. And earnings are at record highs.

It’s an opportunity that international investors - specifically Asian economies with high rates of savings - will only pass up for so long. So we’re suggesting an unpopular strategy for next year. Begin accumulating good mineral and energy investments now.

That isn’t quite as simple as it used to be. Markets are less forgiving than they were between 2003 and 2006. The main problem is that the worst symptoms of the credit crunch aren’t over yet.

You can still invest intelligently in the ongoing resource boom. We’re nearing the best possible time to do that. But you’ll have to adjust your strategy. Your focus should be on looking for mining and energy firms with three indispensable traits.

The Three Ps

Above all else, a good miner in 2008 needs a quality project. That means, at the very least, a profitable resource of material in the ground.

Even better would be a quality reserve. As you may or may not know, there’s a difference between the two. A resource is simply what material is located in the underground deposit. A reserve is by definition a resource mine-able at break-even or better, economically speaking.

There’s no point buying a cheap stock with no deposit. But there’s no point overpaying for raw material. That’s the least of your worries though. We’ve seen good reserves trading for less than 20% of their real value. If you look hard enough, you’ll find a good one at the right price.

Slightly more difficult is finding a company run by people who can bring the project through to production. So to simplify things we suggest you invest in a firm run by a management with two qualities.

1. At least two decades of experience dealing with their company’s commodity.
2. Decades of experience financing mining projects.

Directors need to know what the highs and lows feel like in their chosen market. That means both geology and marketing. Avoid inexperienced teams that have gotten high on the recent fumes of the commodity boom. Some projects won’t be profitable at any price. It’s up to management to drop these, not approve them. An experienced team knows when to cut losses, and when to forge onward.

One of the greatest threats to a mining stock’s share price is a lack of funding. Getting funding depends on talented financiers with good contacts.

That leads us to our last trait. Finance is crucial, especially in the junior market at the moment. Indeed, one of the reasons many good projects are trading at a fraction of their value is because they’ll never find the money. They’re living a pipe dream.

When is the current meltdown over?

Today is another difficult day for the S&P/ASX 200, and little by little there are many stocks that become oversold. Investors are actually waiting for signals that could convince them to come back on the market and to take advantage of a rebound.

Obviously the timing for a rebound has not come yet. The bad news coming out from the US is not over. And equity markets can remain oversold for a while. This argues for a further decrease on the S&P/ASX 200. After 4 years and a half of continuous rise between March 2003 and November 2007, the investable benchmark for the Australian equity market has now retraced 50% of this bullish trend. Take a look at the chart below to see what I mean.

Click to Enlarge

The coming weeks should be particularly sensitive as the global equity markets are on the edge (lows of the year, 50% retracement of the 2003/2007 bullish trend). The news from Wall Street about potential new collapses will keep investors nervous and anxious therefore markets will remain volatile. Large swings and strong rebounds and pull backs may be expected on the near-term.

The weekly chart shows the 50% retracement of the bullish trend occurred between March 2003 and November 2007 (between points A and B on the chart). This support level has already been hit in early August (point D), generating a small rebound.

Today the price closed below this 50% retracement level. It’s an additional bearish sign and may confirm (the lowest closing price this year has been posted at 4,552.30 on September 18) that the support is cleared. Another false break signal is improbable therefore the price action will move further down. With the price support broken here, where is the next low? More on that in a moment.

Rebounds are difficult to assess right now. The price action rebounded in early September but was unable to gain positive momentum. New longs entered the market, but it was not enough to convince the rest of the market to fly back into the ASX 200 stocks. As a result, the technical indicators which were moving up since mid-July again triggered bearish signals.

This is the case with the MACD which crossed below both its signal line and the 0 line. It is also the case with the Momentum indicator which peaked and turned downward to cross below the 100 level. Consequently it is more than likely that the Index will fall lower on the near-term.
What could be the next target for this price action?

Where is the new low?

The new target will be the 61.8% Fibonacci retracement which is set around the level of 4,300 points. There will be a probable rebound as it is the last significant support level. Indeed, the 61.8% ratio also corresponds to a previous high which had been posted in March 2005 (point E). Previous highs become new lows therefore some buying interest should appear at this level.

Ultimately, there is another support at 3,500 points, which was a previous high level posted in June 2001, February and March 2002 (points F and G). On the upside, the current resistance line goes through the highs posted in early November 2007 (point B) and in May this year (point C).

The index is setting up for a mighty rebound. That means individual stocks will rebound as well. It will be impressive. But between now and then, we’d expect further declines in confidence from the U.S. banking crisis to lead to lower lows here on Australian stocks. We’ll be biding our time and building a list of rebound stocks to trade when the new lows are put in, or some other external event triggers an unlooked for reversal.

New items in the Senate Bailout Bill, SEC relaxes market-to-market rules

By the time the Australian market opens for trading on Thursday, the U.S. Senate will have voted on its version of the Paulson bailout bill. However, the Senate version of the bill has some new bells and whistles not included in the version that failed to pass the House. Two of the main measures added seem aimed more at shoring up political support for the bill, rather than improving the chances that the plan will actually work. But let’s take a look at them anyway.

First, the Senate wants to temporarily increase Federal insurance on deposits in U.S. commercial banks from US$100,000 to US$250,000. You might wonder what an increase in Federal deposit insurance does to improve the quality of assets on bank balance sheets. The answer is, “it doesn’t.”

But the increase in what the FDIC can offer is designed to make the Paulson plan more difficult to oppose in the House. Who is against providing ordinary savers more insurance for their life savings? Anyone? There is also the question of confidence.

By increasing FDIC insurance to $250k, you reassure (hopefully) people that there’s no need to remove their money from the bank. Here the Feds aim to prevent a run on banks by depositors that leads the bank to fail. This is what happened first at Indy Mac in July and at Washington Mutual earlier this week.

Depositors took out a whopping $16.5 billion from WaMu between September 15th and the end of the month. That kind of run is a serious drain on a bank’s capital. It’s a scenario the Congress wants to avoid by increasing FDIC insurance. It does nothing to improve bank balance sheets, unless, by restoring confidence, it prevents a huge drawdown in a bank’s assets (its deposits).

SEC relaxes market-to-market rules

Meanwhile, to address the value of those damaged assets that Henry Paulson can’t wait to get his hands on, the SEC clarified its stance on Tuesday with regard to mark-to-market accounting rules. This move is designed to give banks some wiggle room when it comes to valuing their damaged assets. The higher the banks can value the assets at, the less likely they are to have to take losses on those assets or sell them to meet capital requirements. They can stay in the game.

Here are some excerpts from the SEC’s clarification. Emphasis added is our own:

Can management’s internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable….This can, in appropriate circumstances, include expected cash flows from an asset. Further, in some cases using unobservable inputs (level 3) might be more appropriate than using observable inputs (level 2); for example, when significant adjustments are required to available observable inputs it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment.

How should the use of “market” quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?

Broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security. In a liquid market, a broker quote should reflect market information from actual transactions. However, when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker.

Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.

And so on.

How does one make an estimate of an assets value based on “unobservable inputs?” How is one to reasonably estimate future cash-flows on a mortgage-backed security when house prices continue to fall? When a “market does not exist for a security” doesn’t that mean no one is willing to buy it at the current price? Why is that disorderly?

It is not overly-transparent account rules that have brought the banking system to its knees. It’s the fact that so many global banks own securities tied to the value of U.S. houses.

No bailout plan in the world is going to force banks to lend, even if they can get rid of their bad assets. More importantly, no bailout plan in the world is going to reverse the fall in American house prices (or even arrest in). Until someone comes along with a plan that severs the connection between residential American real estate and the banking system, the system itself remains on the edge of crisis. More on why the plan must fail below. But first…

When will the current meltdown end? The short answer is, not yet. There’s probably another few hundred points to go.

Yesterday was another difficult day for the S&P/ASX 200. Little by little, stocks are becoming oversold. Investors are actually waiting for signals that could convince them to come back on the market and to take advantage of a rebound.

Obviously the timing for a rebound has not come yet. The set of bad news that come out from the US is not over. And equity markets can remain oversold for some time before recovering. This argues for a further decrease on the S&P/ASX 200.

After a 4 and a half year rise between March 2003 and November 2007, the benchmark for the Australian equity market has now retraced by more than 50%.

The weekly chart tells that story (between points A and B on the chart). This support level had already been hit in early August (point D), generating a small rebound. Yesterday the price closed below this level. It’s an additional bearish sign and may confirm (the lowest closing price this year was 4,552.30 on September 18) that the support is cleared.

That means lower share prices for a little longer.

Click to Enlarge

The price action rebounded slightly in early September, but was unable to gain positive momentum. A few profit taking trades or new long positions built up but it was not enough to convince the rest of the market to move back into the ASX 200 stocks. As a result, the technical indicators have triggered bearish signals since mid-September.

The MACD has crossed once again below its signal line. So too the 40-day Momentum indicator. It has peaked and turned downward to cross below the 100 level. On the very-short term, the 5-day Stochastic Momentum Index has also turned bearish.

It’s more than likely that the Index will fall lower before any significant bounce back.

Click to Enlarge

So what’s the next target?

As mentioned in our last update (September 17), the new target will be the 61.8% Fibonacci retracement which is set around the level of 4,300 points. Expect some sort of rebound there. It’s the last significant support level.

Indeed, the 61.8% ratio also corresponds to a previous high from March 2005 (point E). Previous highs become new lows therefore some buying interest should appear at this level. We’ll re-assess at that stage. Until then it’s probably a good idea to be a spectator, not a speculator.

This is where we disagree with the world. Australia is backed by tangible assets. Our point today isn’t that risk is making a comeback. It’s that investors have overestimated Australia’s risk.

Australia’s tangible assets aren’t any old things. They’re minerals and energy that are still in demand.

Don’t get us wrong. We know commodities have corrected. But spot and contracted coal prices are still well above what they were a year ago. The same goes for iron. ABARE reported last week that Australian commodity exports should rise by 44% to over AU$200 billion in 2008-09.

Our favourite super-metal is holding up in price too. We checked it this morning.

Tangible assets are better at keeping their value than paper, because they’re real. They’re backed by real economic trade. The US is backed by trillions in paper debt. Yet the Aussie share market is currently down 25% for the year. America is down just 18%.

In fact, when you translate them both to US dollars, the ASX is down around 32%.

UBS: Australia Less Risky than Britain

Unsurprisingly, UBS analysts declared Australia less at risk to the credit crunch than Britain this morning. The difference? Commodities and Australia’s natural resource advantage. But London’s FTSE is only down 24% for the year.

Any boom is usually followed by a bust of the same size. Australian shares went up harder and faster than any others, because of the commodity supercycle. But if you believe that boom is still alive, then it makes sense that Aussie shares will turn around at some point.

That doesn’t mean it’s time to heave your savings into ASX. Simply put, there are a few signs that some individual ideas are getting cheap enough to invest in. There are now a lot more opportunities in our market than there were a year ago. And there are good companies out there dropping in price.

We’d love to know when it’ll turn around. But that’s not our beat. So now we hand you over to Gabriel for a look at the S&P/ASX 200 following this week’s jerky motion in financial markets.

If Australia is a share on the global stock exchange, it’s oversold. Definitely oversold relative to other global markets. Possibly oversold in regards to its real value. That’s our contention.

Why? Well, here’s the market’s lesson for the day. Investors have separated global assets into two buckets. The first bucket is marked ‘risky’. The second is marked ‘not risky’.

Into the first bucket goes pretty much any asset you can buy that isn’t a sure thing. Shares, funds, commodities (oil in particular), high-yield currencies and anything else that isn’t pinned down go in there. Into the second bucket goes triple-A grade government-backed securities, low-yielding currencies and gold.

When investors want safety they go for the second bucket. But they’re still greedy enough to head back to bucket A from time to time.

Dow Gains 5% on Rescue Hopes

Take this week. Monday saw the Dow Jones drop 7%, oil drop 10% and the Aussie dollar fell below US80 cents.

Last night all those things gained. Oil is up US$4 this morning. The Dow Jones added 5%.

Why? Because rumours abound that the US Fed is about to take some risk out of the risky bucket. How? By orchestrating a global interest rate cut to relieve gasping credit markets.

It might happen. It might not. We’re not sure it’s even relevant. The Fed injected billions into the market after the bailout plan self-destructed. But we do know this. Investors will swing between the two buckets depending on whether a risk-reducing rescue mission looks likely or not.

Australia is definitely located in the risky bucket at the moment. The world sees mining shares as risky. Australia has mining shares. Ergo, Australia is risky.

Recently so much talk has been made about whether the global economy is coupled, decoupled…re-coupling, decoupling, or who knows what. Do individual countries economies move alone or are they all intertwined in one big global economic cesspool?

For example, if I showed you a chart of two indexes, but didn’t tell you what they were… you could tell me if they track each other just by looking at them.

Here we’ve got two indexes that over the last year seem to be following the same pattern. While they’re not exact… they track each other pretty well. The two lines on the chart represent the S&P 500 index and the iShares MSCI EAFE index (a broad measure of 21 individual country indexes).

Are these coupled, do they move together? Well in simple investing terms, the answer is yes. The S&P 500 index over the last year is down 22% and the MSCI EAFE index is down about 26%. So are global markets coupled?

Well the answer isn’t always as clear as the example seems…some are and some aren’t.

Just because the broad U.S. markets have been heading south all year and the larger more familiar international countries’ markets have also been on a year-long losing streak…don’t think that every market is following lock-step.
There are opportunities out there in the global markets. Not everyone is facing the same crises as the United States. Some South American countries, the Middle East, parts of Africa and others offer intriguing opportunities.

Availability of credit allows money to flow between savers and borrowers.

Resources and funds are allocated to various projects or investments during a boom phase.

Eventually borrowing becomes excessive and leads to malinvestment, thanks to the suppression of the real rate of interest by our illustrious Federal Reserve Banking system.

At this stage, adherence to the free market theory would allow for an efficient cleansing period and a healthy recovery period. How? Irresponsible and unprofitable businesses fail. Bad debts get liquidated. Excess resources go on sale, flow into more stable ventures and pool together with more profitable resources controlled by healthy corporations or entities.

Sure, pain is felt by certain parties who can’t keep things going. But the moving parts become more efficient and stronger. Healthier, more efficient businesses emerge.

As the Austrian School of economists says, the bigger the boom generated by manipulation of money and credit, the bigger the ultimate bust.

That’s important, because thanks to the massive manufacturing and sale of derivatives, there has never been a boom supported to such a large degree by thin air. And since the laws of gravity haven’t been outlawed yet, what goes up must come down.

The bailout will probably give the global financial sector a boost. Mainly banks holding garbage assets. After all, they’re getting paid for their mistakes.

But we’re sticking to resource stocks. If the bailout goes through, and the market reacts in a good way, it’ll be the broader market that rises.

And diggers and drillers are good enough businesses to actually make dollars themselves in the next decade. Without needing 700 billion gift-wrapped from the printing press.

There are a lot of cheap miners out there too.

Take the uranium situation in Western Australia. With the uranium mining ban lifted, around a dozen new uranium deposits are now fair game. No-one really knows much about them. I sort of think of them as ’shadow resources’. There’s still a lot of light to be shed on their earnings potential.

But from what I can tell so far, the top echelon of projects stack up to over 100,000 tonnes of uranium. That’s a lot. On current demand, it’s enough to power all the nuclear power stations in the world for a year or two.

At the current contract uranium price of US$80 per pound, it’s worth over US$17 billion.

More importantly, these shadow resources have been even more shadowy the last few weeks. The media spotlight is firmly trained on the bailout. Paladin (ASX:PDN) owns a stack of WA uranium. The market has ignored it. The stock is down 27% this month.