Move Over Buffett, B&B Strike Deal of the Millennium

Move Over Buffett, B&B Strike Deal of the Millennium
Hooray! Phoenix from the flames. Back from the dead. The resurrection. Off life support.

You’ve guessed it, our friends at Babcock & Brown [ASX:BNB] are back trading again this morning after a two week trading suspension.

And what do you know, they have roared back with a vengeance. As we write, the company’s shares are trading at the giddy height of 51 cents. That, readers, is a 100% increase from the price it last traded at before the suspension.

You can see why investors have got themselves so excited when you read the release to the Australian Securities Exchange (ASX). You’ve got to hand it to these investment banking lot, they are nothing if not geniuses.

Not content with cobbling together any old business under a massive debt arrangement and then flogging it off to unsuspecting retail investors, they have now done the same thing to ‘one of their own.’ Or rather, 25 of their own.

The business in this instance is itself - namely Babcock & Brown. It is lumbering under billions of dollars worth of debt which if it wasn’t for a $150 million cash injection by the 25 bank syndicate would render it insolvent and out of business.

But the creme de la creme of this arrangement is something even the B&B executives must be surprised they have got away with. You see, the terms of the debt repayment are that funding will be provided until 31st December 2009. The interest rate will be a whopping great 6% above the 30 day BBSY (that’s right, BBSY, not BBSW incase you were thinking of writing in) rate.

That’s pretty expensive debt. But B&B needn’t worry, because under the terms of the deal the repayments of interest will be made on a - and this is true - “Pay If You Can” basis!

of the century. Aside from all the why’s and wherefore’s about what went wrong with the merger, it also elicited the greatest number of marriage/engagement/divorce metaphors in the history of journalism.

That is quite some feat. We write of course, on the subject of the BHP Billiton/Rio Tinto story.

Aside from all the benefits that a takeover would have brought to BHP, the big point to take from it is that even mega companies are reluctant to add debt to their books at the moment. And it also gives an indication that if it is troublesome for the likes of BHP and Rio to raise money in this market, think about the smaller companies and how they must be faring.

An example of this is one of the companies in our Australian Small Cap Investigator (ASI) portfolio. Last week it released details of a new joint venture deal it had entered into. Three days later the window closed for shareholders to pick up more stock in a capital raising.

The result was that the company raised less than 40% of the capital is was hoping for. If it was twelve months ago we are sure they would have raised the full amount. Fortunately, the company in question does have a Plan B. But many small companies out there don’t. If they can’t borrow from banks and can’t raise additional capital from shareholders, it makes it very hard for smaller companies to invest in growing their business.

On the other hand, that is one of the reasons why rather than stepping back from looking at new investments for ASI, we are actually ramping up the coverage in the New Year.

The credit markets will eventually recover, but it may be slow. However, even before this becomes obvious to the market many small cap companies will have already taken advantage and should surge ahead in price.

In our view, we believe the next six months will be the best time in years to pick up undervalued small cap companies.

What is the big news this morning? We’ll need to think about that one for a while.

In the meantime there is the small matter of BHP Billiton [ASX:BHP] pulling out of the takeover of Rio Tinto [ASX:RIO].

Let’s be honest, it isn’t a major surprise. For some time the market has doubted that the deal would go through. Based on yesterday’s BHP share price Rio should have been trading closer to $90 a share rather than the $63.90 that it closed at.

Chairman Don Argus summed up the reasons for the decision:

“We have said that we would only seek to complete the transaction if it was in the best interests of BHP Billiton’s shareholders. While we have not changed our view of the basic industrial logic of the combination, or of the longer term prospects for natural resource demand growth driven by emerging economies, we have concerns about the continued deterioration of near term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value.”

After Mr. Argus finishes his stint as BHP chairman he may want to consider giving the circus a try. Because that’s the best example of tightrope walking we’ve seen in a while.

In effect the statement reads, “Not making the acquisition is now good, but we still think the resources sector is going to boom… only not right now, but in the future. Honest.”

Now the story is over and the papers and web pages are stuffed stories about the “Bid Collapse” and “BHP scraps $150bn tilt at Rio Tinto” we think about what the real reason for backing out is.

After all, $450 million is a lot of money to spend on putting the deal together. And it is also a lot of money to just write off by backing out of the deal.

So, three points stand out. First, it is a crappy market for one resources company to be taking over another. Second, Rio Tinto has a big stack of debt - $9 billion due to be refinanced by next October. And third, when you combine the first two it just doesn’t make much sense to proceed… for now.

We’ve got no idea what is going on in the mind of Don Argus and Marius Kloppers, but we would be surprised to see BHP come back with a new deal once the market has steadied and once Rio has tidied its books up.

It may mean paying more. And they could even miss out all together if China Inc decides to have a go. But there is just as much chance of BHP picking up a leaner, meaner and possibly less indebted Rio at a later date even if it does involved paying a premium.

Better that than getting lumped with $70 billion worth of debt in a falling resources market.

Australia’s Apollo 13 ‘Moment’
“Is this a new $800 billion the Fed and Treasury are stumping up?” I asked Daily Reckoning editor Dan Denning this morning.

“Yep” he replied.

This time it is to support the credit card and mortgage debt collateralisation markets. Roll back the clock three months ago when the $700 billion TARP was first proposed and there was almost universal shock and alarm that the government could spend that much on bad debt.

Today $800 billion seems like a drop in the ocean. There’s no vote in Congress, no suspension of Presidential campaigning, no special TV programmes. In fact it doesn’t even make the top story on Yahoo! Finance.

We imagine it to be like the space race in the 1960s and 1970s. Everyone stood up and paid attention the first couple of times, but as more and more missions were scheduled the public took less and less interest. Until Tom Hanks got into trouble on Apollo 13 and the world watched again.

We’re not sure whether the market has had its “Apollo 13″ moment or not yet. With any luck last week was it.

The issue for Australia is not so much whether the US government can repay all its debts (clearly it can’t) but how closely the Australian federal government is watching. Is it picking up ideas, and working out ways to spend and increase government debt?

If it is like most governments it will try to get away with as much as it can, all in the ‘national interest.’

After re-reading the ASX circular on the new covered short selling regime it appears we made an error last week. Our assumption was that the daily report would show all ‘open’ short positions in a stock. This appears to be incorrect. Instead, in their wisdom, the ASX are only publishing the daily volume of short trades.

So, looking at today’s report for instance, a couple of points stand out. First is the daily short selling volumes are greater than we thought they would be if you compare it to the total volume traded in a stock.

BHP Billiton [ASX:BHP] had nearly three million shares traded short yesterday. Compared against the total number of outstanding BHP shares of 3.3 billion that only equates to less than 0.1%. However, when you compare the three million shorts against yesterday’s share turnover of about 18 million shares then this is nearly 17% of the daily turnover that is going short.

A more bizarre one is Fairfax Media [ASX:FXJ]. According to the short report over four million shares in Fairfax were traded short yesterday. Again, as a percentage of its total outstanding shares it is only 0.26%. Yet, as a percentage of yesterday’s traded volume of about 5.5 million shares it equates to 73%.

We just make the point out of a matter of interest. Remember that only ‘covered’ short selling is now allowed on the ASX. This means that the brokerage firm executing the trade must be satisfied that the short seller is able to deliver the stock on T+3. Also, as we understand it, the report only shows the gross amount and does not take into account short positions that may have been closed out intraday.

And we still do not have a problem either with the concept or the practice of short selling. After all, in order for a short sell to go through there must be someone else who is prepared to buy them. Hence the argument that short selling helps to add liquidity to the market.

There are many explanations for the seemingly high day-to-day shorting volumes. One is obviously those terrible hedge funds. Another is the retail investor using Contracts for Difference (CFDs). Another reason could be institutions reweighting portfolios. And another could be companies that are hedging their DRP schemes. In addition there are probably another dozen or more explanations.

The upshot of it is that the ASX will need to provide a more thorough short selling report that displays more meaningful information than what it is supplying at the moment.

ASX Renamed - Now Called the “$2 Shop”

This morning we were beaten to it by The Age newspaper. Damn the ruthless efficiency and timeliness of the printed press.

“$2 company has new meaning” reads the front page story. It tells us that 48 of the S&P/ASX200 companies are trading for less than $2. We did a similar check on the S&P/ASX100 index yesterday. Fifty-three of those companies are trading for less than $5.

Of course the actual dollar value of the share price is not always significant. The market capitalisation of the company is more relevant. But it’s certainly a far cry from the euphoria of last year. Remember when pundits were jumping up and down with excitement trying to pick which Australian share would be the first to break through the $100 barrier?

Leading the charge was Macquarie Group, CSL, Rio Tinto and Perpetual. Where are they now?

The chart below tells us the story.

From December 2006 all four of them led a charge towards the $100 level. Then October 2007 came along and spoilt the party. Since then, as you’re no doubt aware, the share prices have plummeted.

As of yesterday Rio Tinto was $75.20, Macquarie was $26.95, CSL was $36.95 and Perpetual was $35.26.

Templeton’s $1 Stocks MkII
But back to our original premise.

Company share prices are getting smaller and smaller by the day. Market caps are falling. In fact, some of the companies that used to be blue chip are now targets for inclusion in our Australian Small Cap Investigator report. More on that later.

You may have heard this story. In 1939 US investor John Templeton bought $100 worth of stock in every New York Stock Exchange listed share that was trading for less than $1. So the story goes, there were 104 companies that he invested in with 37 of them in bankruptcy.

Three years later he was in profit on 100 out of 104.

Unfortunately we don’t have the time or space to do the analysis on every share currently listed on the NYSE. So here’s what we have come up with. After taking into account inflation, 1939’s $1 is now the equivalent of $14.78.

The NYSE now has 3,619 US companies listed, which is double the amount listed on the Australian Stock Exchange (ASX). But it doesn’t include listings of overseas companies - or the thousands more that are traded on the NASDAQ.

So, how many companies are trading on the NYSE for less than USD$14.78? It would be a lot, so we won’t bother counting. But if we look at a narrower range of stocks, say the S&P500 it tells us the following story.

Of the 499 companies in the S&P500, a total of 142 are trading at the inflation adjusted equivalent of less than a Templeton dollar. And they aren’t all Mickey Mouse companies either. There are some big names in the mix: Western Union, Sara Lee, New York Times, Morgan Stanley, Motorola, Mattel and Intel.

To make the equivalent investment to Templeton, an investor today would need to stump up around USD$210,000.

Which is more important in the current economic conditions? The government being seen to ‘do something’, or allowing private enterprise to take advantage of market conditions.

Based on the evidence of last Friday it is the former. As you may have read, the federal government is tipping $22 million of taxpayers’ money into a failed private business. To be fair, it isn’t much. It is only a few dollars for each taxpayer.

But there is a bigger problem with it. First, does it represent the beginning of the beginning for government sanctioned bail outs? We’ve seen in the US how once the flood gates are opened, there is no stopping it. Remember the USD$700 billion Troubled Asset Relief Program (TARP) which was supposed to provide liquidity to credit markets? Now it seems as though it will be providing relief to Ford, General Motors and Chrysler as well.

Just as important is the message it sends to other businesses. What about all those successful child care centres out there? Many of them are run on a for-profit basis, and many are run on a not-for-profit basis. Most of them have not gone through with a stock market listing, and they have not put themselves into hock in order to go on a frenetic domestic and international expansion programme.

Instead they have grown their businesses responsibly and have provided a reliable service to the community. Their reward for running a good business? They now face competition from the new government backed ABC Learning Centres. Of course, they had competition from ABC before, but now they are being denied the opportunity to take on new business from ABC centres that would have closed, plus they are being denied the opportunity to potentially buy these centres at bargain basement prices.

The argument from government is that they are helping working families. The reality is that they are helping to save the bacon of a failed business.

We won’t deny it, it is a difficult time for investors and traders. Even long term investors can be shy about buying if they think the market could fall further.

Take a share like Woolworths [ASX:WOW]. The argument could be made that as Woolworths is in the non-discretionary sector it should continue to perform well even if there is an economic downturn. As they say, people still need to eat.

While that may be the case it doesn’t mean that consumers will spend the same amount. Especially if brand names start to be replaced on shopping lists by cheaper brands. Its recent rally is doubtless the result of many shareholders switching out of cyclical stocks into more defensive stocks.

But who is to say that the current share price of $28.50 is a bargain. What is to stop the price going lower? Considering we are entering into a period where stock prices may not rise significantly many investors are looking even closer at dividend yields. The yield on WOW for 2009 is not that impressive at 3.6%.

It is possible that investors will demand a higher dividend if they are to accept flatter capital growth. With the current cash rate at 5.25% and many online savings accounts offering rates near this level the shares could fall closer to the $20 mark in order to increase the yield towards 5%.

It’s one reason to be cautious about following the herd. Sure, investors should be looking at defensive positions, but only if they represent good value.

Cheers.
Kris.

Money Morning Uncertainty Index

Anyone would think today is a public holiday in Melbourne it is so quiet. Sydneysiders would probably argue that every day is quiet in Melbourne. Of course, we know different.

The next couple of days will provide us with some key information for the Australian housing market. Tomorrow we have the meeting of the board of the Reserve Bank of Australia (RBA). On Wednesday the Australian Bureau of Statistics (ABS) will release the September Building Approvals numbers.

The green line on the graph below tells us that the futures market is pricing in a 100% certainty of a 0.5% cut in interest rates. It is also telling us that there is some belief that the RBA could cut further by an extra 0.25%.

The likelihood of that happening is now decreasing. Last Monday the market had built in a 100% chance of a 0.75% cut but by last Friday that had dropped to only a 79% chance.

So, what - if any - impact will this have on the housing market? We hear all the time from politicians that they want to make housing more affordable. Is this really the case, and what do they mean by affordable?

To most people, affordable means to make the item cheaper. Although that may be happening with house prices at the moment, that is not what the politicians want. When they say ‘affordable’ they mean keeping prices inflated and providing subsidies.

That way it keeps everyone happy. Existing home owners hope it means the value of their house won’t fall as much. And new homebuyers get a stack of free cash from the government. No need to save for a deposit if the federal government is giving you $21,000 plus any extras the state governments are throwing in.

On top of that, elevated house prices do the state governments a favour as well by ensuring they receive more in stamp duty. The higher the prices the higher the stamp duty.

Therefore Wednesday’s Building Approvals numbers will be met with interest. Partly for the fact that everyone agrees part of the current credit problem is due to overextended borrowing. Yet if building approvals remain low the immediate reaction will be a call to create a stimulus to encourage borrowing.

Instead of everyone congratulating the population for pulling their collective heads in and not going into hock the people will be told that the economy will be in dire straits if something isn’t done to get the money flowing again.

Is it any wonder the public become so apathetic towards finances when the messages are so mixed?

The Market is Off to the Races

Later this morning we are off to the races. It is the first time we have been to Derby Day. Looking at the market this week we are almost convinced that before long the Australian market will be off to the races too.

We won’t bore you with another Warren Buffett quote about being greedy or fearful or robins missing spring or anything. The fact is, you don’t need to be a multi billionaire in this market to judge when markets are at a good value.

For rapid capital growth we like the look of the small cap sector. For those that are looking for income, well, providing those companies can maintain the dividend payouts there are some pretty good yields on offer. But neither approach is entirely risk free. As we have shown with the Money Morning Uncertainty Index there have been wild movements on the markets that can turn a cheap stock even cheaper overnight.

Yet things could be about to change. This could be a cheap stock less cheap overnight. We don’t write this with blind optimism. And we don’t say after having said it every month for the last year, just hoping that this was the bottom of the market. You will not be surprised to know that some analysts have been calling the market bottom since November last year!

The financial press has had a field day during the last couple of months as one nightmare led to another. Even the mainstream tabloids and non-financial media have expressed an opinion on the ‘credit crunch.’ Everyone is getting involved and have made for the exits.

It’s at times like this when we join the queue waiting to get back in.

The reason we like the look of the market now is down to something we read about… yes Warren Buffett several years ago. He said that when he buys shares in a company he does as though he was buying the whole company. Of course, now Buffett can afford to do that.

It makes a lot of sense. Sometimes you can get bogged down with annual reports, ratios, press releases, industry news and 101 other things. The most important thing to consider is, ‘if I had the money to buy the entire company would I do so?’ Once you put it in that context it can give you a much better understanding of whether buying the company is a good investment or not.

Yesterday the US market soared in the last few minutes of trading. Today it choked in the last few minutes. Everyone is always looking for a reason why the market does certain things.

The main reason it went up yesterday was because more people were prepared to buy at the prices quoted. The reason it dropped late on today is because more people were prepared to sell at the prices quoted.

The 0.5% rate cut by the US Federal Reserve was already built into stock prices so it isn’t entirely surprising that there was little further upside.

The interest rate story here could be a little more interesting. As of yesterday there was still a 100% chance of the RBA cutting interest rates by 0.5%, leaving rates at 5.5% next week. If you believe the futures market.

More interesting is that the futures market still has a 94% probability of a bigger cut to 5.25%. What we don’t know is whether institutional investors have fully priced that into stocks.

In a speech that Deputy Governor Ric Battellino gave in Sydney this morning it seems as though he is trying to cool expectations. He said, “We have acted pre-emptively in reducing interest rates. Nonetheless, there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy.”

The question we ask is, why reduce interest rates if inflation is still a problem? Which it is. Instead of focusing on a long term and the more insidious issue of inflation the RBA have been caught up in trying to address the short term problem of the credit crunch.

RBA Says Home Balance Sheets Strong - Are They?

Also in the speech, Battellino claimed that the average household financial position was strong. As he presented it in the following graph it is a fair comment.

However, is the graph fair. For a start he has combined short and long term assets and liabilities. If we subtract Superannuation from the balance sheet we can clearly see that liabilities exceed assets.

Considering most people have paid off their mortgage prior to retirement and that Super can’t be accessed until retirement then it skews the argument by including it in household finances.

So the position for households at the moment is a lower value of liquid assets, with debt repayments remaining roughly the same, inflation rising and uncertainty about job stability.

It isn’t the kind of environment that suggests consumers will be getting revved up anytime soon.

One of the upshots of the farce happening in the US is that the global economy is destined to take an even bigger shift across the Pacific towards Asia. The urbanization of Asian nations and growing wealth of individuals will compensate for lower demand out of North America. Remember, they have been saving while the West has been spending.

Australia is perfectly placed to benefit from this. Importantly, Australia actually produces things that industry wants. Correction, that industry needs. Raw materials. Commodity prices may not stay at elevated prices forever. In fact they may fall lower than where they are now.

The reality remains that Asian economies continue to grow. And their demand for raw materials is growing with it.

That’s fine for exports, but what about the Australian banking system? Thanks to the “4 Pillars” banking policy and the lack of competition, Australia is likely to miss out on the banking blow-ups that we have witnessed in the US and the UK.

Because of this the local banks have not had to get too “smart” with how they finance their loan books. For the most part they can rely on deposits to fund their lending. Our two investment banks, Macquarie and Babcock & Brown have not been so lucky.

Despite this, they do have some exposure to the complex derivatives products that have caused such trouble in the northern hemisphere, but not to the same degree.

The main risk for the Australian banking system is that it develops overconfidence. And that they start to puff out their chests congratulating themselves on escaping the worst effects of the credit bubble.

Perhaps the bravado has started already. Before the bodies of Freddie & Fannie are even cold there has been talk about setting up a government funded “Aussie Mac.”

A company called Rismark has proposed setting up a listed property derivative which would trade on the ASX. In a typical example of the private sector taking the profits and the government taking the losses, Rismark has proposed that Aussie Mac would only be a back-up in a liquidity crisis.

Just as mortgage backed securities were originally designed to help US Savings & Loans companies to hedge their risk exposure, that is exactly how the ASX property derivatives would be marketed here.

However, we have little doubt that before long the sales guys at the investment banks would be out marketing the products to as many funds and hedge funds as they can. Thanks to the past few weeks we’ve seen the consequences of nearly thirty years of the same thing in the US.

Given the choice between buying resources and energy stocks at a discount or buying banking shares at a discount, we will take the resources and energy stocks every time.

We’re happy to stay clear of banking shares until at least after the next reporting season. If that means missing out on 20% upside, it’s a chance we’re prepared to take.

There’s nothing more to be said about the markets last week except that we all survived, battered, bruised, shell shocked and worse if you were shareholders in some American companies no longer with us like Lehman Bros, Merrill Lynch, AIG, Macquarie, HBOS and a host of other financial stocks.

This week events will be dominated by the shape of the rescue body announced Friday to bailout the dodgy securities.

Here in Australia we have banned all short selling, not just the naughty naked kind, in a new development revealed last night by the financial regulator, ASIC. It starts from today and continues until further notice.

It is a step up of the ban on naked shorting announced Friday.

But the big issue is the $US700 billion bailout fund which is likely to provide an opportunity for ambitious and idiotic US congress representatives to try and add pet deals of their own to the bill.

Markets around the world simply love the idea, but that affection will be hard to hold as the fund takes ages to have any lasting impact.

The Standard & Poor’s 500 dropped by more than 4.7% twice last week after Lehman Brothers’ collapse; Bank of America Corp’s takeover of Merrill Lynch and the US government’s seizure of American International Group.

But the S&P 500 ended the week by jumping 8.5% on Thursday and Friday on the US government’s plan to purge banks of bad assets, crack down on short sellers and to stand behind money market funds through support from the Federal Reserve.

Shanghai surged 9.5%, in the biggest daily gain for seven years, to 2,075.091.

Hong Kong’s Hang Sang gained 9.6% to 19,327.73, London’s FTSE 100 had its biggest daily gain in its 24-year history, jumping 8.8% and in Australia the ASX 200 was up 198 points or more than 4.2% on Friday.

It was the biggest two-day global stocks rally in 38 years. Friday’s rallies in London and the US were partially fuelled by bans on short-selling in financial stocks announced on Thursday night.

Besides the S&P 500’s gains the Dow added 929 points from Thursday’s low and markets from the UK, China, and Australia and elsewhere surged as investors appreciated the fact that the great panic had been halted for the time being.

But it is short term, even the new fund being set up to help buy the so-called toxic securities by the US Treasury.

The longer term issues will be the newly increased size of the US deficit and debt, the impact of this huge expansion of money supply on inflation, and most of all the slumping US economy and the disaster that is the US housing sector.

The S&P 500 ended up 48.57 points to 1,255.08 on Friday, the Dow surged 368.75, or 3.4%, to 11,388.44 and Nada rose 74.8, or 3.4%, to 2,273.9.

The MSCI World Index of 23 developed nations’ markets jumped 5.7% to 1,286.44 on Friday and rose 8% over Thursday and Friday. Europe’s main regional index (the Sox 600) rose a record 8.3% Friday and the MSCI Asia Pacific Index added 5.5% Friday.

The S&P 500 actually erased its fall to close up 0.3% for the week, but it is still down down 15% this year.

Market reports said a record 3 billion shares were traded on the NYSE on Friday: that was more than double the three-month daily average.

Under pressure investment banks, Goldman Sachs and Morgan Stanley saw their shares leap more than 20% on Friday as shorts scrambled to cover themselves.

Traders said that only consumer staples, the best performing group this year, fell led by Wal-Mart, the world’s largest retailer.

Its shares fell almost 3% for the biggest decline in the Dow.

That reaction has a touch of unreality because it won’t be too long before investors start worrying about the economy and banks again and go back into consumer staples.

US and European government bonds tumbled; reversing gains made earlier in the week as investor sold equities and commodities and moved into bonds as quickly as possible.

The proposal from Paulson and Bernanke (and strongly supported by president Bush over the weekend) is aimed at isolating devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.

US Congressional leaders said they aim to pass legislation soon, but some have started wondering about loans to US car companies like General Motors and a $US50 billion stimulatory package to follow the $US120 billion tax rebate which came and went from May to July of this year.

That sort of grandstanding is going to be dangerous, and expensive.

In Australia the major banks led the surge on Friday and today the market is forecast to be up by around 130 points, if Saturday morning’s overnight futures finish is any guide.

The ASX200 index finished up 196.8 points, or 4.27%, to 4804.1, while the All Ordinaries index ended up 188.8 points, or 4.06%, to 4840.7.

The National Australia Bank soared $3.40, or 17.35%, to $23.00; the Commonwealth jumped $2.62, or 6.54%, to $42.70; the ANZ rose $2.26, or 14.63%, to $17.71; and Westpac ended up $1.54, or 7%, at $23.54.

But the focus was on Macquarie Group: after being belted up to the close Thursday, it rocketed $9.85, or 37.81%, to $35.90 after touching an intraday high of $38.55 just before noon.

Suncor Metway leapt 75c to $9.10 as the company completed the underwriting on its dividend reinvestment plan two weeks early.

In resources BHP Billiton ended up 40c at $35.40 and Rio Tinto jumped $3.10 to $101.50.

Iron ore miner Fortescue Metals Group added 50c to $5.70 despite reporting an annual bottom-line net loss of $2.8 billion and saying it would not provide a forecast for the current year because it may prejudice “the interests of the company”.

Oil and gas producer Woodside Petroleum was up $2.66 at $54.06, and Santos 53c to $18.28.

Newmont dropped 55c to $4.92 and gold fell; Newcrest eased 65c to $23.85 and Lehar dropped 3c to $2.45.

The Australian dollar finished higher in New York at 83.40, US cents after the US dollar lost ground as nervy investors sold the currency.

Earlier, the Aussie had finished around 81.15 on Friday, up about 1.3 US from Thursday’s close of 79.88. That’s up 3.5c in two days, or almost 5%.

And naked short selling will be banned on the Australian Stock Exchange from today.

But in a dramatic decision the regulator, the Australian Securities and Investments Commission has banned ALL short selling for a month from today, not just the naked variety.

 ASIC said the widened ban would act as a circuit breaker to restore investor confidence.

Short selling, where traders seek to profit by selling borrowed shares of companies to then buy them back, in the anticipation their prices will drop, has been partly blamed for the sharp falls of stocks such as Macquarie Group in recent days.

Naked short selling, involves selling without first borrowing the stock, or even ensuring the shares can be borrowed.

The Australian Securities Exchange (ASX) said on Friday it would remove all securities from its list of stocks approved for naked short selling from Monday.

The ASX said the “The removal will remain in force until further notice.”

“It will be reviewed when the government’s foreshadowed legislative amendments to the reporting of covered short selling activity take effect.”

But last night the ASX ban was supplanted by the wider ban from ASIC.

ASIC chairman, Tony D’Aloisio, said “To limit the prohibition to financial stocks, as has been done in the UK, could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short sell plays.” 

So, what does the banning of short-selling mean to the market?

It’s a good question. In our view, short-selling is no more to “blame” for markets falling than long buying is to blame for markets rising. In other words, it does have an impact on the downside but only as far as it adds to the number of sellers. It is not the sole reason for a share price falling.

We keep hearing commentators and analysts tell us that the likes of ABC Learning and Babcock & Brown are fundamentally strong companies. We are told that they hold great assets and that the market is failing to recognize it.

a couple of months ago that it was a misleading argument. Sure, these companies may have good assets, but that is only one side of the balance sheet. Don’t forget about the debt on the other side. If we only concerned ourselves with the assets then share prices would never go down.

Cause and Effect
It is easy to confuse cause and effect. Short sellers aren’t the cause of a share price falling. The cause is due to something that the company has or hasn’t done. The effect of the company doing (or not doing something) leads to investors selling those shares. In some cases this will involve investors short selling.

In reality, the ban on short-selling is likely to have almost zero impact. There may be short term price action to the upside as those who currently have short positions buy back the stock to close out. Secondly, those investors that use short selling to hedge a long position may choose to close out their long positions, which could put pressure to the downside.

But for those professional investors wanting to trade ’short’ they need look no further than the Options market. Options traders will be able to implement reasonably simple strategies that will give them almost exactly the same exposure as if they had used the share market to short sell.

In financial terms they call it a “synthetic short.” By simply buying an ‘at the money’ Put Option and writing an ‘at the money’ Call Option the trader can replicate a short trade. It is not exactly the same, but if an investor really wants to short particular stocks it is an easy way to do it.

The bigger question is what will happen to the markets next. We all have an interest in share prices rising, but are we really interested market manipulation?

ASIC and the ASX have rules against investors falsely manipulating the market. Yet its actions to restrict short-selling are doing exactly this in the short term. The banking stocks again look likely to be the main beneficiaries of this policy when they eventually start trading this morning.

What Happens When the Party is Over
The party on the stock market will doubtless continue today after Friday’s celebrations. But as is usually the case with a big party, there are plenty of hangovers.

Governments and regulators have thrown everything at the markets over the past week to try and ‘fix’ things. It may work. But if it doesn’t they haven’t left themselves with many other options.

Not surprisingly the ASX/S&P200 looks as though it is going to get off to another strong start this morning.

We dare say you have all had the opportunity to digest plenty of information over the weekend. Newspapers and websites have been screaming about financial Armageddon. Two weeks ago very few people would have heard of Henry “Hank” Paulson. Today he is almost a household name.

A quick summary of what has happened over the last few days in chronological order.

Markets have slumped. The US government has proposed buying up bad debts from US banks. The US, UK, France, Germany, Switzerland, Canada and now Australia have implemented various bans to prevent or limit short-selling. Markets have soared.

So as traders all around the globe watch their bottom lines bottom out and their hedge funds blow-up, I’m flat-out loving this market.

Why? I have a secret weapon that lets me profit when markets are sinking, while my stock trading buddies can barely stay afloat with their stocks.

What’s that secret weapon? The Japanese yen. You see, when volatility increases in the markets and stock traders lose their shirts, their loss is my gain. The Japanese yen experiences an uptrend when almost every other asset class (even commodities) is headed downhill.

At times like these, I can pair the yen with almost any currency in the foreign-exchange market and I’ll win. I know the yen thrives off of volatility, so one of my buddies’ strongest tools works even better for me during bear markets.

Stock traders all over the country look to the VIX (Volatility Index) to gauge when the stock market may bottom. They wait until the VIX rises to an extreme level and then they go in and buy. However, I watch the VIX heading higher and I know it’s giving my yen trades another boost.

Then when the VIX appears to peak, and these stock traders are just beginning to make some headway in their trades; all I have to do is reverse my yen trade and I’m still making a killing the whole time. If they only knew it was so easy…

Take a look at the VIX in the chart below, and the Japanese yen price right above it. When the VIX hits extreme levels (above 30 but especially around 35 or higher), the yen starts to peak. At that time, I just reverse my trade and start shorting the yen.

The VIX and the Yen…Traveling Buddies!

As a currency trader, you can buy or short the yen based on what you see using the VIX, their so-called “stock tool.” If you’re a stock trader and you understand the VIX, then you also understand the yen whether you know it or not.

As you can see above, the yen’s run may be almost over because the VIX is showing an extreme reading (i.e. it’s soaring higher). So it may be time to reverse your Japanese yen trades.

Secret Weapon #2: Collect Daily “Dividends” from the Currency Market

But there’s one secret that would REALLY push my stock buddies over the edge if they knew about it. It’s one I use in “up” markets, when stocks are also doing well

Most traders know the S&P 500 hasn’t gone anywhere for a number of years. However, once you take into account these companies’ dividends, then you could have an overall gain even while stocks stay flat.
However, these stocks only pay out dividends on a quarterly basis, while currencies pay out interest on a daily basis. Yes, you read that right…

It’s like getting a dividend daily.

So I have 365 opportunities a year to profit, while my stock buddies get four. If they only knew…

Secret Weapon #3: No Commissions, So There’s Less Fees in Currencies

The third advantage I have over stock traders is my stock buddies have to pay a spread AND a commission for each stock trade, while I ONLY have to pay the spread.

And I pay a smaller spread than they do because I control more currency with less money down and because the currency market has more volume which leads to tighter spreads.

So while my stock buddies are trading in this bear market, losing money on their positions AND paying commissions along the way, I’m earning profits now and paying less in fees.

Let’s say my stock trading buddies and I place the same number of trades each year. My stock buddies pay a measly US$7 per trade (even though many firms charge more). If we both made only 10 trades each month, we’d both have 120 trades over the course of a year.

Now remember that stock traders are charged twice on each trade (when they buy and when they sell). So over the course of the year, my buddies must pay 240 different commissions, costing US$7 each. That’s US$1,680 in commissions. That doesn’t even count how much they also pay in spreads.

What do I pay in commissions for completing those same 120 trades? Nothing! I only pay my much smaller spread all year long.

My stock buddies have to earn that much more in profits before they even break even. So obviously, the deck is stacked in my favor. If they only knew…

You now know my three secret weapons that give me an edge in the currency markets.