Stock market Guru

The Gambler

Lured to the markets by promises of vast and easy profits, the gambler is unfortunately a sizeable group. Typically male, these “investors” are prepared to risk large sums of money on speculative and volatile shares in the hope of making that one big win. Like all gamblers they tend to ignore any losses, boast about the wins and continually chase the perfect trade.

To their credit, they are highly motivated and driven to learn all they can. But unfortunately this can make them very popular with discount brokers, churning accounts as they experiment and try to build trading systems without proper plans and risk management. Many people belonging to this group will eventually end up like any gambler; broke and bitter, rather than learn proven formulas for market success.

The famous investor Sir John Templeton said “The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, the market will be your casino. And you may lose eventually…or frequently.”

Don’t become a gambler. Don’t trade or invest based around emotion. Always have a plan. Boring, age old adages that have survived the test of time and represent timeless wisdom.

The Skeptic

Regardless of what the facts are, there are those that refuse to acknowledge that the market can offer sensible and conservative investment opportunities. Some may have come to this view due to a bad experience with shares (former gambler, see above), others may simply be doubtful due to negative media commentary.

The skeptic will often hold many misconceptions about the share market, and will be ready to quote you any number of examples that support this pessimistic view (HIH, ABC Learning, Allco Finance). This view does nothing except prevent skeptics from participating in the best performing asset class available. And this in turn seriously limits their wealth creation potential.

The Timid

The timid investor is essentially the exact opposite of the gambler. While they are convinced of the benefits of share ownership in principle, they falter when it comes to the real thing.

When prices are going down, they are reluctant to buy for fear that the down trend will continue. When prices are rising, they are convinced prices are over inflated and remain on the sidelines in anticipation of a pull back.

For those that do take the plunge and buy some shares, they sell out at the first sign of trouble and crystalise their losses, removing their exposure to any eventual recovery. Likewise, shares that gain ground are soon liquidated for fear that they may soon reverse direction. In doing so they often miss out on much better returns down the track. In short, the timid investor is often doomed to fail.

The greatest mistake these investors make is the failure to recognize that markets are volatile. And while that means that it is a poor asset class to park your capital in the short term, it always has (and always will) give exceptional results in the long term. The other great mistake these investors make is to let their investment decisions be driven by emotion.

The Imperturbable

This final group is perhaps the smallest, but it is in my experience, the group that has the most success in the market. More often than not, these are the people that have managed to ignore the day to day trials and tribulations of the market and have instead remained resolutely focused on the bigger picture.

Typically, this group is composed mostly of people over 50 who have often done nothing more complicated than buy a mix of quality blue chip shares. They know that regardless of what prices do in the short term, their companies will for the most part continue to pay them reliable, rising and tax effective income. And they have also seen many recessions and bear markets and understand that no matter how bleak the outlook, the human race has survived and gone onto greater prosperity.

The imperturbable investor usually belongs to that era where people bought shares so as to become a shareholder – not to profit from a short term change in share price. They understand the business they invest in, they read all the correspondence, they attend the Annual General Meetings (AGM’s) and they vote in company matters. They know nothing of advanced technical indicators and trade philosophies, and yet tend to out-perform their younger and more reckless counterparts. Grandma it turns out is nearly the perfect model for retail investors to aspire to.

Yesterday’s spectacular 889 point rally for the Dow ranked as the sixth largest daily percentage gain in history for the world’s most widely followed benchmark. The Dow surged 10.9% on Tuesday and other international markets also followed suit with huge double-digit gains.

But again, don’t get too cocky thinking we’re at the cusp of a new bull market. It won’t happen. The economic backdrop does not portend profit recovery any time soon. Domestic consumption is still declining in the United States as Americans start saving again. A higher savings rate is bearish for earnings.

A big stock market recovery like Tuesday’s probably has many investors itching to get back into the market to recover losses - but that’s a major mistake if you’re unhedged.

Joining Ranks with the Great Depression

Yesterday’s price action joins the dubious list of other extraordinary Dow rallies in history. According to The Wall Street Journal, the Dow’s 889 point rise on Tuesday and its 936 point gain on October 13 are dwarfed by Great Depression rallies of similar magnitude.

Of the top 10 stock market rallies in history, seven occurred during the 1930s, one in October 1987 and two this month. Unfortunately for investors, Tuesday’s 889 point rally was preceded by a 15.3% gain in March 1933, a 14.9% surge in October 1931 and a 12.3% gain in October 1929. That’s not exactly in good company when it comes to impressive rallies.

Global stock markets; however, remain oversold and are likely to extend their first bear market rally since the Fed’s bailout of Bear Stearns in mid-March. All sentiment indicators I follow are extremely bearish, suggesting we’re going to see more gains, however short-lived. The VIX Index - which plunged 16% on Tuesday - is still heavily elevated at 67.

Don’t Jump the Gun

In my view there’s no point chasing this short-term bounce.

The Presidential elections next Tuesday might also provide a jolt to stocks as renewed investor confidence is celebrated once McCain is sent packing his bags. Yet any celebration is unlikely to last beyond several weeks because corporate earnings are still rapidly deteriorating and consensus estimates are too optimistic, meaning more downgrades are coming.

There’s also the big risk surrounding unsettled CDO and credit swaps. There’s about US$60 trillion worth of these things floating around the world. And you can bet that most counter-parties probably can’t honor more defaults should they occur. Credit derivatives need a clearing house and hopefully, they’ll get just that in 2009.

Meanwhile, the credit markets are slowly improving. LIBOR rates are coming off their highs and commercial paper is flowing again, courtesy of the Fed.

I think it’s a good time to nibble - not bite - at your favorite blue-chip stocks and non-Treasury bonds, including investment-grade corporate bonds, intermediate tax-free municipals and TIPs, or Treasury Inflation Protected Securities.

I’d also bet against Treasury’s because long-term yields look awfully low this morning at 4.2% compared to the monster level of Treasury issuance coming our way over the next 12-18 months.

The Bulls Are Back
The Dow Jones Industrial Average was up by 10.88% overnight. What are we to make of that? Is it the end of the bear market or is it just a bear market rally?

Of course it isn’t the first time we’ve seen a massive 10% gain on the Dow. And we don’t have to turn the clock back that far either. Only two weeks ago on the 13th October the Dow picked up 936 points for its biggest ever one-day points gain.

Last night’s 889 point gain was not surprisingly the second ever biggest one-day points gain.

The bad news is that last night’s move still puts the Dow over 200 points behind where it closed on the 13th. So there is still a big question mark over how solid these big points rallies are.

This morning there was another late rally. A pattern we have seen during several sessions recently. The index gained by 700 points during the last two hours of trading.

It is arguable whether long term investors are going to storm into the market with two hours of trading remaining and then drive the market up by a record amount. Long term investing is, well, a bit more boring than that.

But still, the market has to - hopefully - go up from somewhere. Maybe this is it.

Cure For Recession - Drink Beer
Over at the Daily Reckoning Dan Denning has been asking readers about the idea of Robinson Crusoe Stocks. Crusoe, having spent 28 years stranded on an island, returned to find that his investments had grown in value leaving him a rich man. Sorry to give the ending away if you haven’t read it already.

So what are the type of Crusoe stocks on the Australian markets? Stocks that you can buy today and tuck them away for the next 10 or 28 years. One of them could be anything that involves beer.

According to the Westpac Consumer Confidence survey, beer sales have been recession beaters during the last thirty years. Perfect if you happen to have bought beer stocks 30 years ago just before getting marooned.

There are a few beer companies on the ASX. Fosters [ASX:FGL] and Lion Nathan [ASX:LNN] are the two biggest. But at the small end of town you’ve also Little World Beverages [ASX:LWB] and Empire Beer Group [ASX:EEE].

NEW YORK - Wall Street shares vaulted higher, with investors optimistic that the US congress was on the verge of a deal on a massive rescue plan for the financial sector.
The Dow Jones Industrial Average gained 196.89 points, or 1.82 per cent, to 11,022.06.
The Nasdaq composite added 30.89 points, or 1.43 per cent, to 2,186.57, and the Standard & Poor’s broad-market index increased 23.31 points, or 1.97 per cent, to 1,209.18.

LONDON - The London FTSE index rose 101.4 points, or 1.99 per cent, to close at 5,197.02 points.

FRANKFURT - The DAX added 120.16 points, or 1.99 per cent, to close at 6,173.03 points.

PARIS - The CAC 40 gained 112.27 points, or 2.73 per cent, to 4,226.81 points.

TOKYO - The Nikkei lost 108.5 points, or 0.9 per cent, to close at 12,006.53 points.

HONG KONG - The benchmark Hang Seng Index closed down 27.56 points, or 0.15 per cent, at 18,934.43.

WELLINGTON - The benchmark NZSX-50 index closed down 21.964 points, or 0.67 per cent, at 3237.715 points.

SYDNEY - The Australian stock market is expected to open stronger today after US political leaders struck an agreement in principle on a $US700 billion plan to revive the crippled financial system.
It is hoped both houses of US congress will vote on the plan within days.
Wall street and European markets have reacted positively to the news, with major indices recording gains of around two per cent.
At 0735 AEST, the Sydney Futures Exchange’s December Share Price Index contract was up 63 points at 5,057.
In news today, Greater Bendigo Gold Mines holds a general meeting.
Heritage Gold NZ, a company listed in both Australia and New Zealand, holds its annual general meeting in Auckland.
The Emissions Measurement and Information Systems conference continues in Sydney.
Yesterday, the benchmark S&P/ASX200 closed down 54.5 points, or 1.09 per cent, at 4927.4, while the broader All Ordinaries lost 47.4 points, or 0.95 per cent, to 4960.8.

NYMEX
Crude oil rebounded on hopes that the $US700 billion bank bailout plan would stabilise the teetering US economy and boost domestic energy demand.
New York’s main contract, light sweet crude for November delivery, rose $US2.29 to settle at $US108.02 a barrel.
In London, November Brent crude rose $US2.15 to settle at $US104.60 a barrel.

COMEX
Gold prices fell as an agreement in principle on a US government financial rescue package prompted investors to sell safe-haven assets in favour of stocks.
Gold for December delivery fell $US13 to settle at $US882 an ounce on the New York Mercantile Exchange, after earlier falling as low as $US868.80.
Other metals traded mixed. December silver fell 16.5 US cents to settle at $US13.275 an ounce, while December copper rose 2.8 US cents to settle at $US3.1345 a pound.

The federal government is now on course to engineer the greatest expansion of credit in history. The long-term consequences will ultimately be disastrous for American financial assets, particularly the dollar and Treasury debt.

Thus far in September the Fed has expanded its balance-sheet by some US$425 billion dollars. In just the past three weeks, the Fed has rescued Fannie and Freddie, AIG, spent tens of billions of dollars in efforts with other central banks and has extended a US$75 billion dollar lifeline guarantee to money-market fund investors.

But these figures pale in comparison to the estimated cost of Paulson’s new plan.

Clearly, the credit crisis requires desperate measures and only governments can help to alleviate or even quash systemic failure through unprecedented credit expansion. Like I’ve said all along, it’s Inflate or Die for Western capitalism.

The strains of deflation, however, will take time to extinguish. Markets are wrong to think we can all enjoy a sustained v-shaped recovery. This just won’t happen. Corporate profits will decline for at least the next two quarters.

But over the next 18-36 months, inflation is going to make a formidable comeback as the chickens come home to roost in the United States and Europe.

The cost to resuscitate the financial system is primarily an American problem and will result in a massive expansion of credit. So inflation is all but inevitable.

The best long-term short-sale in my book is Treasury debt. The dollar will eventually return to the basement but that might be delayed as the outlook in Europe grows more and more dim. Though I can’t make a long-term case for the dollar, the odds are high it can continue to rally over the next several months or more, especially if RTC II is passed.

Next on the chopping block for the bears is the Treasury market. The United States will have to pay its creditors higher interest rates in the future. U.S. funding costs will eventually rise significantly unless the United States cuts its bloated spending. And the odds of that happening are pretty much nil.

“We cannot protect all risk in the market, and we should not do it at the risk of the taxpayer.” — Richard Shelby, Alabama Senator

“Moral Hazard” is a pair of buzz words circling lunch tables, office cubicles and board rooms around the world. Why? Simply because the Fed and Treasury are taking matters into their own hands, trying to put an end to the losses wreaking havoc on the global financial system.

And in doing so, our government could be seen as endorsing the reckless lending that led us to this disaster in the first place.

However, what scares me most about these interventions is that some could create a humongous burden on the taxpayer.

The two-year US$85, billion loan from the Fed to AIG this week is an attempt to provide a controlled environment to deal with the pain, spare the financial system from the effects of extreme counterparty risk, protect the real economy and keep the bill off the taxpayer.

So what if the burden of this financial mess doesn’t end up in the taxpayers’ lap? Could there still be moral hazard?

Good question.

Because what kind of precedent are they setting? These are banks and institutions that took on toxic derivatives and securitized debt. They fattened up when times were good, but come crying for help now that the going has gotten tough. How many more will follow expecting the same treatment?

Perhaps this is the real issue.

Earlier today some others criticized the Paulson bail-out plan for assuming that the investment banking model on Wall Street could survive the current crisis, provided it was cleansed of its bad assets. It turns out the model didn’t even make it to Monday’s New York Open.

In a move that marks the end (for now) of the high-leverage, no oversight, risk-taking investment bank model, the Federal Reserve announced that its board had approved, “Pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.”

It’s too early to reach conclusions, but here are some initial observations on why the move was made and what it means going forward:

• The ban on short selling hits leveraged players the hardest. You don’t get more leveraged than Goldman and Morgan Stanley. The banks have to de-lever in an orderly fashion without being driven into the arms of a commercial bank partner with deposits. Goldman and Morgan have accepted the oversight that comes with commercial banking in exchange for maintaining their existence.
• Goldman and Morgan move from being prey to predators. As bank holding companies, they can now take deposits. But it’s much more likely they’ll simply acquire deposits. They can acquire the deposits of firms like Washington Mutual or Wachovia. Or, even better from their perspective, the deposits of regional banks hit hard by the collapse in Fannie and Freddie bonds.
• Goldman and Morgan gain enhanced access to Fed lending facilities now that they are bank holding companies. Even though the Fed had already set up a Primary Dealer Credit Facility, as deposit-taking institutions the new Goldman and Morgan have even greater access to more Fed loans (should they need them. What’s more, the new versions of the old investment banks would presumably be covered by the FDIC as deposit taking institutions.

The Fed must hope this moves Morgan and Goldman out of the “problem” category and into the “solution” category. Given a big enough line of credit by the Fed, these new bank holding companies can become new non-government homes of “good assets” while the Fed and Treasury deal with the bad assets. It also keeps the unthinkable from happening: Wall Street losing all its investment banks and two big counter-parties in the derivatives market.

***Treasury includes all asset-backed securities in new plan

Even though it is just a few days old, the scale of the proposed US$700 billion bailout of troubled mortgage-related assets has already gotten bigger. Bloomberg reports today that the Treasury Department has suggested the new program include a much wider variety of asset-backed securities than previously suggested.

“The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said.

“How much are we talking about here? At least another US$500 billion. According to a September third article by Bloomberg’s Sarah Holland, “More than $358 billion of credit card asset-backed securities were outstanding as of March 31, according to the Securities Industry and Financial Markets Association. Another $196.6 billion in securities were backed by auto loans.”

Click to Enlarge

However the SIFMA’s latest data from 2007 (above) shows that once you include home equity lines of credit (HELOC) and student loans, the number quickly jumps to over US$2 trillion. It is almost certain that student loans would be eligible for purchase under the Treasury plan. But HELOCS?

If Paulson and company are doing a true “Control-Alt-Delete” systemic re-boot of the financial sector, then all securitised assets that will be affected by consumer non-payment (nor or in the future) must be transferred from private balance sheets to the public.

That means that though he’s only asked for $700 billion up-front to deal with the bad assets, the Paulson plan could eventually require as much as $2 to $3 trillion in new Treasury money to buy asset-backed securities. Of course Wall Street will only want to get rid of the worst paper and keep the best for itself.

But you are still looking at a number that’s likely to be much bigger than what Congress has been told. That number is even more bearish for the dollar than the current one, which is already bad enough.

***Forget the short-covering rally, a Futures Freeze?

One point we failed to make clear earlier today is that by eliminating shorting from the market today, regulators make it harder for the market to find a bottom, even though they are trying to help the market find a floor. Why?

Shorts help begin a new bull market by covering their positions. They do this, naturally, by being the first buyers of shares. To cover your short you buy back the shares you previously lent. Without the shorts in the market, who’s going to step in and buy at the lows?

In any event, there are still a few tricks up the regulatory sleeve if the prohibition on short-covering fails. First, there is the futures market, where one can still go short an index or security. Activity in the futures market could be shut down if the regulators think it would help. We’re not saying it would help. But now that we’ve gone through the looking glass, anything is possible.

In 1998, Russia’s economy collapsed. The Russian government defaulted on its foreign debt obligations while the ruble went into a freefall.

In Asia, regional governments exhausted their central bank reserves defending overvalued currencies. This all lead to the destruction of credit that began the summer of 1997.

This was exactly the time to aggressively buy emerging markets, and eventually, commodities. Oil prices bottomed north of US$10 a barrel in late 1998.

As we all know, this story changed quickly. Aided by rising prices for commodities, emerging markets went on to post the most impressive gains in the last 10 years. And it’s not surprising.

After all, the emerging markets are home to the world’s fastest-growing economies supported by bulging trade surpluses, booming foreign-exchange reserves and in most cases, healthy balance sheets.

There’s no doubt that in the longer term, emerging markets will become larger and therefore dominate global stock market performance. Growth rates will certainly continue to outpace the major markets for years to come. But a marked slowdown in exports and a prolonged commodity slump might also crimp the near-term prospects for emerging markets.

It is possible that after years of huge triple-digit gains the emerging markets can lag the major markets. That’s especially the case after the crippling declines we’ve seen in the financial stocks. A recovery, however short-lived, will boost the value of U.S. equities because financials comprise more than 15% of the broader market and more than 20% across Europe.

Financials Will Dominate

History strongly suggests that financials will eventually form a bottom and lead another broad rally for major market equities.

It might be hard to make a long-term case for financial services as industry business models have radically changed and have been compromised by the credit squeeze. Still, a major advance in emerging markets can happen even for a short period of time.

I’m certainly not long-term bullish on U.S. or European stock markets. The smart money will remain committed to emerging markets, including new frontier markets like Vietnam, Bangladesh, and Botswana among others. Plus, China, India, and Brazil are superb growth stories for the next 10 years.

But it might be time to start looking carefully again at U.S. stocks as foreigners return to positions that have been severely slumped over the last few years. A stable dollar would go a long way in solidifying this possibility.

Since 1998, the Morgan Stanley Capital International (MSCI) Emerging Markets Index has gained 13.5% per annum or 9.5% annually adjusted for inflation. That’s the highest total return posted by any broad global index over the last decade. This one number flat-out confirms that major markets have lagged behind emerging markets.

Indeed, emerging markets continue to post strong growth rates while the industrialized economies continue to struggle. Markets from the U.S. to the Eurozone are drowning under debt deflation tied to a financial crisis, rising long-term unemployment and declining standards of living.

The emergence of China as a major financial power combined with rich commodity-producing nations of Brazil, Russia and the Gulf States all point to a bright long-term outlook for emerging market plays.

It’s worth noting that emerging nations hit a bear-market low in late 1998 following the Asian economic crisis and the Russian ruble collapse.

At the time, this marked the best market-timing purchase among select global indices. We may see the same opportunity emerging here in the U.S. in the S&P 500.

For now, the S&P 500 Index remains hostage to a credit squeeze, deflation in housing, and a decline in domestic consumption. But that may all change soon.

Amid a 13-month credit crisis affecting most of the developed world, the United States might be at the cusp of outpacing other markets over the next decade. What happened in the emerging markets 10 years ago suggests this might be possible, at least from a contrarian investor’s standpoint.

As I said earlier this week, the United States has by far the world’s most sophisticated system of financial surveillance. Today, I’m going to give you five strategies to sneak under that surveillance, and protect your assets in the process.

First of all, to avoid pervasive U.S. financial surveillance, I highly recommend offshore investments and relationships:

• Place a portion of your assets outside the United States. Yes, you do have to report offshore bank accounts and trusts to the IRS, but you can purchase some regulated contracts, such as insurance policies, in relative privacy (see Marc Sola’s article above for more details on such a tax-deferred policy).
• Transfer funds outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, into alternative currencies. The dollar has appreciated sharply in recent months, so it’s an ideal time to start diversifying your cash into greater currencies (you’ll get more “bang for buck,” because of the stronger dollar).
• Use attorney-client privilege. Many countries (including EU members) now require attorneys to report “suspicious transactions” to their domestic authorities. Keeping this requirement in mind, you can achieve considerable privacy by conducting business and financial transactions through an attorney. However, in virtually all jurisdictions, attorneys can’t provide advice that would result in or encourage the commission of a crime.
• Evaluate non-reportable offshore investments. Depending on where you live, certain offshore relationships or assets may not be legally reportable. U.S. persons need not report assets held in a non-U.S. safety deposit box, where no foreign financial institution has legal custody of those assets. Other non-reportable offshore investments for U.S. persons include real estate, vehicles and other assets not considered a “foreign bank, investment or other financial account.”
• Use cash. Despite the global crackdown on cash, you can still achieve significant privacy by using cash instead of debit/credit cards or checks. This is particularly true outside the United States. However, cash transactions (over US$10,000) are subject to substantial surveillance. An increasing number of countries also require that you declare substantial sums of cash when crossing domestic frontiers.

This simple solution allows you to be fully compliant while investing without restrictions due to citizenship. It allows you to enjoy full tax deferral under U.S. law, rock solid asset protection, and it serves as a first-class estate planning tool.

It’s known as a foreign variable annuity.

I know that “variable annuity” sounds boring, but it’s one of the most powerful investment tools used by wealthy individuals in their international portfolios.

An annuity allows you to invest freely, shield your assets and even allow your wealth to build up tax-deferred until you withdraw assets.

Plus, your foreign annuity will protect your wealth from the next bank failure in the United States. Not to mention, it gives you the leverage you need to have your money managed by some of the best asset managers and banks in the world.

In case you didn’t hear, the government finally jumped into the mortgage business over the weekend when the politicians officially nationalized Fannie and Freddie.

Without an official guarantee from Washington, the odds of a full-scale mortgage-backed crash was imminent. So you could argue Paulson’s pre-emptive strike on Sunday was successful.

Spreads, or the difference between risk-free Treasury bonds and mortgage-backed debt, remained elevated all year until this past Monday. That rate was 2.74% last Friday or 6.40% - the highest spread versus T-bonds since the credit crisis began.

Meanwhile, the 30-year fixed rate mortgage plunged from over 6.40% on Friday to 6.04% on Monday. In other words, the bailout alleviated credit stress on that segment of the mortgage market. That’s the good news.

The bad news is that “jumbo” mortgage rates, or mortgages considered too large to be purchased by Fannie and Freddie climbed to 7.35% from 7.14%. How the jumbo market will react going forward is anyone’s guess. But the primary concern for the market is that lending giants Fannie and Freddie remain solvent and recapitalized by the federal government.

Paulson, a former Goldman Sachs chief, is no stranger to structuring deals. In some ways, the United States and its foreign creditors are lucky because anyone else holding this position would have no idea how to put together such a complex rescue package.

Here’s the plan: The Treasury will recapitalize the government-sponsored enterprises (GSEs) by gradually buying preferred stock. Of course, stock holders will get the short end of that stick. Fannie and Freddie shares collapsed about 85% on Monday.

I’ve already purchased intermediate and short-term Fannie and Freddie debt. Spreads should continue to narrow over the next several weeks as investors return to this market. These bonds, along with high quality corporate bonds are among the best values today in fixed-income markets. In stark contrast, treasury bonds offer you poor values adjusted for inflation. They’re also overbought.

Taxpayers, naturally, will fund this enormous bailout. The Savings & Loans crisis in the late 1980s cost taxpayers about US$300 billion adjusted for inflation since 1989. This bailout should easily match those figures. It might ultimately be twice that amount if housing values don’t stop falling soon.

Today we are only interested in energy. To be precise, Origin Energy [ASX:ORG] and the impact on one of our Australian Small Cap Investigator stock picks.

Let’s go through what this deal isn’t. ConocoPhillips [NYSE:COP] has not offered to buy a part or whole of Origin Energy, so this is not the same as the offer by BG Group [LON:BG] to buy the company outright for $15.50 per share.

What is the deal? It is a deal which blows open the doors to the Australian energy market.

Origin Chairman Grant Kevin McCann said “Origin is delighted to welcome ConocoPhillips, one of the world’s largest integrated energy companies, as its partner in monetizing our extensive CSG reserves and resources.”

Show Me The Energy Money
In other words, Kevin McCann borrowed the phrase “Show me the money” from the film Jerry Maguire. ConocoPhillips was happy to comply. The extent of this deal shows us who was in the driving seat.

[Source: Origin Energy]

Origin will receive AUD$6 billion in cash in return for giving ConocoPhillips a 50% stake in its Coal Seam Gas (CSG) assets. That’s AUD$6 billion just for turning up. Additionally ConocoPhillips will cover Origin’s costs to develop the project of AUD$1.15 billion. Further payments are due when production begins.

On top of that, Origin gets to book 50% of the revenues and profits from the joint venture.

What is special about CSG, also known as Coal Bed Methane (CBM)?

In some respects nothing. In some respects something. Most importantly, it is a proven and probable resource and ConocoPhillips wants it.

We won’t go into the specifics here on CSG. We will say that for usage it can be used in exactly the same way as natural gas meaning there is little infrastructure development required at the point of distribution. Also, CSG does have a number of benefits over LNG (Liquefied Natural Gas) in that it can be easier to drill and cheaper to process as it has less impurities.

Sometimes there is the tendency to make things look too complicated. The bare facts in this case is that Origin have something that ConocoPhillips want a part of and they are prepared to pay more for it than BG Group.