Yesterday I wrote to you about the silly headline in The Age newspaper. It was this:

“Queensland rebuilding will boost GDP”

Look, we love it when we see this kind of nonsense written. Simply because it gives us an excuse to again read Frederic Bastiat’s, “That Which is Seen, and That Which is Not Seen”.

You can click here to read it for yourself.

I won’t reprint it because you should read the entire essay. But in a nutshell, it’s economic nonsense to suggest that a flood will be beneficial to an economy.

Only an economic ignoramus would argue such a thing. Floods destroy things. Floods make no distinction between the destruction of brand new goods and goods that are due for replacement.

The last time we brought up this subject we were told it is good for the economy because money comes into Australia from insurance companies. That this money hasn’t been taken from elsewhere in the economy.

Rubbish.

To borrow from the title of Bastiat’s essay, it only considers that which is seen but not that which is not seen.

Even so KPMG chief executive Michael Andrew is quoted in The Age article:

“This will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia. Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

It’s the idea that Australia is getting a free lunch from the insurance companies.

The fact is, Mr. Andrew couldn’t be more wrong if he tried. But let’s run through the argument in more detail…

Think about it, how do insurance companies raise money? They charge premiums. Premiums paid for by Queenslanders and others.

Now, how does an insurance company pay for the claims made by policyholders? It covers the costs from its reserves but would also issue bonds to investors which it will then repay over time from insurance premiums.

Here’s the problem for the insurance company. Aside from the big payouts such as the Queensland floods, or the Christchurch earthquake, the insurance companies also need to pay out other everyday claims.

So, the insurance company will need to rebuild its cash reserves.

How will it do that?

Simple, it’ll need to increase insurance premiums.

And who pays for the insurance premiums? Individuals and businesses. In other words, money that would otherwise have been spent elsewhere or saved will be now spent on increased insurance costs.

Yes, some industries may benefit as claimants buy another item of furniture to replace the item that was destroyed. But it is at the expense of say, the clothing store where someone may have spent money but they are no longer able to do so because of the increased insurance premium.

But what about this idea that foreigners are actually funding the rebuilding as the cash flows in from overseas.

While that may be true, it ignores the attitude of those overseas investors. If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance policies. And that means passing on higher premiums to policyholders.

In economics there’s no such thing as a free lunch. If something is destroyed and needs replacing then there will be a cost to replace it. That cost will either be a direct or indirect cost.

Think about it this way. If there really wasn’t a cost, then why wouldn’t you just crash your car and write it off at every opportunity? I mean, that’s the logic Mr. Andrew is using.

The reason you don’t write your car off is because you know there will be a cost to you in the form of an increased insurance premium when you get your next car.

There is no difference between this example and the costs of the Queensland floods. To the Australian economy as a whole, and to anyone who holds any kind of insurance policy there will be a cost.

Claiming that foreigners will pay for the flood damage without any impact on Australians is just another childlike example of the Australian mainstream falsely believing that ‘Australia is different.’

One day they’ll get it through their thick skulls that Australia isn’t different. Australia has benefited from an extraordinary boom in the resources industry which has helped prop up the entire economy.

When that boom stops, the Australian economy will suffer. Only then will the mainstream numpties realize that the Australian economy is no different to anywhere else.

Kris Sayce
Editor
Money Morning

Monday: You’ve got your eye on a stock – but you’re not sure if it’s the right time to buy it… You’re holding another stock that just went up – or down – significantly… but you don’t know whether it’s time to sell… The solution to both of these dilemmas will become a lot clearer once you’ve watched this video (turn on your speakers). Click here for more…

Tuesday: No wonder Diggers & Drillers editor Dr. Alex Cowie looked jolly as he bounded into the office this morning. The “Stock Doc” has been long coal stocks since March last year. Click here for more…

Wednesday: We see the lazy Aussie retailers have launched a media campaign. They were clearly influenced by the success of the miners’ campaign against the Resources Super Profits Tax (RSPT). Except they forgot one very important thing… Click here for more…

Thursday: But speaking of non-robust and flaky, much to our surprise we received a reply to our Freedom of Information (FoI) request from the Reserve Bank of Australia (RBA). Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else). Click here for the most intriguing stock story of 2011. Click here for more

If you haven’t found the time to read the transcripts from the Senate economics select committee I suggest you find the time.

Simply because comments from two National Australia Bank [ASX: NAB] executives confirm – that’s right, confirm – everything we’ve written about NAB’s secret bailouts in 2008 and 2009.

You can download the transcript by clicking here.

We told you the banks need the loans because they faced a massive liquidity and solvency problem.

Our critics said we were talking rubbish. That we had finally lost our marbles.

They tried to say NAB was just being cheeky. That is was snaffling Federal Reserve loans on the cheap. They said NAB did what any back should do, take the opportunity to borrow low and lend high.

We countered the argument by explaining how bank borrowing works. How banks have to roll over debt on a regular basis. If there’s a problem with rolling the debt over, then, well, it can leave a bank in the lurch.

We showed you how NAB and Westpac [ASX: WBC] had stood hunched shoulder to hunched shoulder with other troubled banks. Banks such as Royal Bank of Scotland, LloydsTSB, Citibank and ABN Amro.

Believe me, the admission I’ll show you in a moment is dynamite. It’s an admission straight from the horses’ mouths. That the Australian banking system was in dire trouble in late 2008.

Yet where is the Australian mainstream press on this story?

Good question. Nowhere. The mainstream press conspired with the banks and regulators to sweep the secret loans scandal under the carpet. And now they’ve done the same with the Senate committee statements.

To be honest, the incompetence of the mainstream press doesn’t surprise us. We’d waited a couple of days for the transcripts to be posted to the Hansard website (Hansard is the official record of parliamentary debate).

Until then, like you, we had to rely on what the mainstream press had reported. And what did they focus on? Of course, they focused on the easy stuff… banks’ interest margins, bank fees, executive pay levels… the sort of stuff that’s easy for the journalism cadets to get their teeth into.

I mean, the bombshell I’ll reveal to you today isn’t the sort of thing the seasoned finance hack would touch with a bargepole. Why? Because the seasoned finance hack doesn’t want to ruin his chances of an invite to the next banking dinner party.

Or the chance to interview a top banking executive. That’s more important to them than uncovering a story that proves the fragility of the banking system.

Although to be fair, even if they did want to report on it, chances are their editor would exercise a veto and cut out all the juicy stuff.

So, when we read the transcript, guess the first thing your editor did. Go on, guess.

What’s that, you can’t? Think harder. Think how annoying we can be… that’s right, we fired off another email to our pals at the ASX. I won’t reprint it here, instead I’ll expand on what I wrote to them.

Remember some of the previous banter we had with the ASX folks. They told us the ASX didn’t have the power to request information from a company. Not unless there was an unexplained price movement.

We told them their version of ASX Rule 3.1 was wrong. The ASX did have the power to request additional information from the banks. Not only did they have the power, but that they should do so immediately.

Funnily enough, two weeks since the US Federal Reserve released the extraordinary details of NAB and Westpac’s secret loans and the ASX is still sitting on it.

The ASX continues to conspire with NAB and Westpac to keep the market uninformed about secret loans that prevented two of Australia’s banks from going bust. I don’t know about you but I’d think that was something the ASX would want an explanation on.

Yes, I’ve been criticised for my comments on the seriousness of these loans. I’ve been told on more than four occasions (five I think… maybe six) that Australia’s banks were nowhere near going bust.

Well, it turns out your editor was right. But don’t just take my word for it. In a moment I’ll show you what two top execs at NAB – one of them the top dog – told the Senate committee about the financial condition of the banks in 2008 and 2009.

But first, Money Morning reader Paul sent us this timely reminder of the spin put out by the banking industries puppet mouthpiece, the Australian Bankers’ Association (ABA) in October 2008:

“The Australian Bankers’ Association (ABA) is concerned that recent announcements by the Federal Government to guarantee deposits and wholesale funding are being characterised as the Australian banks having been ‘bailed out’.

“This is false

“No bank deposits have been at risk. Bank deposits are safe – with or without the government’s guarantee.

“Australian banks and the regulatory framework have been successful. Unlike in the UK, Europe and the USA, no taxpayer’s money has been allocated to support an Australian bank. Australian banks are very strongly capitalised and continue to hold assets that are of good credit quality.”

It’s interesting the ABA would say that, because one year prior to that statement Westpac had grovelled to the US Federal Reserve for USD$1 billion. And one month later NAB would need to raise billions of dollars on the Australian Securities Exchange.

As NAB director of finance Mark Joiner told the Senate committee:

“There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered.”

Despite that, the ABA claimed Australia’s banks were “strongly capitalised”. So “strongly capitalised” that the NAB had to raise $6 billion on the market plus another USD$4.5 billion in secret from the US Fed.

That doesn’t sound very strong to me.

But right there, in Mr. Joiner’s statement is the precise reason why the NAB grabbed the secret loan money from the US Federal Reserve. Not because it was trying to make a few extra bucks, but because the bank was on a negative credit watch.

The bank execs knew that if the market knew just how tight the bank’s balance sheet was, the bank would have lost its AA credit rating. Here are Mr. Joiner’s comments to the Senate committee:

“There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered. Then our ability to support the economy in the ways we described before—staying open for business and predictable for customers—would also have gone. We would have had to freeze our balance sheet growth and the like. While you probably do not want obscene amounts of profitability out of your banking system, it is good for everybody to have a strong banking system that supports a degree of economic self-determination and flexibility.”

See, without these bailouts Mr. Joiner admits it would have been hard for the bank to stay open for business.

Yet just like the secret loans, you didn’t hear about this statement in the mainstream press. They didn’t seem to think it was important enough.

But that wasn’t all, NAB CEO Cameron Clyne backed up his finance director. Here’s what Mr. Clyne told the committee:

“As we went to the crisis, we were in a situation where obviously, quite appropriately, investors and prudential regulators were seeking us to hold greater capital. We had to go to the markets. We went to the markets in November 2008 and in July 2009 and raised about $6 billion in equity. We effectively had to absorb that and suffer the drop in return on equity. Had we tried to maintain the same return on equity on the additional $6 billion in capital, prices would have been substantially higher. I do contest the fact that we maintained return on equity. We most certainly did not.”

There you have it. Australia’s banks were on the edge. It needed the capital raised on the market, plus US Federal Reserve secret loans in order to make it.

Think about it. Think about the other bailouts the banks received – the first homebuyers grants, the wholesale guarantee, the deposit guarantee… but still it wasn’t enough to prop up NAB and Westpac.

They needed more. These two “strongly capitalised” banks needed the secret Fed loans. Plus top-up loans from the Reserve Bank of Australian (RBA), which itself received USD$53.5 billion from the US Fed.

Yet all the while the ABA yapped that “Australian banks are very strongly capitalised and continue to hold assets that are of good credit quality.”

We now know that to be false. A strongly capitalised banking system doesn’t need a raft of government and central bank bailouts. It certainly doesn’t need secret loans from a foreign central bank.

But even now, the regulators are spinning the same yarn. We printed this comment on Wednesday by RBA assistant governor Guy Debelle:

“The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system’s own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions.”

We thought about his statement some more after we sent it to you. The way Debelle carries on he’s making out that America and Australia were playing doctor and nurse to the sick global banking system…

That Australia was fine. Our banks were simply being good doctors by helping out others.

He’s making the RBA and the banks out to be the Dr. John Forrest and Matron Grace Scott of the banking world. In reality they’re no more than the Dennis Jamieson and Ada Simmons of banking.

But considering the magnitude of the admission, how did the good Senators’ respond?

Following Mr. Clyne’s reply, Senator Hurley continued:

“All right. Let us talk about the most recent rate rise above the RBA cash rate.”

What?! Handed on a plate an admission that Australia’s banks were in dire trouble in 2008 and 2009, and the hapless Senator blabs on about the latest interest rate decision.

That’s another reason we didn’t take up the offer to put questions to government ministers. If members of the Senate economics can’t recognise a bombshell when they see one, there’s not much point in us wasting our time giving them more ammo… they’d probably only blow themselves up with it anyway!

But all this aside, two weeks after the secret loans were revealed, Australia’s regulators refuse to inform investors of the banks’ deception.

As far as the RBA, APRA and ASX are concerned it’s a non-issue. We can only draw the conclusion they don’t want to ask NAB or Westpac any questions. That’s because they know the answers will be embarrassing.

Not only that but they’re clearly embarrassed at having talked up the stability of the Australian banking system while behind closed doors the banks were secretly receiving multi-billion dollar bailouts.

Based on everything we’ve read so far, it’s clear that Australia’s banks were much closer to going bust than even we thought. And that if it wasn’t for secret loans from the RBA and the US Federal Reserve the Australian banking system would have collapsed.

We’ve got a lot more digging to do on this issue. It wouldn’t surprise us if the Aussie banks had further secrets they’d prefer locked away in the closet.

Cheers.

Kris Sayce
For Money Morning Australia

It’s amazing how a little bad weather can affect the price of a commodity.

While we’ve been looking at commodities over the past few weeks, pretty much every commodity is affected by the same thing: adverse weather.

And today, cotton is no different.

Except, in one part of the world, what has created a shortage has actually been a boost for another part of the world.

It was only yesterday that The Age reported ‘Cotton Producers Never Had it So Good’. It should have actually started with ‘Australian’ cotton producers, because most other parts of the world that produce cotton are suffering, and badly.

But, it’s only been recently that Australian farmers have been able to crow about the cotton season this year.

‘We have had good prices before and we have had good seasonal conditions before, but it’s rare that we get them at the same time,’ said David Bone, communication manager at Cotton Australia.

There’s more to this story than just a good bit of good growing weather and high cotton prices for Australia.

First, you have to go back to how the high prices began…

Demand for cotton, like many things, fell off a cliff during 2008 and 2009. A period Australian’s have come to know as the Great Financial Crisis and what the Americans called the Great Recession.

It was during this period that production dropped a massive 21% due to lack of demand, which coincided with an alarming drop in mill usage.

As result, farmers around the world, especially in places like America which is still the world’s largest exporter of cotton, downsized the hectares that cotton covered. Some even moved into more profitable commodities to grow things like soya beans.

As farmers moved away from cotton and into other crops, demand slowly started to pick up. Which is about when the futures cotton price added USD20 cents per pound over 2009, averaging about USD80 cents per pound.

However, the price had been slowly increasing as the supply was lower than normal, a drought affecting major cotton growing regions of China started to push up the CC Index 328, which is China’s ‘free market’ cotton index. Currently, the Chinese cotton index is up over 100% in less than 12 months.

At first, only China was seeing the high prices, but then India, another major cotton growing nation decided to withhold supply from the international market to protect its industry. To make matters worse, Pakistan, the fourth largest producer of cotton saw most of their crop wiped out by the devastating floods in July this year.

And in the U.S., production has been declining for the past three years, or 43% of production, as it was no longer a profitable crop to grow.

Quite simply, the extra ‘slack’ in the system has slowly been removed.

And this is where our 800 or so Australian cotton farmers have been able to take advantage of the higher prices. Heavy rain has flooded and wiped out one crop in one part of the world, yet the heavy rains for Eastern Australia have resulted in a bumper crop for Aussie farmers.

For the moment, Australia has been able to get its cotton to the Chinese market much quicker than the U.S., but our 3 million odd bales we get to the export market is unlikely to take up the slack where the U.S. once was.

But, it’s believed that our mini cotton boom will be short lived as the heavy rains in Queensland could lead to flooding, are now becoming a threat to cotton production.

Yet, no matter how much cotton Australia gets to the international market, the supply is so short, it’s expected that global stock will be lower by 15% this year, the lowest level in 16 years.

If you look at the chart below, you can see where the price of cotton per pound reached an all-time high of USD$1.51 per pound as recently as November:

Source: ICE Futures- Cotton No 2 Futures

The highest ever price since trading began over 100 years ago.

Not everyone believes the higher cotton prices are here to stay. Gary E Kerkow from Tradingmarkets4u.com, doesn’t claim to be an expert on the cotton industry, but he believes that it’s just another growing commodity bubble.

Boosted by adverse weather, a short term production decline and of course the Federal Reserve interfering with the greenback has encouraged investors into commodities.

And with the cotton price so higher, the demand for cotton is likely to wane at some point.

In an already wary consumer market, be it here in Australia or America, consumers more than ever before are very careful with where their dollars go.

Currently, it takes about six months from production to product, or from the farm to the clothing garment, for cotton. And the higher costs for materials like cotton aren’t going to be worn – if you pardon the pun – by the company’s for much longer.

Levi Straus & Co has already warned consumers in the U.S. that prices will rise next year due to higher fibre costs. It’s one of many retail companies that have reluctantly announced a price increase in these conservative spending times.

And while nothing may be as nice on the skin as natural fibres, technology has come a long way with the manmade stuff. Better fabrics at cheaper prices are likely to encourage consumers to switch from higher cost garments to something more affordable.

The move away from cotton should see demand return to more normal levels, and hopefully the cotton price will stabilise in the long term.

In the meantime, it might be time to ditch the 501′s.

Now let’s have a look what happened on the market’s yesterday…

The S&P/ASX 200 ended the day 1.95% higher, or 89 points, to 4,676.20. Retail trade for October was down 1.1%, which is the biggest fall in fifteen months. The main declines were in the café and clothing sectors.

The Dow Jones Industrial Average rallied again, adding 106 points to end the session at 11,362.41. New jobless claims for the week rose 26,000, but the four weekly average showed a two year low of 431,000.

The market clearly decided to only focus on the positive data, which was retail sales in the U.S. reporting higher than predicted results, rising 6% for the month of November.

The FTSE added 125 points (2.22%) to finish at 5,767.56, boosted by confirmation from the head of the European Central Bank (ECB) saying that they will delay the exit from its emergency liquidity measures and continue to offer unlimited loans to banks through the first quarter of next year.

The ECB has increased the number of bonds they have been buying the past couple of weeks, mainly Irish and Portuguese. However some traders were disappointed that the ECB didn’t announce a more aggressive response by increasing the size of the purchases. As expected, the ECB kept interest rates at 1%.

The Spanish government was able to auction off €2.5 billion (AUD$3.38 billion) of 3 year bonds which helped to lift the markets spirits.

And finally the Nikkei was higher after positive data in the U.S., with the index closing at 10,168.52, up by 180 points. A Goldman Sachs report has suggested the index would increase about 20% next year.

The price of spot gold in Australian dollars is trading at $1,418.52 while in US Dollars it is trading $1,385.27. The price of silver in Aussie dollars is $29.21 and in US Dollars it is $28.52.

Copper is currently USD$3.87 a pound (AUD$3.96) Nickel is USD$10.69/lb (AUD$10.94) and Tin is USD$11.39/lb (AUD$11.66).

The Aussie dollar was higher this morning thanks to the positive attitude that was going around the overseas markets last night.

The Aussie dollar versus the US dollar was USD$0.9765, and against the Japanese Yen JPY 81.84

Crude Oil was higher, closing at USD$87.98.

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

52-Week Highs and Lows

Number of companies reaching a 52 week high previous day: 56
Number of companies reaching a 52 week low previous day: 22

Before your editor carries on today, we’ll declare an interest in today’s article.

Thanks to last week’s so-called computer glitch at National Australia Bank [ASX: NAB], your editor hasn’t been paid.

So just bare that in mind in case we get a bit narky this morning – sorry, more narky than usual…

We notice NAB CEO Cameron Clyne has paid for a full-page ad in today’s Australian Financial Review (AFR) – and we dare say other newspapers – apologising to NAB customers for the problem in “processing some payments and transactions.”

That’s nice.  But what a dope.  Not a single mention of the fact that the glitch has affected non-NAB customers as well.

According to The Age, “Mr Wright [NAB spokesman] said the accounts of all but 19,000 customers have been fixed.”

That would be 19,000 NAB customers of course.  Not including the hundreds of thousands, probably millions of customers at other banks where transactions haven’t been received due to the NAB’s stuff up.

But here’s the thought that ran through your editor’s conspiratorial brain over the weekend… is this whole mess really the fault of a computer glitch?  Or is it something much more serious than that?

I mean seriously, a corrupted file bringing down an entire bank’s systems.  We wouldn’t have thought so.

Clearly they don’t have the calibre of IT staff at the NAB that most IT helpdesks have.  We wonder if the NAB has tried switching its machines off and back on again… or the ultimate solution, if they’ve tried unplugging the machine, waiting thirty seconds and then plugging it back in.

That usually seems to work when the printer in the office doesn’t work or when the wireless router has gone haywire.

Anyway, perhaps we’re naïve, but we thought the mega-banks had disaster recovery sites, and data back-up thingies, and erm, other technology stuff that helps prevent something bad from happening.

The banks spent millions making sure all their systems were prepared for Y2K.  And the banks have been heralded as safe and sound thanks to their – albeit taxpayer guaranteed bailouts – escape from the global financial meltdown.

Yet according to The Age, “NAB did not know the correct balances on some accounts in its investment banking division.”

And now you’re expected to believe that a “corrupted file” has caused the bank’s entire payment and processing system to collapse.

But then again, maybe it’s just a coincidence that the NAB’s computers should encounter a glitch at the time the Irish banks are being bailed out by European taxpayers.

Surely there’s no connection between NAB’s former ownership of National Irish Bank, which admittedly it did sell to Danske Bank in 2004.  But despite that being six years ago, can it be entirely discounted that there aren’t some hangover assets or liabilities still on the bank’s balance sheet?

According to Terry McCrann over at the Herald Sun, “NAB has had to provide around $1.2 billion for loan losses in its two small British banks.” This refers to NAB’s current ownership of Clydesdale Bank and Yorkshire Bank.

And what about the reports at the end of last year that, “National Australia Bank has amassed a $12.78 billion indirect exposure to the debt-laden Italian Government…”

The report in the Herald Sun in December 2009 claimed:

“NAB is believed to have been issued up to $12.78 billion worth of Italian bonds as collateral for taking on that obligation.

“The bank is exposed because if it has to take up the lending obligation it will be relying on the value of those Italian bonds as compensation.”

Then this:

“Disclosure of the exposure comes as ratings agencies have cast a spotlight on the rising risk of southern European governments defaulting on loan repayments to international lenders.”

You can see from the chart below how that the yield on Italian two-year bonds has soared from 1.5% to over 2.5% over the last twelve months:

Source: Bloomberg

Most of that gain in yield has come in the last month as doubts about the ability of European nations to honour their debts grows.

But why is a rising bond yield bad?  It’s not if you don’t own the bonds and you want to buy them, but if you already own them you take a hit on the capital.  Bond prices move in the opposite direction to bond yields.

If the yield rises then the price falls.  And vice versa.  As for the NAB’s current exposure to the Italian debt, according to a May 8th article in The Age, NAB’s exposure to the Italian bonds was down to $5.5 billion, “most of this in short-term maturities.”

Based on the chart above, if the NAB has sold down its position further it will have taken a hit on the transactions as bond prices have fallen since December 2009.

Of course, that’s not all.  The NAB would have copped it from the Aussie dollar increasing against the Euro:

Source: Yahoo! Finance

In December 2009, $12.78 billion would have been worth about EUR7.92 billion.  Today EUR7.92 billion is only worth $11.01 billion.

Of course NAB doesn’t have the same exposure today as it did then.  And the loss isn’t huge.  Not when you compare it to the total size of the bank’s balance sheet.

But the important thing to remember with banks is that it’s not the size of the total balance sheet that’s important, because that’s all built on leverage.

Leverage gained by taking depositor money, claiming that it’s held safely in a deposit account which is available on demand, meanwhile the bank is creating the same amount of money as credit and gambling it on an overpriced housing market and European sovereign debt…

Sovereign debt that turns out to be not as good an investment as originally thought.

So, as with all leverage, seemingly small losses are magnified.  A $1 billion loss on a bond transaction may seem small against the total leveraged position, but compared to the bank’s shareholder equity the loss is more significant.

Then add in the cash to bailout its two British banks… and it’s starting to add up.  And we’re still only half-way through the story.

And is it really stretching the imagination to think the bank’s exposure to Ireland could be just as bad?  I mean, the NAB did own a couple of banks on the island.

You’d think it would have some legacy investments there.

Below is a chart stretching back to 2006 that shows the yield on an Irish government 10-year bond:

Source: Bloomberg

Even just in the last couple of months the yield has soared from below 5% to over 9%.  Remember that a soaring yield means a plummeting price.

According to a May 8th report in The Age:

“Australian banks’ exposure to the euro area is running at just over $56 billion, including more than $3 billion to Spain and $4 billion to Ireland.”

What’s NAB’s exposure to this?  We’ve no idea.  But based on these numbers, let’s say it’s a quarter – about $14 billion.

That includes the roughly $5.5 billion exposure to Italy and then let’s say around $1 billion to each of Spain and Ireland.

But let’s not forget, that’s only the known direct exposure.  What about the unknown indirect exposure?  What about investments NAB has in other European banks which do have a larger exposure to Ireland?

And also take a look at the credit default swap (CDS) spreads on the sovereign debt of Greece, Spain, Portugal and Italy:

Source: Acting-man.com

In simple terms a CDS is like an insurance policy.  It’s the market cost to insure against the risk of default.

As you can see on the chart above, over the past year CDS spreads have bolted higher.  For instance, Spain (red line) has seen its CDS spread increase from around 100 basis points (100 basis points is the same as 1%) to over 250 basis points (or 2.5%).

In other words, insurance costs have taken off.  It’s reflective of the risk investors see in investing in sovereign debt.

That’s not good news for banks that need to source about 40% of their funding from offshore.  In a nutshell, what happens to interest rates in Europe does have an impact on Australian bank interest rates.

Simply because interest rates don’t work in isolation.  Interest rates act as a measure of risk to investors.  If an investor is choosing between two investments he or she will consider the yield.  If one is 5% and the other is 6% the investor would naturally prefer the one yielding 6%.

However, the 6% investment could be a higher risk than the 5% investment.  That’s something the investor needs to weigh up and decide if they’re prepared to take the risk in return for a higher income.

But if another firm – say an Australian bank – offers the same risks as the 6% investment, but the Australian bank only wants to pay 5.5%, then it’s going to be tough to attract investors.

Why would any investor accept the same level of risk for a lower yield?  They wouldn’t.

To the extent that the Australian bank may have to increase the yield it pays in order to attract investors.

That feeds back to what the bank charges to borrowers in the Australian market, and how much it can afford to pay depositors.

In other words, Australia and Australian banks aren’t isolated from sovereign and corporate debt problems overseas.

And let’s not forget that NAB has form with dodgy investments.  Remember the currency trading scandal a few years back?

And how about the bank’s secret CDO losses that it kept mum about.  As the Sydney Morning Herald report a couple of weeks ago:

“National Australia Bank is facing a class action from shareholders seeking $450 million in losses caused by a share plunge in 2008.”

And according to the law firm bringing the class action, Maurice Blackburn:

“Our case is that all of the indicators showing the deterioration in the US sub-prime housing market were available to NAB – it’s a bank after all – starting as early in some cases as 2006, going through 2007.”

Look, maybe it is just a coincidence.  Maybe it was a “corrupted file” that caused the bank’s systems to meltdown.  And maybe NAB will be back to normal tomorrow.

But what if there is more to it than the bank is letting on?  As I say, it wouldn’t be the first time NAB has kept quiet.

The bank didn’t think to tell investors about the potential $12.78 billion Italian debt exposure until it was sitting on its books.  And it didn’t tell anyone about the collateralised debt obligation (CDO) exposure until the last possible moment.

Why should you assume that NAB has been upfront on its exposure to European debt now, when it wasn’t upfront about its exposure to US and European debt two years ago?

Quite frankly, given the extraordinary lengths the major banks have gone to in recent months to not only deny the existence of a housing bubble, but to keep pumping it higher, it strikes us that the banks will take any step necessary to hide from the market the real extent of their liabilities.

Could that extend to blaming it on a computer glitch to prevent customers from withdrawing funds?

Conspiratorial?  Maybe.

Drawing a long bow?  Perhaps.

But based on everything we’ve seen happen in the market over the last couple of years we wouldn’t be at all surprised to learn that the real problem for NAB is a question of liquidity rather than a glitch.

Make no mistake, despite the spin, Aussie banks aren’t the conservative and well-managed institutions they and the mainstream media would have you believe.

Cheers.

Kris Sayce
For Money Morning Australia

Dubai World

The Sun Never Sets on Dubai World; Arabic. TechnoPark’s efforts at IDA World Congress 2009 Prompt donation to UN’s Darfur 1001 Wells Project …

Career Development – Contact Us – Our Portfolio – About Dubai

www.dubaiworld.ae

Nakheel – Where Vision Inspires Humanity

Dubai real estate development company. Includes list of developments, corporate information, executive profiles, history, partners, and investor relations.
www.nakheel.com

Dubai’s crisis exploded on Wednesday when the emirate said it would delay payment on debt issued by one of its flagship firms, angering investors and sending global markets sharply lower.

Dubai World (Arabic: دبي العالمية‎) is an investment company that manages and supervises a portfolio of businesses and projects for the Dubai government across a wide range of industry segments and projects that promote Dubai as a hub for commerce and trading. It is chaired by Sultan Ahmed bin Sulayem.

A policy of selectively assisting cash-strapped companies affiliated with the government of Dubai, instead of providing blanket assistance, challenges assumptions made by many investors who assumed that wealthy Abu Dhabi provided a complete safety net for its racier neighbour.

Abu Dhabi, which pumps 90% of the oil that make the United Arab Emirates the world’s third-largest oil exporter, has already provided $15 billion in indirect support for Dubai through the UAE central bank and two private Abu Dhabi banks. How much more support the emirate provides for its cash-strapped neighbour, however, will depend on how Dubai clarifies its stand on unresolved issues.

Some projects By Nakheel

• Palm Islands
• Palm Jumeirah
• Dubai Exhibition City
• Dubai International City
• Dubai Maritime City
• Dubai Waterfront
• Trump International Hotel and Tower (Dubai)
• The Universe (Dubai)
• More – > http://www.nakheel.com/en/developments

Some recent background on the Dubai world  Recent troubled History – Wikipedia

2009 financial woes Dubai

With the onset of a global recession, Dubai’s real estate market declined after a six-year boom. On November 25, 2009, the Dubai government announced that the company “intends to ask all providers of financing to Dubai World and [its subsidiary]Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010″.^[3] The company will also undergo a restructuring process with the help of Deloitteconsultants. Several months earlier, Dubai World accounted for a $59-billion debt, nearly three-quarters of the emirate’s US$80-billion debt.^[4] This includes a US$3.5-billion loan which the company is unable to repay by its December deadline.^[5]

In response to the government announced moratorium of Dubai World’s debts, bothMoody’s and Standard & Poor‘s Investors Services heavily downgraded the debt of various Dubai government-related entities with interests in property, utilities, commercial operations and commodities trading. In Moody’s case, the downgrade meant that the affected agencies lost their investment grade status.^[6]

Italy and Russia the biggest importers of Indian coffee  have massively slowed down on thier coffee imports.Total trade growth of Australia with India for 2008 has risen to  $15.356 billion.Blistering rise in the value of the rupee gives sleepless nights to Indian exporters, forcing many to shut down

India’s exports fell in May for the eighth month in a row as overseas demand for goods continued to shrink in the global recession

SURJEET JOLLY, MANUFACTURER AND EXPORTER OF SPORTS GOODS AND OWNER OF ROBINSON SPORTS, SAYING:

"The (rupee’s) appreciation continuation will mean 60 percent of the sports industry will close. More than 150,000 workers employed by us, those will be on the roads. They will be unemployed and that is going to affect the economy very badly and it will lead to crimes and many more things which the country does not need."

Exports in May were valued at 534.3bn rupees ($11bn; £6.7bn), down 29.2% from 655bn rupees a year earlier, government figures showed.

Exports are a significant driver behind the Indian economy, making up about 15% of gross domestic product.

Imports shrank 39.2% to 786.8bn rupees from 1.1 trillion rupees a year ago.

The falling price of oil was a significant factor behind the decline in imports. Oil currently stands at about $70 a barrel – less than half of what it was last summer.

Oil imports in May were down 60.6% on the year. India imports about 75% of its oil.

India’s trade deficit – the difference between imports and exports – halved to 252.5bn rupees from 533.2bn rupees a year earlier.

S.P. OSWAL, MANAGING DIRECTOR OF ONE OF INDIA’S LEADING TEXTILE FIRMS, VARDHMAN GROUP, SAYING:

"The industry will remain weak and if it remains weak for another four-five years, it will have very little chance of survival against world competition. Because our competitor is China, today our biggest competitor is China and China’s size of the industry is 300 billion dollars against India’s present size of only about 45 billion dollars. And if we cannot grow in the next five years to about 100-120 billion dollars while China will grow from 300 billion to about 450 billion dollars — they will crush us."

Australian tax return tips

This year we can expect, on average, a tax return increase of more than $300 based on goverment grants and reductions.

"It’s gone up quite considerably, we reckon last year people got about two thousand dollars, so to be getting $2,300 as a return this year is obviously a big increase,"

See if you qualify for Education Tax Refund for families with kids in school.The type of expenses you can claim include computers, internet, even repairs to computers."

You can claim up to $375 for children in primary school and up to $750 for children in secondary school.

This benefit applies to most parents earning less than $120,000 a year. It’s those earning seven figure salaries that the tax office has set its sights on.

Australian Tax Office Are targeting executives, directors and wealthy Australians this year.

In the past the ATO have only looked at wealthy Australians that had a net worth over $30m. This year the ATO are now able to go down to people with a net wealth of only $5m.

Nearly 12 million of us will lodge a tax return, the tax office will then hand back nearly $20b. It sounds like a lot but with wages being frozen and unemployment set to rise, it might be a while before we have that much cash coming in again.

what look out for  while lodging your tax returns ?

improperly stating income from rental properties; also from dividends, shares, interest and work related costs which shouldn’t be claimed, like clothing.

 

Do check to see if you qualify for claiming on your union fees.

"The Australian Tax Office this week sent out 600,000 letters to mostly rental property owners because they got things wrong like borrowing costs, repairs and maintenance, interest on their mortgages and also in relation to capital works deductions as well," .

Those most likely to be audited by the taxman will be truck drivers, sales and marketing executives and electricians.

When it comes to doing your tax return yourself or hiring a professional remember that accountants’ fees are tax deductible. Also keep in mind that 98% of audited returns done by individuals need some kind of adjustment – almost always down.

Last traded: $ 1.30
Sector: Industrials
Market cap: $1,556M
ACCUMULATE / MARKET PERFORM
Valuation: $1.55

Equity raising On 15 June 2009 Asciano Limited (AIO) announced it would undertake a $2b underwritten equity raising instead of selling part or all of its assets.

The actual offer price was $1.10 per stapled security for a $2b underwritten equity raising.

The raising comprises four parts:

 1-for-1 underwritten accelerated non-renounceable pro-rata entitlement offer to existing security holders to raise approximately $769m comprising $330m institutional component and a $439m retail component.

 $231m underwritten unconditional placement to professional and sophisticated investors.

 $1,000m underwritten conditional placement to professional and sophisticated investors.

 Up to an additional $151m through a non-underwritten conditional placement to Mark Rowsthorn — the release states that Rowsthorn intends to take up this offer to retain his 10.92% stake and

ABOUT ASCIANO

The company brings together the powerful combination of the Pacific National rail operations with the Patrick ports and stevedoring businesses to create a unique transport infrastructure company.

We own and operate a range of infrastructure assets including ports and rail across Australia.

Investor Fact Sheet

Year listed on ASX
2007

No. of Employees
8,000

ASX Code
AIO

Type of Securities
Stapled Securities

Revenue
$2.814.2 million*

EBITDA
$652.9 million*

EBITDA Margin
23.2%*

Key Operations
Owns and operates transport infrastructure assets
with a focus on ports and rail

CEO
Mark Rowsthorn

Head Office
Melbourne

*For the period 1 July 2007 to 30 June 2008

Asciano in $2bn share sale

Australian electrical goods retailer JB Hi Fi Ltd (JBH.AX

JB HI-FI 15 June,2009

15/06/2009 19:18 Sydney, Australia.

Price
Change
% Change

14.480
-0.120
-0.820%

• Company overview
• Real-time quote

JBH.AX , 14.480, -0.120, -0.820%) sees its profit for the year to June 30 rising to A$92 million ($72 million) after strong sales and cost-cutting, the company said on Tuesday.

The company had previously said it was comfortable with analysts’ forecasts for a year profit around A$87 million. It said it would open 160 new stores, up from an earlier planned 150

JBH.AX or JBH

The retailer has upgraded its 2008-09 profit guidance by 41% to $92 million, up from the previous guidance of $87 million. One stock picker says the company is better-placed than many of its peers if retail conditions weaken as the federal government’s stimulus cheques begin to peter out and unemployment rises.

JBH -About

JB Hi-Fi Limited engages in the retail of home consumer products in Australia and New Zealand. It offers consumer electronics, including televisions, high fidelity, DVD players, home theatres, digital still, video cameras, mobile phones, and accessories; electrical goods comprising whitegoods, computing equipment, kitchen equipment, air conditioners, and small electrical appliances; car sound systems, such as audio and visual products; and music, games, and movies. As of June 30, 2008, the company operated 93 stores in Australia and 12 stores in New Zealand. JB Hi-Fi was founded in 1974 and is based in Brighton, Australia.

www.jbhifi.com.au

There is no question that the stimulus payments have helped the company improve its margins. One stock picker says that despite the considerable run up in price, the stock remains an attractive alternative to its traditional rivals like Harvey Norman.
Management has reiterated that although the business is not recession-proof, it is currently the best-positioned retailer listed on the ASX.

JB HI FI IS A GOOD BUY AT CURRENT LEVELS

Current news on JB HI FI

Key developments for JB Hi-Fi Ltd. (JBH)

JB Hi-Fi Ltd. Expects to Open 160 JB Hi-Fi Branded Stores

06/9/2009

JB Hi-Fi Ltd. announced that it now expects to open 160 JB Hi-Fi branded stores of a similar size (sales and earnings) to the current average store. Previously, the company expected to open 150 stores. The company also expect to open a further 50 stores in smaller catchment areas which will primarily be in smaller mall and strip metropolitan shopping centres and country towns across Australia and New Zealand.

JB Hi-Fi Ltd. Revised Earnings Guidance for the Year Ended June 30, 2009; Reports Comparable Sales Results for the 11 Months Ended May 31, 2009

06/9/2009

JB Hi-Fi Ltd. revised earnings guidance for the year ended June 30, 2009. After continued strong sales, solid margins and cost control in the second half of fiscal 2009 the company expects its profit for the year ending June 30, 2009 to be circa $92 million, a 41% increase on the prior year NPAT of $65.1 million. Previous guidance was comfortable with average analysts expectations of $87.1 million. Sales are forecast to be circa $2.3 billion or a 26% increase on the prior year. Comparable store sales growth for the 11 months ended May 31, 2009 was 10.6%.

JB Hi-Fi Ltd. expected to Report Fiscal Year 2009 Results on August 17, 2009. This event was calculated by Capital IQ (Created on April 21, 2009).

04/21/2009

JB Hi-Fi Ltd. expected to Report Fiscal Year 2009 Results on August 17, 2009. This event was calculated by Capital IQ (Created on April 21, 2009).

JB Hi-Fi Limited (Australia Stock Exchange)

sector: Cyclical Consumer Goods & Services . industry: Retail – Computers & Electronics · View JBH on other exchanges

As of  2:10am EDT

14.48AUD

Price Change

-0.12

Percent Change

-0.82%

Analyst Recommendations

Independent Research |  Broker Research

Prev Close $14.60

Open $14.75

Day’s High $14.98

Day’s Low $14.47

52-wk High $15.16

52-wk Low $6.87

Beta 1.23

Volume 1,055,995

Avg. Vol 1,201,435

Mkt Cap. $1,557.57M

Shares Out 105.89M

EPS (TTM) $0.76

Div & Yield 0.31 (2.14)

Ex Div Date 12 Feb 2009

1d 5d 3m 6m 1y 2y 5y max

Research Another Stock: Symbol Look-up

Latest News

Australia’s JB Hi Fi sees higher year profit
Monday, 8 Jun 2009 08:25pm EDT

PRESS DIGEST-Australian Business News – Feb 11
Tuesday, 10 Feb 2009 02:42pm EST

Australia retailer JB Hi-Fi sees strong sales growth
Monday, 9 Feb 2009 04:36pm EST

JB Hi-Fi says Christmas sales ahead of last year
Tuesday, 6 Jan 2009 07:21pm EST

CORRECTED – CORRECTED-PRESS DIGEST-Australian Business News – Dec 29
Sunday, 28 Dec 2008 04:07pm EST

More JBH.AX News…

The 2 big iron ore miners Rio Tinto And Bhp billiton

Shares in Rio jumped as much as 13 percent to a 7-month high of A$75.75, nearly triple the price of the rights issue at A$28.29 a share, while BHP Billiton’s shares rose 10 percent to A$38.60 on the Rio venture, expected to save $10 billion in costs.

Technorati Tags: rio tinto,bhp billiton,big

Rio dumped its deal with Chinalco earlier today. Instead, BHP will pay Rio $US5.8 billion for a stake in a proposed joint venture between Rio and BHP on all of the existing and future Pilbara iron ore assets in WA. At the same time, Rio has announced a massive $US15.2 billion rights issue, which is renounceable and offered on an effective one-for-two basis.
Within hours of the announcement, Rio stock was up 11%, BHP stock was up 8%, Fortescue (the third biggest iron ore miner) was up 15%.

The ASX has now rebounded from rock-bottom lows of 3145 points in March to the 4000 mark in a matter of months. We may see a correction in the coming days, but the odds of a return to the dark days of late 2008 are slim. On that basis it’s time to get back to lucrative and enjoyable business of investing.