If you’re a subscriber to Australian Small-Cap Investigator you’ll know we’ve had a bit of a fetish for rare earths stocks.

It lasted for a while, but came to a conclusion late last year when we told readers to sell Lynas Corporation [ASX: LYC] for a 190% gain, and Alkane Resources [ASX: ALK] for a 130% gain.

We didn’t sell because we’d gone off the rare earths story.  We sold Lynas because we thought it was a good time to lock in a big profit.  And we sold Alkane because it hit our trailing stop. [Ed note: a trailing stop is where you move your selling price up as the share price rises.  If the share price falls, the stop order is triggered and you sell your shares.]

At the time – and even now to a lesser extent – rare earth stocks were going off like firecrackers.

Companies that had no prior involvement in rare earth exploration were suddenly announcing to the market a potential rare earth resource.  You can guess what happened next…

And while we still like the rare earth story, we’re also aware of the game China could be playing with the supply.

If you don’t know, China controls about 95% of the global rare earth market…

And it knows it.  In recent years the Chinese have made massive cuts to rare earth exports.  This has pushed the price of rare earths and rare earth stocks higher… and encouraged mining firms to search for these valuable minerals.

But what’s China got planned now?

One of our concerns has always been that China could tighten the market to drive up the price and then quick-as-a-flash flood the market with a massive supply… sending the price of rare earths crashing, and crushing the viability of prospective mines.

You can bet your bottom dollar if that happens, it would be some time before investors would be prepared to take a punt on rare earth stocks again.

In fact, almost exactly one year ago the Financial Times reported:

“China’s leading producer of rare earth metals has been given government approval to build a strategic reserve, exacerbating concerns that Beijing is tightening its grip on the valuable minerals…

“Baotou Rare Earth said in a statement to the Shanghai stock exchange that it had gained approval from the regional government of Inner Mongolia to build 10 reserve facilities capable of storing more than 200,000 tonnes of rare earth oxides…

“The move to create a strategic reserve at a cost of about $3bn could also boost the cost of rare earths.”

And today The Wall Street Journal reports:

“China is building strategic reserves of rare earth metals, an effort that could give Beijing increased power to influence global prices and supplies in a sector it already dominates.”

If China does build a 200,000 tonne stockpile, it would equal roughly five times the amount China exported last year.

Knowing this gives you as an investor two choices.  You either buy in now on the expectation that China will tighten exports further, causing rare earth prices and rare earth explorer prices to rise.  Or you give it a wide berth and look elsewhere.

It’s a tough one.  Because fundamentally rare earths is still a good story.  The only problem is the Chinese government manipulation could turn the market at any moment.

So, right now, I’m giving it a wide berth.  Of course, that could be a big mistake.  But after already locking away big gains last year I’m prepared to let other investors play the rare earths game for now.

But if rare earths are off the agenda, what else is there?  Well, our old pal at Diggers & Drillers, Dr. Alex Cowie has been all over tin for the past year… and it has paid dividends as the price of tin has soared to above USD$30,000 a tonne.

But we’re not about to tread on his toes.  He picked that market inside out and found the two best stocks on the market that he feels can profit from the resources boom.

Meanwhile, our good mate and publisher, Dan Denning at Australian Wealth Gameplan has recently jumped on an oil stock.

Which makes a lot of sense given the political unrest in North Africa.  And it could get a whole lot worse if the unrest spreads to the Suez Canal.  Bloomberg reports:

“Shipping on Egypt’s Suez Canal, used to carry about 8 percent of global seaborne trade, is transitting on schedule after service workers linked to the waterway began striking, the Suez Canal Authority said.”

Why does this matter for oil prices?  The report tells you:

“The canal has the capacity to handle 2.2 million barrels of oil a day while that of the adjacent Suez-Mediterranean Pipeline is 2.3 million barrels… Actual volumes in 2009 were a combined 2.1 million barrels…”

Either way, cutting the Suez would have a big impact on oil prices.  In fact, it has already.  And it’s shown up in the price spike of Brent Crude Oil and the increased spread between Brent Crude (European benchmark) and West Texas Intermediate Crude (North American benchmark).

Normally the spread is minimal, and as a casual observer it doesn’t make much difference whether you’re looking at Brent or West Texas crude.

But right now there’s a big difference.  The guys at ETF Daily News have printed the following chart showing the spike in Brent/West Texas spread:

Source: ETF Daily News

As you can see, normally – aside from 2008 and in recent months – the spread is quite small.  And for the most part, the West Texas price trades at a premium to the Brent price.

But since late last year when things started kicking off in North Africa, the spread has blown out, and Brent is trading at a premium.

To the extent that right now it’s at a record high.

As ETF Daily News comments:

“WTI [West Texas Intermediate crude] is a sweeter, lighter crude, and all things being equal, gasoline refiners prefer to work with WTI over Brent.  Thus… WTI should trade at a premium to Brent.”

You can see this clearly on the following table from Bloomberg:

Source: Bloomberg

The difference in prices is over USD$12, compared with just a couple of bucks for most of last year.

Clearly it means that any Middle East supply disruption to Europe equals an increased demand for European oil – hence the higher price for Brent Crude.

But it also shows you how sensitive crude oil still is to geopolitical tensions.

For the most part oil and oil stocks haven’t really taken part in the global inflationary commodity trade.  Could that be about to change?  Certainly Dan hopes so with his oil tip.

Personally, I’m looking elsewhere.  The global inflationary commodity trade is still working and if I’m right it could have further to run…

That’s where I’m looking with my next stock tip for Australian Small-Cap Investigator, taking advantage of the “Money Torrent” flowing from central banks and pushing commodity prices higher.

It’s not a risk-free trade, but in my view it’s a risk worth taking.

Regards,

Kris Sayce
for Money Morning Australia

Good morning reader.

It’s a new year.

But, it’s the same old story.

Nothing much has changed.

We’re tempted to say nothing has changed. But that wouldn’t be true. Things, even little things change.

Even so, as we see it, the big things are just the same.

We won’t list them all here. You already know what they are. We spent the entire length of 2010 talking to you about them.

You know and I know that we shouldn’t treat the fourth of January any differently to the 31st of December.

However, investors do. And commentators do.

Changing a number at the end of the year does funny things to attitude of investors.

It’s like the proverbial spring clean.

Dusting away the cobwebs of last year and opening the doors and windows to the fresh air of this year.

The problem with this approach is that it assumes just because something is old it’s less important than something new and fresh.

For instance, if popular opinion is anything to go by, Facebook is better than Gold. Because Facebook is new and is used by billions. Whereas Gold is old and is only used by cranks and crackpots… OK, the cranks and crackpots could be applied to Facebook as well, but you get our point.

But don’t get us wrong. We like old stuff and new stuff.

We like Gold, so we own some. And we like the Apple iPad, so we bought one. See, we aren’t stuck in the past.

That’s fine, but what’s happening in the markets today?

“Wheat Rises to Five-Month High as Australia Flood, U.S. Cold Threaten Crop” reports Bloomberg News.

“As the rain comes down, coal prices rise and GDP goes on the skids” says the Sydney Morning Herald.

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.

But being long coal stocks isn’t much good if the mines are flooded and the companies can’t sell the stuff. Which is why the Stock Doc had an extra spring in his step – he’s long African coal plays.

Not much danger of flooding in them there parts you’d think.

But we did laugh at the comment from our favourite rail company, QR National [ASX: QRN]. It advised the market that, “Until these highly unusual weather impacts subside, it is not possible to make a full assessment on Full Year published earnings forecast.”

Oh dear. Still, the stock is still over 10% higher than its listing price. Which is better than a poke in the eye.

But that said, even as we enjoy the fourth day of the new year, we’re still struck by the lopsided nature of the Australian economy.

How it relies on natural resources for just about everything. That without the demand for Australia’s natural resources the Australian economy would die.

We thought about that as we settled down over the holiday to watch one of the excellent 30 for 30 documentaries on sports network ESPN.

To celebrate the thirtieth anniversary of that sporting network, it commissioned thirty documentaries. Each highlighting a key sporting event or sporting drama during the past thirty years.

This one in particular was called “The Two Escobars”. As you’d expect, it retold the story of two people with the same last surname – Andres Escober, a Columbian footballer. And Pablo Escober, a Columbian drug lord.

Neither was related to each other.

To cut a long story short – the documentary went for about two hours – Forbes magazine estimated that Pablo Escobar was one of the world’s richest men in 1989. With a wealth of around USD$9 billion.

Back then, according to The Pittsburgh Press:

“The Sultan of Brunei… is still the world’s wealthiest man with an estimated fortune of $25 billion…”

King Fahd of Saudi Arabia was next with $18 billion, with the Mars Family coming in third with $12.5 billion.

Australia’s Queen, Elizabeth II was the fourth ranked billionaire with $10.9 billion. As we recall, 1989 was before her annus horribilis, which was when the whole royal thing started to go pear-shaped.

As an aside, we tittered at the following statement in the article, “British real estate tycoon Gerald Grosvenor is ninth… [with an] estimated wealth of $6.9 billion.”

We’re not sure “tycoon” is the best way to describe Gerald Grosvenor. A man more commonly known as the 6th Duke of Westminster. A man whose tycoonery extends to being in the fortunate position of inheriting vast swathes of land in central London.

It would be like describing Her Majesty as a tycoon. Or Prince Albert of Monaco as an entrepreneur.

As for the 1989 top ten, not a single mention of Bill Gates or Warren Buffet. Instead, the top ten was dominated by… Japanese real estate billionaires.

Considering how Japanese real estate has performed since then, it might be a warning to the Australian property goons about how quickly apparent wealth can vanish.

But anyway, back to our Pablo Escobar story…

Mr. Escobar made his billions selling drugs to Americans and Europeans. Whether you’re in favour of the legalisation of drugs or not is irrelevant.

The simple point is that Mr. Escobar, like many Australian mining companies, made a mint from exporting a natural resource overseas. Not that Australian mining companies export drugs mind you.

As you can imagine, even though the trade may have been illegal, it brought much wealth to Mr. Escobar and his cronies. And some of it even filtered through to the poor people of Medellin.

As the documentary explains and as our pals at Wikipedia also point out:

“Escobar was a hero to many in Medellin (especially the poor people)… he was credited with building football fields and multi-sports courts… Escobar was responsible for the construction of many churches in Medellin… [he] frequently distributed money to the poor through housing projects and other civic activities…”

Of course, Wikipedia also points out that:

“The increased murder rate was fuelled by Escobar’s giving money to poor youths as a reward for killing police officers, over 600 of whom died in this way.”

In one instance Escobar heard of 700 people who lived in a rubbish tip. Each day they’d scrounge what they could and we dare say, either eat it, wear it, or sell it.

Escobar was so distressed by this that he built a bunch of houses for these people to live in. Whether they continued to “work” at the tip is unknown.

In 1993, Escobar was dead. Shot by police while on the run.

As you can imagine, the death of Escobar and the war on the drug trade by the Colombian and US governments didn’t do much to maintain the wealth of the drug lords. Nor of the cronies who benefited from it.

In an instant, the flow of cash from overseas was slashed. And local wars broke out as the drug lords fought to keep up their revenues. With fewer drugs being exported that meant the drug lords needed to get market share in other ways – by killing their competitors!

In a nutshell, the economy of Medellin was propped up by what was largely an unsustainable export market. Many were wealthier than they were before, thanks to the export of drugs and the import of cash.

Many were able to piggy-back off that by providing services and products to those that directly benefited from the exports. But when the drug exports collapsed… there was no import of cash. With no cash coming in, there was no demand for the products and services offered by the businessmen.

In other words, these businesses relied on the export of drugs continuing.

While the comparison with Australia isn’t identical, it does show how it’s possible for one industry – resources – to provide finance for many other industries.

This is pretty much the argument we tried to make before the Christmas break. That billions of dollars of cash flowing into the Australian economy from overseas is used by banks to finance a whole bunch of other industries.

But what happens when the export of resources and import of cash slows? What is there for the Australian economy to fall back on?

The housing sector… the retail sector… the manufacturing sector…

Nope. All three, plus the rest are financed by Australia’s resources sector.

The Australian economy is just as reliant on the export of resources as the Medellin economy was reliant on the export of drugs.

The Australian government tried and failed to wage a war on the mining industry with its Resources Super Profits Tax (RSPT). But the real threat to the mining industry and the Australian economy is from overseas.

How much longer can China – and Dr. Cowie’s favourite, India keep feeding their insatiable natural resources addiction?

The Stock Doc says commodity prices “will keep rising this year on the back of a weak dollar, strong Asian demand, improving US demand, and ongoing supply problems.”

He could be right. And he could be right that “coal, copper, tin, gold and silver will be the star performers.”

Even so, our commodity crash radar is on high alert right now.

But we’re not foolish enough to bet against it just yet. For now we’ll keep one foot in the resources sector while the other foot keeps the door to the exit ajar.

Cheers,
Kris
For Money Morning Australia

Firstly let’s look at methodology. Basically these fall into four categories. The first is Fundamental and even though I don’t personally use this approach nevertheless it is used by the vast majority of investors – retail and institutional.

The next three are technical. The first are what I would call trend following indicators; the second range trading indicators and the third are what I would call pattern recognition such as Elliott Wave and Gann.

I personally use Elliott and have so for the last 15 years. Perhaps conservative at times but it does not lose you money in my view. If you are going to use technical’s then it is important to have at least a basic understanding of each of the three so you can make an informed decision. No approach is the Holy Grail. Yet I see many would-be successful investors waste effort searching for the easy route to riches. It does not exist. It is like the ‘Long March’ it is one step at a time. But with experience under your belt there are short cuts.

The reason I mention this is that I also see many study one approach, try it and give up as it does not bring the instant riches. And they then spend a fortune studying the next system.

But I also see others who are too mite minded to properly invest in education.

I will also say here that it does not matter which system you use as long as you use it with an applied approach and with discipline. They all work. I would say you could choose any approach and apply it in this way and you will succeed.

The other key point is that you must apply it in a measured way. That is, you try your new found knowledge steadily. Many investors jump in head first after a training seminar. You apply your learning in small easy comfortable steps at first using a small trading kitty.

The sleep test is important here but to mix my metaphors – you must at some point fully immerse yourself after putting your toe in the water.

It reminds me of that old adage ’slowly slowly catchee monkey’.

Most of you will have heard the expression ‘markets have memories’ and I am inclined to believe so. Because markets are made up of ‘humans’ and ‘humans’ have memories. And you may ask ‘what about the Instos?’ Well at times investors may have other adjectives for them but yes they are human too and their views are a part of the mass of opinion.

So if we as individuals have memories, can we collectively have a memory? Well I do not see why not and whilst many of you may not put too much store in that I am inclined to think the market memory is made up of collective human memories and this is a major subliminal driver of markets.

Our individual memories take many different forms. Some of us are painfully rational others can be totally subjective. Some of us have short memories – we forgive and forget easily. Some just never forget even the smallest of misdemeanours. I am sure we all can recall examples at both extremes. And of course there are a myriad of variations in between. We may also have biases about certain stocks because of past experiences – good and bad. We may have biases about types of markets and instruments and so on.

Our memories are multi dimensional and what may be important to you may not be important to me. Our memories can maintain a bias and sometimes I think to myself when it comes to trading I need to erase certain files in my memory or even defrag the brain or even format the memory space.

Of course that is really what technical analysis should be. It is supposed to strip away – lay bare if you like all our biases, subjectivities and emotions. And when I talk about emotions I include all within the range from ecstasy through to anger. And as an analysts and a writer I am aiming to provide each week something of value in all I do. And in this process I am on the receiving end of emails that cover the full range of emotions. That is part and parcel of a job that I enjoy enormously. In fact it is not a job and there is a blur between my job and fun. I digress. But I see your emotions in your emails. I am not talking about anyone in particular and please keep those emails coming! But there are very few emails that don’t show some degree of emotion. Some of it is well controlled some out of control!

It is not for me to see your emotions but. It is for you to see them, analyse them, understand them, and manage them. Because, unless you can do that I am not sure you can be a great investor.

Technical analysis can be like reformatting the disk, purging the soul – but only if we allow it to be. But many won’t allow the ‘technical’ process to be purely objective. They allow internal feelings and external information to interfere. We can all be guilty of seeing what we want to see sometimes – even unwittingly

I know pretty much all of the sins of investing. I am human. And you name it I have made all the mistakes at some point – including allowing emotion to get in the way.

Memory biases – whether short or long term – can create market mismatches and this is where the shrewd market players can take advantage of those who are allowing biases to rule their day.

Capital Raising by cortona resources

Cortona Resources (CRC) announced a $10.3 million capital raising last week aimed at accelerating development of its Dargues Reef gold project in NSW, 60 kilometres east of Canberra.

Predictably, the shares fell from their week’s high of 20¢ to as low as 14¢ after the company confirmed a planned share placement at 15¢ to an “international funds manager” at 15¢ to raise $2.5 million.

Fully underwritten renounceable 1-for-2 rights issue at 15¢

Proceeds of the new capital raising will be used to underpin a Definitive Feasibility Study (DFS) on the Dargues Reef main lode, part of the 100%-owned Majors Creek Gold Project within the company’s 700 square kilometres of exploration tenements The DFS is scheduled for completion by the end of 2010 with first production targeted for mid-2011.

Official website :

Cortona Resources Limited

http://www.google.com/finance?q=ASX:CRC

Cortona is a Perth based exploration company with a quality portfolio of projects in NSW and Western Australia, global gold resources of around (…)
www.cortonaresources.com.au/

While the initial project may appear on the small side, the upside for the company is the drill-testing to be carried out on other identified targets within a few kilometres of Dargues Reef. They lie mostly within “the shadow of the headframe”, according to Cortona’s managing director, geologist Peter van der Borgh. Initial drilling on five such targets has recovered promising gold intersections, such as 19 metres of 5.6g/t at the Tory Boy prospect, two kilometres from Dargues Reef.

Cortona resourcesrecently completed positive scoping study on a potential $30 million underground mine at Dargues Reef, based on and indicated and inferred resource of 1.44 million tonnes of 6.2 grams per tonne (g/t) for 286,000 ounces.

LINKS:

Cortona Resources News

The latest news about Cortona Resources sourced from hundreds of Australian news publishers, companies and blogs.
wotnews.com.au/news/Cortona_Resources/

Should you study the markets or watch football? Spend your spare cash or save it? Will you make your own decisions or trust a fund manager? Should you stay home and look after your kids or go to work and take them to day care? Will you do overtime at work or go home to your family? How you make your decisions and how you allocate your time and money depends on your values.

Have you ever been puzzled by others’ decisions? Have you ever said: “How can they do that? It does not make any sense.” They simply are using a different set of values. They may be putting people before profits, or the other way around. They may value money more than friendships or the other way around. They may value leisure more than study. They may be after short term pleasures and not care about long term plans.

Would you give up your life savings to help a family member? Then you value family more than money. Have you dealt with computer companies that make you pay for every support call? You are dealing with a corporation that has money high in their values.

Your decisions, especially when the pressure is on, when you are tight on resources, are filtered through your values. Different people have different values and each make their decisions based on their own values. Before you judge someone find more about their values. Before you align yourself with someone find more about their values.

What are your values? Where do they come from? Your values are derived from your needs. If you have had financial hardships, money would be fairly high in your values. You may be pursuing money every which way. On the other hand if you have experienced financial abundance all your life, then pursuing money may not be a big deal. Carrying this to the next level, if you’re trading requires a little bit of studying, charting, analysing you may find this too hard and give up very quickly.

Your decisions are filtered through your values. Different people have different values and make their decisions based on their own values. Before you judge someone, you better find more about their values. Before you align yourself with someone, you better find more about their values. It is equally important and useful to figure out your own values. Here is a list to choose from:

• Money
• Friendship
• Contribution
• Health
• Trading
• Family
• Career
• Leisure
• Spiritual
• Self improvement
• Health and fitness

Add to this list as you like and then put them in priority order. If you have limited time, if you have limited money or both, which one of these would you go for? Which one of these would you sacrifice? You will then know why your life is the way it is. Want to improve? Review your list of values.