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Thread: Contrary Investments

  1. #26
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    Default Re:Contrary Investments

    Let's bring this one back, our original discussion on Euro prices started in Dec. 2, 2003.
    Here's my thought. China demand changes everything. $2 Billion people who buy cars, consume and have to eat have changed everything. Gas prices. Now above $1.68 for regular and climbing. The NY Times says gas will hit $3 per gal. during 2004.
    (They are good at reporting and bad at business but maybe they hit this one.)
    China is importing gasoline at record amounts and is the number two consumer of gasoiline after the US. Bottom line... They are using our gasoline and driving the price up.
    (IS THIS INFLATIONARY? IT WAS IN 1973 AND 1980.) This thread talks about our views that the dollar is falling through the floor versus the Euro. DOES THIS MEAN HIGHER RATES? iF NO, AT WHAT POINT DOES THE DOLLAR HAVE TO BE SUPPORTED BY HIGHER RATES?
    Commodity prices are up. Melonie talked about gold. Heres' a midwest one. Scrap steel.
    For twenty years scrap steel per ton was low and flat. I hear it is way up. The Union Pacific railcars have soemthing to ship west I note, and it seems to be car after car of scrap steel. China and Russia are buying many of the old closed steel mills on Lake Michigan. They are shipping the entire 1935 to 1958 era equipment intact and
    reassembling it over there. The equipment is old and not efficent, but paying someone 50 cents a day to work on the old 1935 equipment and the math probably works on production and using it.
    Any way here's my trouble making question. Can we have world wide inlfation on basic commodities (food, clotheing shelter, transportation) and deflation on wages and
    industrial output in the US?
    SURE MIGHT BE A DIFFERENT TYPE OF RECOVERY SHAPING UP???
    I'll freely admit I have no idea but I finally THING i got ther big picture and I'll repeat it.
    CHINA AND 2 Billion extra consumers changes EVERYTHING.

  2. #27
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    Default Re:Contrary Investments

    I agree that China has 2 billion potential consumers who did not previously have the cash or the access to consumer goods. I agree entirely that the Chinese market is simply gobbling up natural resources, from copper and aluminum and steel to make appliances and cars, to gas and oil to run them.

    China also has 2 billion potential semi-skilled laborers. The steel industry is not the only industry where 30 year old machinery and technology has been relocated to China, where it is very cost competitive to operate again at going Chinese wage rates of 1.50 a day, with next to zero environmental protection requirements etc. I agree with you entirely that the basic nature of US businesses and economy is changing, particularly where prices of basic commodities and semi-skilled labor pay rates are concerned (i.e. manufacturing).

    Perhaps more disheartening is another type of export, i.e. the export of white collar skilled jobs to India and other parts of developed Asia. These jobs were the growth engine for "wealth" in the USA for the past ten years, and are now in danger of disappearing very rapidly. Here I'm talking about computer programming, high tech service center phone banks, medical test result interpretations, and many other $50-$60-$70k per year white collar jobs which are now being done at the end of a fiber optic cable in Bangalore, India or Seoul South Korea for $10-$15k-$20k !

    As far as the US economy in general, a statistic came out Friday showing that the average consumer debt of every American man, woman and child (not including mortgage debt !) now exceeds $16,000, with some 14% of all money earned by Americans being used to service interest on debt. This is a formula for widespread bankruptcy unless either A. the average amount earned by US workers increases, or B. the real cost of serving debt interest decreases. Both of these objectives can be achieved by the US gov't at the same time by simply trashing the exchange rate value of the US dollar to start a new round of inflation a la the Jimmy Carter years. Considering the current cost increases for fuel, energy, food, insurance, tuition and other necessities of life, the inflationary pressures are already taking their toll. The segments of the economy which are NOT seeing an increase in prices are "luxury items" such as computers, cars, large screen TV's etc. which have a priority far down the list with consumers after the "necessities" are paid for.

    Unfortunately, this hits close to home for dancers as club cover charges and private dance prices also fall into the category of "luxury items" where sales are becoming increasingly difficult, where the chance of raising prices is essentially zero, and where it's becoming increasingly necessary to offer "special enticements" i.e. high contact an extras in order to make a sale (much like zero down zero interest car loans - having to give more for less in order to get anything at all).

  3. #28
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    Default Re:Contrary Investments

    Nice, the $3.00 gasoline is a pipedream in 2--4 in the absence of a gross supply disruption. $1.70 gasoline is half oil ($34 bbl/42 gallons bbl=approx 85 cents) and half margins of gas station, refining cost, delivery costs and gasoline taxes which account for 40 cents a gallon around here. The half of taxes and margins is independent of the crude cost so oil would have to go to $85 a barrel or so to produce it. That aint gonna happen with out a Saudi war.

    I used to deal with carbon scrap and it is never low and flat. It is an autction market and the price goes up and down by half and double based on the state of raw steel production and export demand. Look at this chart and remember these are nominal prices. http://www.amm.com/index2.htm?/insid...000/ws1026.htm
    The price in 1974 was the equivalent of todays price for scrap being $400 a ton, but the price is about $80 a ton. China will be a major market for scrap in the early 2000s, but Korea was in the 1980's and Japan was in the 1970's--both evolved out of being export markets as the supply of home generated demand rose. Plus the same technology you describe being exportted to China uses iron ore, not much external scrap. PS most of the desireable scrap is old cars and fridges and the world has iron ore out the wazoo.

    PS it is not "our gasoline", it is gasoline made from oil bought on the world market, just like we sell corn and wheat on the world market. It makes no more sense than an Italian housewife complaining about them exporting "our pasta" to America.

  4. #29
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    Default Re:Contrary Investments

    I think someone made a mistake Mel. The flow of funds report of the Federal reserve came out Friday and those numbers do not jive. Total Consumer sector debt including mortgages was was 9647.5 billion or $32 K/person of which mortgages were 6651 B or $22 K per person. The remainder includes partnerships and margin accounts at brokerages. The perhead consumer debt as normally thought of is $6,600 and is swamped by assets. total assets 52 trillion and $10 trillion debt in total.
    Data is at http://www.federalreserve.gov/releas...rent/z1r-5.pdf and population estimates were rounded to 300 million from 293 million cause I am lazy.

  5. #30
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    Default Re:Contrary Investments

    Quote Originally Posted by montythegeek link=board=6;threadid=3539;start=msg64359#msg64359 date=1074489694
    I think someone made a mistake Mel. The flow of funds report of the Federal reserve came out Friday and those numbers do not jive. Total Consumer sector debt including mortgages was was 9647.5 billion or $32 K/person of which mortgages were 6651 B or $22 K per person.
    Geek, I only went by the headline and blurbage offered. In any case, there's no denying that there's one heck of a lot of consumer debt out there, with virtually everyone in the USA being hard pressed to make those monthly payments. The US gov't basically has two choices, continue to inflate the currency to effectively reduce the cost of servicing those debts, or allow bankruptcies and price deflation to occur as cars and houses hit the market due to forced sales and with prices then dropping like a stone because very few people have the extra money to buy more cars or houses (i.e. to absorb this new supply)! If a deflationary mindset is allowed to establish itself, i.e. US consumers waiting till next month to buy a new appliance/car/house because prices are likely to go even lower than they are today, it will spell disaster for both the US and worldwide economy.

    On the subject of crude oil, precious metals, and base metals prices, it is exactly because these things are worldwide commodities that their prices can experience massive increases in terms of US dollars. If you will look at the price of crude oil, precious metals, and base metals in terms of Euros or Yen, you'll see that they really haven't moved much - indicating that the worldwide supply vs. demand equation hasn't really shifted all that much (probably due to the fact that worldwide industrial production has not recovered from the recent recession all that much). However, in terms of the US$ prices, they have all gone up 25% or so in the last year, indicating a devaluation in the worldwide exchange rate of the US$. As new Chinese demand continues to exacerbate the supply side of the worldwide price equation, prices for these commodities in EVERY currency will rise, which only exacerbates the price increase in terms of a continually dropping US dollar. I would not be at all surprised to see US$50 per barrel oil prices resulting in gasoline prices well over $2.00 per gallon after the November election.

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    Default Re:Contrary Investments

    Geek the Wall Street Journal was my source on the steel mills being sold and transported to Russia... and China. In that article they talked about scrap
    being used. It is true that it is a different process than using iron.raw ore
    to start the process with. (Actually a series of steps to process raw ore into steel.)
    i'm not sure if you can mix raw ore with scrap steel in the old 1935 equipment
    and get high grade steel output. The answer may be that you get good enough steel for appliances and cars, but not chromium tempered steel for armor.

    My source on the scrap steel is CNN and me. CNN ran an interview with a lady who
    runs a steel recycle business in Chicago. She said something like scrap steel prices are up three and now maybe four tiems. The interview was early Dec. 2003.

    I live about a mile from one of the main east west UP lines to California.
    Scrap steel used to go east bound to be processed and you c ould see itn open cars. It's now going west bound on trains with four to six engines. I know on the east coast that railroads are old technology and passe', but the Union Pacific runs really big engines (the biggest ones) to get over the mountains, and to see six of them hooked to train is something to see and feel. (You can feel them when they go by.) (Disclaimer I am not a UP employee nor stock investor, although I wish I had bought some stock about four years ago.)

    Finally the steel equipment being bought is not thirty years old. It's more like 30 to seventy years old. Talking lots of people to run it like in 1930 black and white movie shots.

  7. #32
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    Default Re:Contrary Investments

    The 60 year old technology you are talking about is basic oxygen furnaces or BOF. It takes as the main ingredient refined iron ore and adds carbon to make steel. Chromium or stainless steel is just an additive and can be made in electic arc furnaces as well. The major difference is that the electirc furnace can best be thought of as a steel scrap melter and the bof is a steel cooker using iron ore, In a sense one makes stew in a crockpot and the other reheats the stew like a microwave oven reheats leftovers. One of the advantages of reheating in a microwave is its faster, but speed is not always the overriding concern.

    Steel scrap is a big export commodity and has been for decades. It will go to the west coast and goes by rail when the price is right, otherwise the same commodity goes west anyway, just by boat from the east thru Panama canal. I have no doubt scrap prices are way up, especially at the scrap yard level where the price swings by bigger percentages because it does not include as many delivery costs.

    The big advantage of the old technology is that it uses coal to go from scratch and cheap iron ore from Austalia rather than recycled steel products which they do not have a lot of compared to us. The big labor saving devices in the process are continuous casters which are the stage after the molten steel is poured and a plant without one can have it added no matter the input mix. China is going to need a lot of steel in the next 2 decades, just like the US did in the 1950's and 60's. Infrastructure (like buildings and machinery) is very steel intensive and China needs a lot of it.

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    Default Re:Contrary Investments

    OK, knowing this fact about China and future steel demand is all well and good. But how does a contrary investor like myself best position themselves to profit from this knowledge ? I have already come to the same conclusion about Chinese copper and aluminum processors, and have invested in Hong Kong H shares of Chalco Aluminum and Jaingxi Copper. However, the technology involved with Aluminum and Copper processing is such that it's not really possible for small scale operations using antiquated equipment to compete effectively, even in China. Is there a similar angle with Chinese steel processors ?

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    Default Re:Contrary Investments

    There must be similar companies in steel in China. Sorry but I have no clue who they are.
    Geek, that was an excellent discussion and I must say I agree with 95% of what you said
    in your latest post. However the scrap steel that used to come east on the rail road to
    Chicago was recast in the Chicago area mini mills. Think Inland steel a mini mill plant company. WE both agree it is now going to China or points west, which from here is the "far east". (Going to west coast ports to be transshipped to China.)

    Happened to be watching world business on CNN since our markets were closed on MLK
    day. They were batting around that if there is real growth in the U.S. that investors in Europe will have to invest more in the U.S. as Europe growth sucks.

    Initial point from early Dec. To be an investor in US companies is probably still a good bet.
    I need to know what has totally changed (in both your views) that I would bet entirely on China (which has political unstability risk) when Europeans are betting on the U.S.?

  10. #35
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    Default Re:Contrary Investments

    I need to know what has totally changed (in both your views) that I would bet entirely on China (which has political unstability risk) when Europeans are betting on the U.S.?
    In my case, I'd say it was the fact that Chinese companies are experiencing real and sustained growth at levels in the 8% range, as well as real company profits based on an ever-improving competitive edge versus their Asian neighbors due to the falling US$= falling Chinese Yuan, topped off by the fact that the price to earnings ratios of most Chinese company stocks are still "rational".

    I'm not betting entirely on Chinese companies, and I own stock in quite a few north American companies. However, the north American companies that I do own are involved in energy (mostly natural gas) or metals mining (mostly copper and gold). To be very honest with you, with all of the accounting manipulations which have been steadily hitting the news, with all of the securities lending and repo's being done with US gov't money in an effort to pump up US stock prices, with the persistent below normal levels of actual "meaningful" employment in the US etc. I really don't see where the vast majority of US stocks are that good of an investment at current prices, nor do I see a domestic "engine" for real growth. What I DO see is election year manipulation, but as the rich old guys in the clubs always say - "don't fight the Fed".

    As far as europeans betting on US stocks, they have an advantage which we don't - their home currency is Euros not US$. This means that they can buy a US stock which costs say $1.00 a share for E0.79 right now, and sell it next month at the same $1.00 a share price but actually get back E.85 or so as a result of the de-facto admission by the European Union that they will now intervene in the international currency markets to lower the value of the Euro. An American buying and selling the same stock would make zero profit in terms of his US dollars !

    At the time this ECB announcement was made, I exchanged the Euros which I had been holding back into US$ to avoid taking a reciprocal loss.

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