How to Live Normally

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“Market failure” is the term given to instances where economists aren’t doing their job. That’s because there aren’t really any market failures, just things that economists don’t get.

For example, pollution. Everyone knows about pollution, so the market must be taking it into account. But economists don’t understand why people still pollute, so they call it a market failure. They don’t realise that the warmth burning coal gives is more valuable than the cost of the carbon pollution it puts into the air. So, the failure is in the economists’ perception, not the market’s.

But regardless of how you understand the term “market failure”, how on earth could there be market failure in an industry that wouldn’t exist without its artificial creation by government? No, we aren’t talking about banking, we’re talking about Super. So was Stuart Washington in The Age:

“The Cooper superannuation review has taken a highly interventionist approach to regulation after identifying widespread instances of market failure in Australia’s $1.3 trillion superannuation industry.”

Market failure? The industry was created by regulation, so it must be a regulatory failure! But the Cooper Review continued with its ridiculous conclusions:

Rather than relying on the ”efficient markets” hypothesis of a rational investor acting rationally, embraced by the Wallis inquiry of 1997, the review found the assumption and disclosure had failed to deliver a competitive, transparent market.

”Competition has not effectively driven prices down far enough or created the efficiencies that we think are quite easily available to it,” Mr Cooper said yesterday.

When you turn up to Finance 101 at Australia’s universities, you learn some of the most fundamental principles of … finance. The financial crisis has left few of them plausible. The “efficient markets hypothesis” was one of the disproven ones. (Not that it isn’t still taught.)

But even before efficient markets were exposed to be nonsense, nobody would have argued that an efficient market could exist in an industry that it is compulsory to participate in. And you don’t even participate; you just hand over the money.

Until recently, one of the remaining still potentially true financial concepts was “risk aversion” – the idea that, all else equal, people prefer less risk.

But, apparently, that is out of the window too. Just call up NAB to witness the new world of finance. According to a recent customer, you will be put on hold and then witness a travesty that goes something like this:

“At NAB, we know that the current economic climate made some lenders nervous, causing them to decrease or stop lending all together. We did the opposite. We increase our lending, so our customers can continue to live normally”.

So now you know that next time markets are getting routed again (i.e. now) NAB will be handing out loans so that “customers can continue to live normally.” Meanwhile, shareholders will be having sleepless nights.

And with Dan in Sydney exposing the housing industry’s bubble, NAB could really be in for some trouble. Remember that Aussie banks, those pillars of risk aversion, are overexposed to residential property.

Only it seems that NAB may have been a little misleading in their recorded phone message. According to Eric Johnston at The Age, “Banks bond with cash as fears rise”.

Bonding with cash means “pumping up their holdings of cash by a hefty $12.7 billion in recent months as fears over Europe’s debt woes rise.”

So what on earth is NAB doing increasing lending? Who can know for sure with banks being what they are these days…

Coal on the other hand, remains coal. Unlike loans, coal can’t be created out of thin air. Which means that people have to go looking for it. And Thai company Banpu has found it in Centennial Coal (CEY).

Yesterday Centennial accepted Banpu’s takeover bid (valuing the NSW firm at about $2.5 billion) which sent shares surging more than 30 per cent to $5.83 – their highest level in two years.

Our own Murray Dawes also found something in Centennial: a trading opportunity.

And what a trading opportunity! Murray advised his members to enter a long position on Centennial back on 24th May when the share was trading at $3.83. He instructed a 50% profit-take on June 1st at $4.10, moving the trade’s stop-loss up to ‘break even’.

Essentially, ‘price-gapping’ aside, this turned into a risk-free trade after only 6 trading days!

Yesterday, the stock closed at $5.83 – up 52% on the trade’s entry price. The Banpu Takeover offer stands at $6.20 per share… this would equate to a 62% gain for Murray’s followers – if the deal goes through. Not a bad return on 6 weeks’ work.

A rarity in the modern financial world (certainly given NAB’s example) Murray looks to limit risk first and foremost in any trade he recommends. That means tight stop loss management (the initial risk on the Centennial trade was less than 9% or 33c), and a measured, pragmatic approach to monitoring price action. That is to say, he doesn’t just dive into a trade… he waits until he’s convinced it’s ready to return serious gains for his members. Then he attacks with power, pace and purpose – just like a Tour de France cyclist moving out of the pack to sprint for home…

And just like he did with Centennial.

Of course, Centennial is just one position Murray has on the go right now. There are more in the offing – that is, if you’re interested to see how a professional trader sizes up these volatile market conditions…

To check out Murray’s Slipstream Trader service in more detail, just click here.

Nick Hubble
for The Daily Reckoning Australia

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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