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Ratings Agencies Put Spain on Negative Debt Watch

The ratings agencies are having such a busy week. You wonder if their staff get Christmas bonuses based on how often they change the ratings.

Standard and Poor’s (S&P) put Spain on negative debt watch last night, making another re-rating likely in the next few years. S&P has already dropped Spain’s rating once this year. The country’s finances are a shambles.

Spain’s debt has grown from 36% to 66% of GDP in the last two years. This is thanks to a budget deficit of 11.2 per cent this year, and will still be around 10.2 per cent for next year.

Not only that, but the unemployment level in Spain is heading for twenty per cent in 2010. Already a staggering 43 per cent of people under the age of twenty five are out of work.

This matters because we’re talking about the NINTH biggest economy in the world. The Spanish economy is bigger than Australia’s, Canada’s or even Brazil’s.

And it’s not just Spain that’s in trouble. As technical analyst Murray Dawes pointed out yesterday, Fitch rating agency downgraded the Greek economy from A- to BBB+, as well as putting it on negative credit watch for future re-ratings.

Greece’s economy looks to be on the skids.

And the Dubai story is still bubbling away and it’s starting to give off all sorts of bad smells. Moody’s rating agency downgraded some of Dubai’s state-owned company debt, as well as putting some of the state-owned enterprises on negative watch as well.

In the middle of all these re-ratings, the monumental news that Moody’s thinks the US and UK “are testing the limits of their ratings” has almost slipped under the radar.

If Moody’s actually put its money where its mouth is, the effect on the market would be far bigger than anything we’ve seen so far.

The news is making investors nervous. Global stock markets have been on the slide for the last week. And in this environment of uncertainty it makes it all the more essential that you take time to select the right companies to invest in.

When markets are rising, it’s not as hard to pick a winner. When markets are choppy or directionless, that’s a different story.

So in this market it’s important to have set-criteria when trying to pick stocks.

It’s not rocket science, but it does take discipline to stick to your guns. For instance, right now I’m looking for excellent companies with good balance sheets.

And ideally they should be well positioned in growing sectors.

The trick is trying to find them. Because there aren’t many that fit the bill. Fortunately, we have spotted a few key stocks for subscribers of Diggers & Drillers. With the world always seeming to run short of one commodity or another, Australia is perfectly placed to fill any gaps. But even so, you’ve got to know which story to back.

For example right now across the globe, there are nearly 488 uranium-hungry nuclear plants that are either proposed, planned or already in construction. Let me put that in perspective…

The number of nuclear plants is set to increase by 112% if all these projects go ahead.

And whether you’re a climate change sceptic or believer, the Copenhagen climate conference is on right now, and both China and the US have already made pledges to reduce their emissions.

To actually achieve that, nuclear power is sure to be a part of the solution in coming years. Therefore, uranium will slide right back into the limelight. Tony Abbott brought this to everyone’s attention last week when he started a discussion about using nuclear power in Australia to reduce greenhouse gasses.

But the catch is that there is already a shortfall in uranium production. Existing mines currently only meet 70% of the world’s demand. The remaining 30% comes from the last place you’d expect.

Where?

Since 1993, the 30% shortfall has been bridged by cannibalising the warheads from the nuclear warhead arsenal of the former Soviet Union!

The “High Energy Uranium” agreement has been in place since 1993. It’s also known by the slightly catchier title of “the megaton-to-megawatts program”.

Over twenty thousand nuclear warheads have been recycled into power plant fuel in the program. Those former weapons of mass destruction have supplied about ten percent of US’ electricity over the last sixteen years.

The weapons-grade uranium in each warhead can yield 700 kilos of lower concentration, reactor-grade uranium.

But this unique arrangement is ending. Back in 1993, the program was designed to have a twenty-year lifespan, and Russia recently indicated that it would let this policy expire as planned in 2013.

We’re hoping it wants to keep the last ten thousand warheads for the 42 nuclear reactors it has in the pipeline, rather than for any less friendly plans!

When this secondary source runs out, there will be a gaping hole left in the market. And this will happen just as many of these new reactors are due to come on line. This shortfall in supply, happening at the same time as a big increase in demand will cause a scramble to secure supply, and will lead to a big rise in uranium prices.

That’s why in last month’s Diggers and Drillers newsletter I looked at which uranium companies are going to be there right in time to meet this need in 2013.

But it’s not enough to just look for companies that can provide uranium. It’s essential that they’ll produce enough volume on a regular basis to attract big players like the Chinese utilities.

China is increasing its fleet of nuclear reactors from eleven, to one-hundred-and-eighteen! This is where the big contracts will be signed, and money made.

Gerard Minack, the highly respected global strategist for Morgan Stanley believes this is “going to be the biggest turning point for the Australian energy market in twenty years.”

Fortunately, Australia has the world’s biggest proven uranium reserves, with 28% of the world’s total, and right now the heat is back on for the uranium sector.

But with more than 55 uranium companies listed on the Australian market it’s not as simple as throwing a dart at a list to choose your stock.

In fact, out of my list of 55 stocks there were only two that matched the criteria. And only one of them that I felt confident enough to tip to Diggers & Drillers subscribers.

Right now it’s not good enough to pick any old stock, when the markets are choppy and uncertain you’ve really got to look for those stocks that are going to generate returns.

Dr Alex Cowie
Editor, Diggers & Drillers
for The Daily Reckoning Australia

4 Comments

  1. GaryB says:

    If a TV reporter were to ask Abbott “exactly where in your electorate do you want to put the nuclear reactor?” and you won’t hear anymore from Abbott about nuclear stuff. Ditto all other State and Federal pollies. The pressure of the nimby effect is far too strong in Australia.

  2. peterg says:

    Glance into the possible future in 10-15 years that it takes to get a nuclear power plant built. Assume global warming has set in big time. Assume that gloal CO2 limits (one tonne per capita globally) are enforced, by trade sanctions or even war.
    Assume that peak oil (probably now) means petrol rationing. Blackouts, brownouts and ratioining. Then ask people if they want a nuclear reactor in their back yard (dont worry, the pwb probably won’t bother asking by then). as for the supply of uranium, yes there is peak uranium, but there are also breeder reactors and other types of fission/fusion somewhere over the horizon – not in the short run though. 4th generation plants , being gas powered, can be put into the desert (so they say).(apologies to the indigenous owners of such lands).

  3. Greg Atkinson says:

    Peterg it takes 10-15 years to built a plant now…but it will not take that long soon and the next generation of reactors are already in Japan.

  4. nigel isherwood says:

    Hi Dr Alex. I’m interested that you are looking for “excellent companies with strong balance sheets” as you put it. Personally I usually buy poor companies with dodgy balance sheets…and then hope for the best. Obviously I’m joking, but might I make a bold suggestion? As we can never know the future and what fate awaits for our companies; nor can we ever hope to know all the things we need to know about things that may be hidden in the company accounts (Bernie Maddoff had a strong balance sheet you know), I respectfully suggest that it might be a better plan to buy a wide range of companies when their prices are cheap, and then sell them off when they become expensive…that should do the trick; it does for me. For the last nine years I have made 50% a year with very little stress and minimal risk. Keep it simple for the best outcome. Bonzer, Nige

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