Central Banks Blink

The Daily Reckoning Australia

Ouzilly, France

Monday, 20 August 2007

---------------------

*** Central banks blink...deleveraging in the resource market...Aussies
'maxed out' on debt...who really runs the Fed, and for whose
benefit...reader mail...

*** Continuing to reckon while on vacation...confused market acts
complacent...

*** Might be time to take out a 'wealth insurance' policy...the long-
awaited consumer cutback signal... 10 tips for picking a junior gold stock... and more!


--- A GIFT FOR DAILY RECKONING READERS ---

MONEY MORNING: Australian market news that matters, in 90 seconds or less

If you're like other investors, you wake up each morning with a short
list of "must-know" information. This is share price data and market
intelligence you need to know before you can really begin your
financial day.

We started Money Morning to give you that "must know" information, help
make you a better investor and ultimately, keep more of your money.
Money Morning is designed for the serious investors who can't afford to
waste time reading mediocre or unimportant investment research.

Best of all, it's free for Daily Reckoning readers:
http://draustralia.c.topica.com/maahvARabAGkpbJhLLIbafpTkF/

---------------------

From Dan Denning at the Old Hat Factory:

--What if the Federal Reserve cut the discount rate and nobody borrows
money? You can make money cheaper, but you can't make a banker borrow.
We'll find out this week if Ben Bernanke's Fed has helped the market
dodge a bullet. We doubt it.

--In case you missed it, the US Federal reserve cut its discount
lending rate by 50 basis points Friday morning in New York. The
discount rate is what commercial banks pay to borrow directly from the
Federal Reserve. Commercial banks are not borrowing a lot from the Fed
these days, being scared stiff of the imploding market in asset-backed
securities, but that didn't seem to bother the market. The news was
well received.

--The Dow rose 233 points to close above 13,000 and the S&P 500 had its
best day in four years, closing up 2.46%. But the biggest winner from
the Fed's Friday move is not going to be the Dow, the S&P, or the
ASX/200. It's going to be volatility.

--For all the smoke and mirrors, the Fed didn't really do anything
except soothe some frayed nerves on Friday. That was enough for a
rally. But the Fed's discount rate is not the same as the Federal Funds
rate. The Federal Funds rate is the rate banks charge one another to
loan money overnight. That rate still stands at 5.25%. And unless
something has changed over the weekend, banks are still petrified of
taking any risk.

--In other words, the credit markets are still a disaster, littered
with assets no one can value in a thinly traded market. Myles Zyblock
at RBC Capital Management writes that "the complex derivatives
instruments born from the credit boom are doing little to structurally
assuage risk. More to the point: These very instruments encouraged
profligate risk exposure and are now inflating the sense of anxiety
because their opaque nature has made it difficult, if not impossible,
to pinpoint ultimate risk exposure."

--The Fed has done a favour for highly-leveraged investors, though. The
futures market is now all but certain the Fed will cut the funds rate,
maybe as soon as this week. The currency markets responded by trimming
the US dollar's recent gains. This allows all those investors who
borrowed dollars to invest in higher-yielding assets a chance to sell
stocks in a rising market, raise some more cash, and pay back those
loans.

--It's all about debt these days. "We're maxed out as a society. We've
got too much debt. So every quarter per cent increase hurts so much
more than it used to and that's the risk," said Aussie Home Loans chief
John Symonds this weekend. You can see Symonds trying to get out in
front of the coming discussion on 'predatory lending'.

--It's funny how markets make opinions. A few years ago non-bank
lenders and low interest rates were lauded as "the democratisation of
credit". On the back side of the credit bust, the politicians will trot
them in front of the cameras and denounce them as crooks and
fraudsters. It's a good public spectacle.

--In the meantime, don't expect banks to issue fewer margin calls
because of what the Fed did. If banks aren't lending money for
individuals and institutions to buy shares, shares will probably go
down. "Borrowing to buy shares has more than doubled to AU$36.2 billion
in the past two years, accounting for AU$88.8 billion worth of
Australian stocks and helping to exacerbate the sharp falls on a highly
geared market," reports Lisa Macnamara in The Australian.

--We know one or two investors who got margin calls last week as the
ASX fell. They were forced to either sell stocks or contribute cash.
It's easier on the nerves to sell.

--What about commodity prices in all of this? If banks crack down on
hedge fund borrowing, or issue margin calls, it will be worth watching
the commodity futures markets. Going long on commodities in the futures
market has been its own kind of carry trade. But it raises an important
question: how much of the strength in commodities prices is related to
financial demand from leveraged borrowers who are now deleveraging
(paying back loans)?

--The gold price and the oil price have fluctuated. But so far, we
haven't seen a big crack in base metals prices or precious metals.
You'd expect the opposite. You'd expect a rising gold price during
massive financial uncertainty. It hasn't happened yet. If the Fed keeps
panicking, gold will do more than hold steady.

--How about some reader mail?

"Dan, I've read a lot of conspiracy theories in my life, including
about the Federal Reserve, and the one that I get stuck on is, what
happened in a 340 point rout in the Dow and then the "buyer" steps in.
Could it be the private bank owners of the Federal Reserve? After all,
they can print all the money they want in any currency. You allude to
it with your computer glitch disguising John Galt."

Dan responds: We're looking into how Australia's Reserve Bank is
structured. But we know that the US Fed is a private bank, not a part
of the Federal government. There are twelve regional Federal Reserve
banks. Throw in the Board of Governors in Washington, D.C. and you have
the Federal Reserve System. Each regional bank has a director who's
elected by nine board members.

Just for fun, we thought we'd see who the board members are of the New
York Fed. Why? We were prompted after reading this in Bloomberg about
the Fed's Friday rate cut: "The initial request for the move came from
Fed district banks in New York and San Francisco. They are led
respectively by Timothy Geithner and Janet Yellen, both former Clinton
administration officials who dealt with the 1997-1998 currency crises.
The Fed's Board of Governors in Washington is dominated by academics."
It's the academics versus the realists, is it? The New York Fed's nine-
member board looks like this:
Class A: Elected by Member Banks to represent banks

1. Jill M. Considine. Chairman and Chief Executive Officer The Depository Trust Company
2. Charles V. Wait, President, Chief Executive Officer and Chairman of the Board The Adirondack Trust Company
3. Jamie Dimon, President and Chief Executive Office JPMorgan Chase

Class B: Elected by Member banks to represent the public

1. Richard S. Fuld, Jr. Chairman and Chief Executive Officer Lehman Brothers Holdings Inc.
2. Jeffrey R. Immelt Chairman and Chief Executive Officer General Electric Company
3. Indra K. Nooyi President and Chief Financial Officer PepsiCo, Inc.

Class C: Appointed by the Board of Governors to represent the public

1. Lee C. Bollinger President Columbia University
2. Denis M. Hughes President New York State AFL-CIO
3. Jerry I. Speyer President and Chief Executive Officer Tishman Speyer Properties

Let's see if we have this right...we've got JPMorgan, Lehman Brothers,
General Electric, Pepsico, Columbia University, and the AFL-CIO looking
out for us. But who are they looking out for, distressed lenders or
distressed borrowers? Hmmn.

The Fed's website (http://www.newyorkfed.org/aboutthefed/fedpoint/fed10.html ) describes
the role of the directors this way:

Class A directors represent the member banks in the District and are
usually bankers themselves; Class B directors and Class C directors
represent the credit-using public. The interests and backgrounds of
Class B and Class C directors are diverse. In combination with Class A,
they ensure board representation from both providers and users of
banking services in each District. The Act purposely calls for the
majority of each Board to be from the borrowing public, reflecting a
concern that lenders should not dominate this oversight of Reserve
Banks.

Right.

The Fed will probably do what it has traditionally done: bail out the
bankers who own it. The borrowers? Well, many of those who were
encouraged by then-Fed Chairman Alan Greenspan to take out an
adjustable-rate mortgage...will be foreclosed on, or sent to bankruptcy
court. And those without bad loans will face tighter credit. In the
long-run, the Fed's systematic destruction of the dollar will punish
savers the most, many of whom will need that money to retire in the
next ten years. You tell me if the Fed ever does anyone but its own
members a favour.

--More mail...

"Hi guys,

"I'm responding to your invitation for advisers, following a reader's
letter you printed, to write to you. I have two purposes in doing so.
The first one is to defend my profession - just as the vast majority of
occupations consist of, for example, 99% ethical, hard-working people
(read: accountants, lawyers, doctors, etc, though I'd draw the line at
politicians) and 1% who on occasion give them all a bad name,
planners/advisers are no different. You state that advisers make money
whether their clients do or not; the same could be said of the
professions, the ones I just mentioned included. Just because you lose
a court case doesn't mean you don't have to pay the barrister and
solicitor. Just because you die on the operating table doesn't mean
your estate isn't liable for the medical costs. And just because you're
headed for bankruptcy doesn't mean you don't have to pay your
accountant for the privilege of finding that out!

"The second reason is to offer your readers some suggestions when
looking for an adviser. The very first one is to ask family and
friends. Like a good adviser in any field, he/she will probably be
gaining new clients by referral rather than advertising. I, among
others, have a healthy and growing client base and have never
advertised - my clients have been referred by existing clients who have
found my services worthwhile. Secondly, ensure the adviser and his firm
are independent; that is, there is no big brother in the form of a
large institutional owner (bank, life insurance company, etc.) looking
over his/her shoulder telling them to favour its own branded products
or platform. Third, like many professionals a good planner will be
happy to provide an initial consultation free of charge; it is simply
an opportunity to speak and listen for an hour or two, to see if the
potential client wants to use the adviser, and if the adviser wants
that person as a client. By the end of that time, you will definitely
know. Fourth, be very clear about what you want: do you want help,
information, guidance, and advice, or are you expecting a miracle-
worker who gets you 50% returns at zero risk? And if the adviser also
says that you are flying without a parachute by having a million
dollars of family responsibilities (mortgage, kids, non-earning spouse,
etc) but no insurance cover, are you going to listen to that advice?

"There's no mystery about what we do, guys; and by being clear and
realistic about your objectives and being prepared to work with your
adviser, you'll be a lot better off over the long run.

"Kind regards,

"Ted G."

--------------------

LEARN MORE ABOUT DAILY RECKONING AUSTRALIA EDITOR DAN DENNING

DID YOU KNOW?  The Daily Reckoning's editor, Dan Denning, is the author of
the New York Times best-selling book, The Bull Hunter: Tracking Today's
Hottest Investments

Ask for it in your local bookshop or buy it online from Dymocks here: http://draustralia.c.topica.com/maahvARabAGkqbJhLLIbafpTkF/

--------------------

Over to Bill Bonner in France:

We're still on vacation, which means that we're still reckoning, but
even less seriously than usual.

Last Thursday, the stock market seemed to hesitate. It didn't know
whether to go up or down...so it did nothing.

On the other hand, gold had made up its mind even before the markets
opened; it scooted down more than US$20.

What's the matter with gold? We don't know. But we're curious about it
and eager to know. Are speculators unloading gold to shore up positions
elsewhere? That's what some commentators think. But of all the things
one might sell to raise cash, gold seems like the last one we'd want to
get rid of - especially when you look at the state of the markets.

As we point out in our soon-to-be released book, 'Mobs, Messiahs, and
Markets', every market is a public spectacle. And every public
spectacle follows a certain pattern. It begins with lies and humbug -
'emergency' low lending rates from the Fed...faith-based
currency...stocks for the long-run. Then, it progresses into farce -
hedge funds...low-doc mortgage loans...and 'cove-lite' LBO financing.
And finally, it ends in disaster.

We have seen plenty of humbug and farce. The disaster phase is
beginning now. Countrywide Financial (NYSE:CFC) - America's largest
mortgage lender - may be facing bankruptcy, according to Merrill Lynch
(NYSE:MER). The stock has been cut in half so far.

More importantly, both Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT) -
America's largest retailers - are warning that earnings ain't what they
used to be. Could this be the long-awaited signal that the consumer is
finally cutting back? Maybe.

Excerpts from CNBC-TV18's exclusive interview with Marc Faber:

Q: How do you read the events as they have unfolded in the past
fortnight? How do you think this might shape up?

A: Basically as you know, the US market went up until July 16. The Dow
peaked out on July 17 above 14,000 and then it started to slide, mainly
driven this time by financial stocks and by what people call a crisis
in the subprime lending sector and the CDO and the BS markets. The
question obviously is where do we go from here? Is it like '98, where
we dropped first and then recovered strongly towards the end of the
year? Or is it something more serious? I think it's something more
serious.

Q: If you had to predict...since your view is bearish, what percentage
fall would you expect in emerging market equities, on an average, over
the next foreseeable period?

A: Well, I think the S&P has a very good chance to decline by 20-30%
and emerging economy stock markets, I think they could drop by 40%.
That may not mean that the bull market in emerging market is over for
good, because in '87 we had drops in Taiwan of 50% and then the market
went up another four times; so you can have big corrections and still
be in a bull market.

But if someone came to me and said, "What is the upside on, say, the
S&P?" We had 1,452; the high was 1,555. I would say the upside and the
big resistance in the market is, say, between 1,520 and 1,530 - so the
upside is limited. But what about the risks?

What I noticed is investors are far more concerned to miss the next leg
in the bull market on the upside, than about the risks of losing a lot
of money. And I think, gradually this will change, and that will mean
lower equity prices...and also prices of other assets such as
commodities can go down substantially and obviously home prices around
the world.

(Watch the entire interview with Marc Faber here:
http://draustralia.c.topica.com/maahvARabAGkrbJhLLIbafpTkF/ )

Daily Reckoning readers should be aware...this is a downturn that COULD
be extremely long and severe.

Here's another DR dictum: The force of a correction is equal and
opposite to the deception that proceeded it. Never before in the
history of the world have so many people believed so many things that
couldn't be true. Now, they owe more money to more people than ever
before. And it could take a long, painful correction...or worse...to
straighten things out. That's why we would hold onto our gold. If we
needed cash, we'd sell something else.

But that's all we're going to say about it today; we're on
vacation...and so is our son...

Will sent us this note from South America:

"Hey Dad,

"I had an enjoyable and productive three-day trip out to the ranch. The
secret to the drive out there is to get a big truck and do it during
the day. Those mountains that you go through are stunning; makes the
time go by quickly.

"The weather was beautiful, at least until we got out to where the dust
storms were. I wrote a blog post about it at http://draustralia.c.topica.com/maahvARabAGk2bJhLLIbafpTkF/
When we got into the ranch, the winds were roaring like a small
hurricane that pretty much went all night long.

"That afternoon we looked at the progress on the house, which was
virtually none. They were getting ready to put the floors down in Jorge
and Maria's house...and still had a good amount of work to do there.
They only just started levelling out the earth for the terrace. The
excuse for the lack of progress was that most of the workers went back
to their families in the mountains in June/July.

"We met with the onsite construction manager and the Salta architect
and expressed our displeasure with the progress and formed the game
plan to get everything done by the end of October.

"The next morning the winds had let up and it was clear and sunny. I
went out with Jorge and surveyed the cattle in the front field, that
was four hours worth of riding... The cattle looked good, almost fat.

"I also talked to Francisco about llamas. There's a special kind that
he'd like to buy. His idea is that the people on the farm can learn to
weave things with the wool - blankets, ponchos etc. We'd start off
small with a handful of animals. After a couple years we could build up
a decent sized herd. Each animal should bring in about US$300 worth of
wool per year. Sounded like a good idea to me.

"I definitely want to go up there more often... It was a good trip. I'm
actually getting sort of interested in the farm stuff."

That's all for today...

--- Advertisement ---

 == SPECIAL FREE OFFER FOR DAILY RECKONING READERS IN AUSTRALIA ==

The Windows Advisor is a brilliant windows manual written for both
beginners, as well as IT/computing professionals. It's easy to
understand, it covers the basics, but it also gives you advanced tips
and tricks you just won't find anywhere else. But the best part about
The Windows Advisor is that as a Daily Reckoning Reader you can try out
it out in the comfort of your home, absolutely FREE for 6 weeks.

We've also set aside 5 FREE-Gifts for you contained on one CD-ROM -just
for trying The Windows Advisor. If you decide to keep The Windows
Advisor-these 5 FREE gifts are yours free! And even if you decide to
return The Windows Advisor-you still get to keep your 5 FREE Gifts.

http://draustralia.c.topica.com/maahvARabAGktbJhLLIbafpTkF/

NOTE: This offer is ONLY available to Daily Reckoning Readers in
Australia and New Zealand

---------------------

The Daily Reckoning PRESENTS: Investing in a junior gold stock can be a
tricky business, as many small exploration companies will never achieve
what they set out to. So how can an investor recognise a quality junior
gold stock? Rick Rule outlines ten key questions to ask when
considering making just such an investment. Read on to discover...

HOW TO PICK A JUNIOR GOLD STOCK
by Rick Rule

Successful speculation in junior gold stocks has to solve one riddle:
How do you anticipate exploration successes before the financial
community reacts to them?

The 12-year bear market in gold [prior to the current rally] has given
you one leg up. The bear dismantled the research and information
infrastructure for precious metals stocks. In the late '70s and early
'80s, big Wall Street firms employed hundreds of brokers who
specialised in gold stocks, and dozens of 'hard money' newsletters
thrived. Since nobody gives medals to yesterday's heroes, most of those
gold experts long ago moved to greener pastures.

Here's another leg up: a successful speculator builds a diversified
portfolio. Placing all your eggs in one basket often breaks your
basket. Always prefer a group of intelligently selected speculations to
one large bet, no matter how compelling the story. A contrarian,
counter cyclical orientation helps as well.

In exploration and speculation, one thing never changes: success
favours the trained observer. Luck follows those who use the best tools
with consistent discipline. Here are some other tools. The right
answers to the following ten questions can help you decide if you even
want to bother following, much less buying, a junior gold stock.

Look for Value

Question 1: "What is the current liquidation value of your company
versus the market capitalisation?"

Compare the company's actual value if auctioned off tomorrow against
the value the stock market places on all of its shares. If the market
cap outweighs the liquidation value, there may be a rat in the feedbag.

Speculation can't stand on one leg alone. You have to forecast both the
upside and the downside. When promoters are trying to sell a stock,
you'll hear how precious metals will soon soar, how exploration will
soon hit the Mother Lode, and how their promotion will boost the
stock's price. That's all great, but we have to weigh that against our
possible downside, and value is the scale we use. Nothing reduces risk
like plain old value. If a mining company is not a viable business,
there's no reason to buy it.

A mining company is only worth what it owns.

Add up all the current assets (like cash), subtract the liabilities,
and add the liquidation value of all the company's mineral projects.
Liquidation value means what the projects would bring in as is.

What's the market cap? To calculate it, multiply outstanding shares by
the current market price. With 10 million shares outstanding quoted at
US$2.50 a share, the market capitalisation is US$25 million. If this
company has US$5 million in cash and no debt, its net financial assets
are 20% of the market cap.

Assume the company has four exploration properties. With a cold and
steely eye, assign each of them a value. Now let's add it up. Net
financial assets of US$5 million and say, property assets of US$12.5
million for a "guesstimate" liquidation value of US$17.5 million,
versus a market capitalisation of US$25 million. If the management can
answer other questions, this could be a sensible speculation. More
often, however, we find market capitalisations of US$100 million and
liquidation values of US$2 million.

Look for Personnel

Question 2: "Tell me about your management and directors, especially
about their past successes in mining and markets."

Past winners are more likely to be future winners. Why do we need to
understand the track record of the technical team, the directors and
the dominant shareholders? Most successful mines are made, not found.
It takes technical prowess to unlock the deposit's geology to
production. It takes financial prowess to unlock the capital crucial to
mining, so the management team must include experienced, proven
fundraisers.

Do their skills fit the job? If the team cuts its teeth strip mining
oxide gold deposits in Nevada, it may break those teeth on underground
silver, lead and zinc sulfide deposits in Peru. Be particularly leery
of exploration teams with little production experience who are out to
build and operate a mine rather than to sell the deposit to someone
more experienced. The reverse can hold true as well: Mine operators are
often poor mine finders. The tasks don't resemble each other, and
what's successful in one field is often unsuited to the other.

Look at the controlling shareholder's track record as well. Has he made
money for investors in previous deals? Sorry, it's not enough to make a
mine - we want to make money. Be picky here,too. Can the dominant
entrepreneur transfer his experience to the project at hand?

Look for the Means

Question 3: "How are you going to make me money on this deal, and when
will I make it?"

This is the question the promoters want you to ask, but make sure you
control the conversation so they actually answer it. I once heard a
stockbroker explaining a venture capital investment in a technological
process. One potential investor asked, "How does the process work?" The
broker replied, "It works fine!" Beware of such answers.

Make the promoter explain in detail how the company's exploration
activities will increase both shareholder value and stock price. Why
these questions? We want to understand what sequence of events
management believes will occur over that time, and how that will affect
share prices. We must assign probabilities to the outcomes forecast,
and understand their timing and sensitivity. If management doesn't have
a plan outlined, it's probably too early to buy.

If the company refuses to keep us informed, or if they promise and
don't deliver, we must consider selling the stock. If management
doesn't have a geological theory with a plant to explore and prove it,
it's probably too early to buy. If the results achieved are below what
we've been led to expect, we should sell the stock.

What are the Goals and Strategies?

Question 4: "What are the company's goals and how are they going to
reach those goals?"

Thousands of public companies specialising in precious metals
exploration litter the investment landscape. The vast majority have
always failed. Many "penny miners" have, at best, only sketchy goals.
Most have none. Small wonder they couldn't achieve anything - they
didn't set out to!

When a company expresses goals, make them get specific. Ask about
intended results on a pershare basis. What do you care if cash flow
doubles and issued shares increases tenfold? Will the company's
expressed goals increase share prices? Some entrepreneurs simply seek
to increase the assets they're managing to secure their own cash flow.

Do the company's goals seem reasonable? Will they raise share prices if
they bear fruit? If the answers are "yes," then ask if the company's
strategy fits its goals. Many companies look like Don Quixote on his
battle-mule: Their goals sound grand, but they have no clue how to
reach them. Measure their goals against the backdrop of the people.
What is their track record for meeting theirgoals? Have they succeeded
in similar endeavors? Are their backgrounds suited to their strategies?

Where's the Money?

Question 5: "How much money do you have, how much money do you need to
make me rich, and how are you going to get it?"

Watch the white-leather-shoe boys blanch when you pop this question on
them. Mineral exploration is a capital intensive business: no capital,
no business!

Start with current assets; cash, treasuries, bank deposits,
inventories, prepaid expenses and the like, and deduct current
liabilities. This should give you a rough idea of net working capital.
Get a detailed description of the monthly "burn rate." What does it
cost for rent, utilities, salaries, promotion, expenses, professional
fees, listing expenses, etc.? then superimpose projected exploration
expenditures on a monthly basis. If the company has any debt, make sure
to add in the interest and principal payments.

This exercise narrows the playing field fast. Many small public
exploration companies with less than US$1 million in net working
capital spend US$600,000 annually on non-project overhead, while they
need to spend several million on exploration to meet goals (and make us
money).

Finally, where will they get the money they need? Years ago at a gold
mining conference, I spoke to an erstwhile promoter who didn't know my
face. I asked him where he would solve his working capital problems and
he informed that a "hot" west coast broker named Rick Rule would raise
all the money he needed at much higher share prices. Imagine his
surprise when I identified myself and explained the likelihood of his
phantom financing!

When companies detail their financial plans, ask what conditions apply
to the receipt of funds. Decide for yourself whether the companies will
receive the necessary infusion of cash and on what terms. If possible,
get the names and the phone numbers of their financing sources, then
telephone those sources and verify that the capital is available. See
if the preconditions and terms match the company's own understanding.

Where is the Owner?

Question 6: "Who owns this company? How much did they (or will they)
pay for it, and when can they sell it?"

Make the company explain its capitalisation history to you. If there
were escrow or founders shares (shares issued for US$0.01 to early
insiders), ask who got them, for what service, and when will they be
free to trade them? Determine at what price every financing has taken
place. Is the stock from those financings already free-trading, or can
it hit the market later to depress share prices? How many options and
warrants are outstanding? At what price can holders exercise them?

What About Promotion?

Question 7: "Who else will you tell this story to, how will you tell
them, and when?"

Promotion often makes the difference between success and failure.
Promotion is crucial in capital intensive businesses because it raises
subsequent financing with less dilution and increasing liquidity and
share prices. Since exploration companies seldom pass out gold watches
to thirty-year shareholders, you want increasing share prices.

Make the company (preferably its promoter) detail its promotional plan.
Who is the audience? What is the message? Who is the messenger? Do the
three mix? What is the promotional budget? Is that sufficient? How will
the promoter raise additional capital? At what price and from whom?

Companies must budge at least US$150,000 annually for promotion. Sad,
but true. At least two management road shows through Melbourne, New
York, and London should be scheduled annually and one yearly tour of
the company's focus properties for analysts.

Institutional investors finance exploration but retail investors
worldwide provide market liquidity. Promoting to only one constituency
is a flawed strategy. Promoting to retail investors should take into
account their large numbers. Will a company spend its promotion budget
in a market where retail investors have money?

Make sure the promoter knows and complies with federal and state laws.
If the promoters are not aware of these regulations and don't have
concrete plans for complying, forget about their stocks.

Where Can it Go Wrong?

Question 8: "What can go wrong, how can I know what is going wrong, and
what will you do if it goes wrong?"

If a company management can't name at least three things that could go
wrong, they haven't thought through their enterprise. Make them
describe the three worst fears for you as a minority shareholder.

Make the promoter describe specifically how you as a shareholder will
get negative information and warnings. Ask what telltale signs you
should look for and how you will get information (from the promoter, by
fax or e-mail is the best answer) to help you assess these risks day-
by-day.

Who is Your Promoter?

Question 9: "Who's buying the beer?"

If a company has answered these questions in reasonably good form, get
to know the promoter personally. No company will answer every question
perfectly, but candour and reasonable responses will tell you who to
spend more time with. As you build a bond with the promoter, get him to
tell you the real story. Because your interrogation took control of the
promoter's spiel, you have helped him order his thoughts about the
company. Now let him lapse into "stream of consciousness," and listen
carefully for tidbits of information you would never get from his
canned spiel.

Where's the Dope?

Question 10: "Where can I learn more?"

If you are still interested, this could be a great company. Get their
annual and quarterly reports as far back as you can. Read what they
hoped to accomplish, and compare that to what they did accomplish. Get
newsletter write-ups, securities analyst's reports, and news releases
as far back as you can. One final trick: Summarise your understandings
in writing and see if you can get the promoters to accept your memo as
true and correct. Hold them to their representations.

Rick Rule
for The Daily Reckoning Australia

Rick Rule is a principal shareholder and senior analyst for Global
Resource Investments, Ltd. Rick began his career in the securities
business in 1974, and has been involved in natural resource security
investments ever since. He is a leading analyst specialising in mining,
energy, water, forest products, and agriculture.



------------------------------------------------------
The Daily Reckoning is a free, daily e-mail service
brought to you by the authors of the NY Times Business
Bestsellers "Financial Reckoning Day", "Empire of Debt"
and "The Bull Hunter".

To learn more or subscribe, see:
http://www.dailyreckoning.com.au

------------------------------------------------------

Our writers and contributors also welcome your questions and
comments. Simply reply to this e-mail with the word 'Question'
or 'Comment' in the Subject of your reply

------------------------------------------------------
The Daily Reckoning Australia ISSN: 1834-3104
------------------------------------------------------
To cancel by mail or for any other subscription issues,
contact us at:

PO Box 899
Braeside
VIC 3195
Australia

Tel: 1 300 78 29 11
Fax: (03) 9558 2219