Profitable Dirty Harry Moment To Buy BHP And Rio

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By Peter Switzer, Switzer Super Report

Investors are in a Dirty Harry moment when it comes to stocks right now. We don’t know how serious the Ukraine drama, starring Vladimir Putin, will get. And we have to gamble on the China syndrome, where economic data seems to be melting down, taking iron ore and our top miners’ share prices with it. But the growth slowdown could be exaggerated because of the Lunar New Year holiday.

So, are we looking at another buying opportunity? And that’s where my Harry Callaghan question comes in, which goes like: “You've got to ask yourself one question — "Do I feel lucky?”

The Vlad question is too tricky, but I do take the view that not even Putin would want a war that would KO his economy, send share prices tumbling and short circuit the Eurozone – an important customer – just when it is getting on its economic feet following the GFC.

So, let’s go to China.

The China question

Economists from the Japanese finance company, Nomura, have marked the first quarter growth down from 7.5% to 7.3%, which is not huge given the likely holiday effect. Bank of America-Merrill Lynch cut it from 8% to 7.3%, which is bigger but is still in the 7% band and showing the impact of the long holiday period more significantly. Their annual downgrade has gone from 7.6% to 7.2%, which does not look like the kind of catastrophe for iron ore prices that was bandied about last week.

The price falls talked about were to $US80 a tonne but they are now around $US111. Last year we saw some $US140 prices but the average was more like $US133. This year it was closer to $US122 and so the recent drop is not huge.

That’s where the Dirty Harry/luck question comes in and you might test your luck by presuming that the price goes lower before it rebounds.

The big miners

So, what are BHP Billiton ((BHP)) and Rio Tinto ((RIO)) saying about their futures – do they feel lucky?

The heads of the companies' iron ore divisions – Jimmy Wilson of BHP and Andrew Harding of Rio – reiterated their belief that China’s demand for iron ore will make one billion tonnes by at least 2025, which they argue will keep demand high for at least a decade!

I loved Wilson’s take, which is compatible with the priorities of SMSF wealth builders. He said, Buffett-like, that “we shouldn't let today's price influence our long-term thinking.''

He thinks credit problems in China have hit some data reads and traders have taken the opportunity to make a bit of money.

On the iron ore price he said: ''I do think it will come down, but then also come back up.''

But it’s not just biased company men who have a more positive view on iron ore, with UBS analyst Tom Price tipping iron ore prices would be around $US126 a tonne on average in 2014.

The major miners breakeven prices are a long way from the current spot price, with Rio at $US43, BHP at $US45 and Fortescue Metals ((FMG)) at $US72 a tonne. Atlas Iron ((AGO)) is $US82 and that’s why this stock’s share price is sensitive to China data and forecasts of $US80 were not good for the company.

Switch to services

I made this point on Saturday and it is worth repeating that the services sector in China is expanding and the construction sector is in the service sector. Even if China goes from being an infrastructure-investing economy to one investing in local goods and services, it will have to construct stuff and modernisation, when you think of it, means steel and glass.

Both Rio and BHP are reasonable dividend-paying stocks nowadays but they do offer capital gain opportunities as China grows bigger as an economy.

One final point. Morgan’s chief economist says the smarties of the trading world are ignoring the fact that as China slows down, the biggest economy in the world – the USA – is now growing at a faster rate than most economists expected. So any China slowdown will be more than offset by a US economy on the comeback trail.

If you don’t have enough BHP and Rio, there could be price dips ahead linked to China, Putin and smart-Alec short-term traders. You, like me, might have enough of these stocks bought at lower prices but for someone who is building a portfolio to fund retirement into the future and who is not long these quality companies, a buying opportunity is here and could get even better.

So, when you ask yourself: “Do I feel lucky?” well the answer should be yes! Some of you will time it better than others but I do smell a good buy for SMSF’ers is in the offing.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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