FYI | Oct 12 2006
It doesn’t always happen like this.
On Tuesday afternoon part of the investment community in Australia started to take note of a report issued by the institutional sales desk at GSJB Were. Emails were coming into our inbox. Some of them enquires whether we had heard anything. Some of them notified about the “rumour”.
Luckily, for us, soon one email came in with the 13 page report attached to it. That was shortly after another email had come in displaying a short summary of what was said in the report. By then it was Wednesday morning.
It is probably a fair assumption that emails about GSJB Were and resources stocks have taken up a lot of bandwidth across the Australian internet over the past 48 hours. As such, it is probably a fair assumption to state that if resources stocks will experience their “second wind” as stated in the much talked about report, people will look back in a few months from today and conclude it all started with that GSJBW report back in October.
Whether this is true or not is of a lesser significance. My personal view is that the overall change in investor sentiment is led by a significant shift in expert views on the iron ore market. FN Arena reported two weeks ago a market shift was building with more and more experts moving their view towards further price hikes to be achieved at next year’s negotiations between the three leading producers of iron ore and their largest customers.
Until recently most securities analysts had been anticipating sizeable price falls from 2008 onwards (minus 20% was no exception). These forecasts are now on the rise, mostly to an unchanged price in 2008 from 2007, while next year should see a small price rise from this year still.
The cumulative effect of these changes in price forecasts has created a new momentum for the likes of BHP Billiton (BHP) and Rio Tinto (RIO). Possibly of bigger importance than the early boost to future earnings forecasts is the fact the sector remains capable of generating a positive news flow, even at a time when many an investor had sold down his exposure to miners and commodities.
So much for market fears about slowing Chinese growth and the fierce determination of the Chinese steel industry to force down contract prices for iron ore next year. The psychological effect of this is probably significant enough to turn around investors’ views on resources stocks – especially since we’re not talking one or two brokers only.
It is easy to see why Tuesday afternoon’s GSJBW report became the hype of the week, with the broker’s Sales and Trading Department (not the Investment Research Department as emphasised on the document itself) stating “make no mistake BHP is going to $40 & RIO [to] $100 – early 2007 looks like the realistic timeframe”.
A few paragraphs further it is stated “the great resource bull market of 2004 to 2010 looks to be on the verge of its 2nd wind…..”
The document’s explanation for the recent sell-offs that hit the sector hard is “eye-catching” to say the least. Keep in mind that the following explanations come from a broker that is partly owned by one of Wall Street’s Greats, Goldman Sachs (the GS in GSJB Were).
Resources stocks have been sold off because “some US investors” don’t understand the sector that well. The statement is backed up with the observation that resources only represent 4% of the S&P500 index. Because of their lack of understanding these investors thought selling out on the back of “some slow US growth numbers” was the right thing to do, the report suggests. All that is missing is the observation that US investors still haven’t come to terms with the fact that China, and no longer the US, is the key factor for the direction of commodity prices from now on.
Also, many investors felt the next commodity price moves were going to be down. Here the authors of the report, Richard Coppleson and Shelley Moon, make an indirect reference to the iron ore based wave of earnings upgrades that is currently sweeping through the sector: “as we now know about 5 brokers have in the last few weeks upgraded substantially”, the report adds.
Finally, and this is probably something we all will have to get used to, there were some big blow ups at a few hedge funds. GSJB Were sees a direct relationship with “some massive dumping of resource shares (and commodities)”.
Ironically, the biggest of these blow ups may well have a direct relationship with the first two letters in GSJB Were. Part of the US investment community is still coming to grips with what has already been touted as the biggest losses recorded by one single hedge fund ever as Amaranth Advisors LLC is reported to have lost 65% to 70% of its assets in bad commodity bets in September.
According to a letter to investors, obtained by Reuters this week, Amaranth suffered a US$6.4bn loss in one single month. It is believed this was mostly because of adverse positions in the US energy futures market. Investors in the US have already taken note of the increased selling of gasoline holdings by Goldman Sachs. Some speculate the firm is paying a service to President Bush ahead of crucial elections that can shift the majority in both parliamentary houses from the Republican Party to the Democrats.
Treasury Secretary Henry M. Paulson Jr. is a former employee of Goldman Sachs. We don’t know whether Goldman Sachs is trying to help the Bush administration with lower gasoline prices, but what we do know is that the firm’s liquidation of what was rumoured to be a significant market position has forced down gasoline prices from US$2.95 per gallon in Mid-May to US$2.73 now, and prices are still falling.
At Amaranth, one of the most successful investors in the market was positioned for higher prices. One could easily conclude the fund became victim to a sudden change of heart at Goldman Sachs.
So what exactly is Goldman Sachs’s game in the big commodities bull run? (I probably don’t need to remind anyone it was the firm’s prediction that the oil price may well supersede US$100 per barrel that became the iconic reference for the energy bull market in 2005).
Let the speculations begin!
Till next week.
Your I like a good rumour myself every once in while editor,
Rudi Filapek-Vandyck
(Supported by the Fabulous Greg, Chris and Terry)