FYI | Feb 14 2007
In mid-October last year the local investment community received an adrenaline kick from a report written by the institutional desk at GSJB Were. For once, and for a very brief period only, it seemed like the majority of email traffic across Telstra’s electronic copperwire based infrastructure did not come from offshore spammers but from enthusiastic investors looking for a reason to once again take a risk on a rebound for resources stocks.
At the time I wrote: “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.”
Alas, it was not meant to be.
Shares of BHP Billiton (BHP), easily regarded as the bellwether of the sector today, temporarily rose from $24 to $28, but they could not hold on to these levels and tumbled back to $24. Only just now have the shares bounced back to $29, a price level not seen since September last year.
Two of the key reasons mentioned in the GSJBW report landed back on our radar this week. One is suspected heavy selling by some damaged hedge funds and the second that US investors had the wrong idea that the US was still the centre of the world when China had already become the new engine behind the current cycle.
Let’s start with the first one. Ever since heavy selling drove down prices of metals, oil and other commodities in January market speculation has been rife about certain fund managers and hedge funds having landed in serious trouble. Nearly every market commentator has mentioned some kind of rumour over the past two-three weeks.
So far, however, the only hard fact that has become public is that UK based Red Kite Management, specialised in trading metals, has had to ask its clients for deferrals when withdrawing their funds. Red Kite was one victim who’d been taken firmly on the back foot in January. The immediate response to the news was a massive sell-off in metals, causing short term turmoil in global commodity stocks. So far, however, that was it.
No doubt, some of the rumours will have substance to them and no doubt when some hardworking journalist somewhere manages to discover the next Red Kite we will see blood in the streets again. As US based market commentator Dennis Gartman uses to say: such is the nature of what we are dealing with.
The second factor –US investors- made a come back at a presentation by ABN Amro resources analyst Rob Clifford last week in front of a selective audience. FNArena has been briefed about the event since.
ABN Amro is a big fan of gold, aluminium and iron ore for the year ahead. Unfortunately, the broker also knows that none of these can replace copper as the leading barometer for the resources sector in general and the trend for the red metal still appears to be down.
Similar to GSJBW’s insto desk, ABN Amro seeks an explanation for a broadly held negative sentiment towards the sector by US investors being spooked by slowing economic growth, and more in particular a firmly slowing US housing sector. It’s easy to dismiss this with a ‘US investors don’t know what they’re dealing with’ label (as GSJBW insto’s did), but ABN Amro believes circa 30% of BHP shares are owned by shareholders in the US while the figure for Rio Tinto (RIO) is believed to be 18%.
These figures, if correct, say it all, really.
No wonder thus ABN Amro believes that once the fears settle in the US, the likes of BHP and Rio Tinto will again become genuinely cheap opportunities as global economic growth is still robust, even though it is slowing slightly.
One could say that ABN Amro’s approach to the matter is suggesting the reason for dumping resources stocks in the sin bin last year was more a psychologically driven occurrence, a sentiment thing. All we have to wait for is then for US investors to feel comfortable again with the housing sector, global economic growth and interest rate prospects.
Can it really be that simple?
Well, some commentators say it is either that or we will start seeing private equity firms moving into the sector plus more merger and acquisition deals because resources stocks, especially the mid-tier and smaller stocks, have become significantly cheaper than the rest of the market. This in itself will push overall valuations higher, as witnessed by uranium stocks this week.
It is probably no coincidence that a huge chunk of global internet traffic has been taken up over the past few days by investors forwarding copies of a story by London based newspaper The Times. According to the report both BHP Billiton and Rio Tinto might be preparing a tilt at aluminium group Alcoa.
Probably every self-respecting news medium across the globe has mentioned the speculation by now.
Unfortunately, according to my old friend James Regan, journalist at Reuters and long enough in the business to have his own share of reliable sources inside the industry, BHP Billiton has no plans to have a go at Alcoa.
Maybe the real story wasn’t whether BHP CEO Chip Goodyear wants to leave with a final bang, or not, but in the readiness of global investors to take the possibility on board and push up Alcoa’s share price significantly in a very short time span.
Till next week!
Your patient as ever editor,
Rudi Filapek-Vandyck
(As always supported by the Fabulous Three: Greg, Terry and Chris)